When a homeowner stops paying the mortgage on time, the lender first sends a NOD (notice of default) letter telling the homeowners that if they does not become current with the loan within a specified period, the lender will recall the loan immediately and initiate foreclosure proceedings against them.

Next, the lender will hire an attorney, who will place a lis pendens on the property at the county courthouse. At this stage it becomes public knowledge that the homeowners are in distress and that the lender intends to foreclose. 

If the homeowners want to avoid foreclosure, they may try to sell their home on their own or using a REALTOR. If the value of the home in the current market is not enough to cover the mortgage plus selling expenses (common occurrence in this market, where home values have decreased), homeowners have to request a "short sale" with the lenders, once they receive an offer.

The lenders then determine if it is worth their while to sell the property at this price, or go to foreclosure. Short sales represent great opportunities for buyers with patience, who do not have a deadline to move, or who are flexible on their moving dates. There is no set timing or certainty for the lender to respond to a short sale request, or whether the lender will approve a short sale offer. 

If the foreclosure process continues its course (most lenders do not stop foreclosure proceedings because they are negotiating a short sale), the judge will assign a date for the property to be offered for sale by public auction on the courthouse steps. These auctioned properties are offered "as-is, where-is", with a no-contingency contract, 10% down the day of the auction, closing 30 days after. Often these properties have to be purchased "site unseen" because the seller may still be living in the home and may be reluctant to let potential buyers conduct their due diligence inspections. 

Normally, properties that are auctioned are "bought back" by the first mortgagee, for whatever amount they are owed. Whoever buys the property may need to evict the former homeowner to take possession of the property. 

If purchased by the lender, normally the property will be placed back on the market as an REO (real estate owned, lender-owned) property, through the MLS. These properties also may represent excellent opportunities for buyers, since their list price is normally very aggressive - the lender wants to minimize their holding costs and wants to sell ASAP!

There are advantages and disadvantages of buying short sales, foreclosures and lender-owned properties. If you want to learn more about these, please contact us, we will be happy to help you decide if these types of properties are suitable for your particular situation or not.