Why is it important to know the difference between judicial and non-judicial foreclosure? Because, you need to know the laws of YOUR state when educating yourself about the foreclosure process and investment strategies. Many books, foreclosure seminars and infomercials provide information that focus exclusively on deed trust states and Trustee Sales.

Let's look at some of the steps in a little more detail for a judicial foreclosure.

1. Lis Pendens

2. Foreclosure auction

3. Bank ownership or R.E.O (real estate owned)

Lis Pendens

Lis Pendens is Latin for "suit pending". Lis pendens for mortgage default is the first filing made during the foreclosure process. Properties in this stage are often referred to as "Pre-foreclosures ". After a mortgage has gone unpaid for 3 consecutive months, the lender (Plaintiff) files a lis pendens (notice of mortgage default) and the mortgagor (Defendant) is served with a summons and complaint. In simple language, the mortgage holder (now the Plaintiff in the action) sues the borrower (now the Defendant in the action) for non-payment of the mortgage.

Foreclosure Auction

If the mortgagor does not respond to the summons and complaint issued by the lender, then the lender's attorney must submit a report to the court stating the facts of the case and requesting that the court appoint a referee (the attorney who ultimately conducts the foreclosure sale). The referee issues a report that includes a computation of the amount due the lender. The judge then signs a Judgment of Foreclosure and Sale that directs a Notice of Sale to be published and the referee to sell the property at auction. The court then assigns a date and time for the auction and the auction date and time is published in the Notice of Sale in a local newspaper approximately 4 weeks prior to the auction.

If no one at the auction bids the lender's minimum (or the "upset price") the property reverts back to the lender. The referee executes a deed conveying ownership of the property back to the lender. The property then becomes part of the lender's inventory of homes, and is referred to as an R.E.O. (Real Estate Owned). Most lenders then farm their inventory of homes out to local real estate brokers for resale. These are the types of properties that are often advertised by real estate brokers as "foreclosures".

What Happens at the Auction

Let's assume for a moment that you are the potential buyer going to an auction to place bids and hopefully purchase one or more properties. Keep in mind that foreclosure properties are "as-is, where-is" for cash or cash-equivalent. Use extreme caution when buying at trustee's sale. You'll own it. You need to know everything you can about the property!!

Information is everything! Up to date accurate information is essential for investing in foreclosures.

The Sale

The auctioneer will ask if anyone wants to qualify, either before all properties are announced or before individual properties are announced. To qualify, you will need to show the auctioneer cash or cashier's checks sufficient to cover any bids you will be making. Some Trustees specify checks are to be made out to them, usually you can get cashier's check made payable to you, then if you are a successful bidder, you endorse them payable to the Trustee. Common practice is to have large checks to cover most of the expected bid, with smaller checks to cover increases in the bidding. You really do not want to have one check for $300,000 if you are going to be bidding on a $150,000 house or if you will want to buy more than one property. Once you sign your check over, you will not have the surplus funds available for a while. When bidding and qualifying, keep in mind that anyone around you is a prospective bidder, if you allow them to see the maximum amount you can bid to, you have weakened your position. The same holds true for notes you have written or numbers, keep your information private!

Bidding

The auctioneer will ask if anyone would like to bid when they are auctioning a property. If it is a property you are interested in, your bid should be a dollar over the opening bid. The property will not sell until the third call and some people like to wait and see if anyone else is showing an interest. Relax; wait to see if other bidders are going to jump in, if no one does put your "dollar over" bid just before the third call. If other bidders are interested in the same property, bids will go up usually in hundred dollar increments. Know the maximum bid you are willing to place and do not exceed that number. It's very easy to get involved in a contest of who's going to win the bid, if you are investing, you need to make a profit, not prove you can bid higher.

After the Bidding

If you are the successful bidder, you will need to sign checks over to the Trustee. Usually, after all sales are complete, the auctioneer will write you a receipt, ask how title is to be held and you'll be done. The Trustee can record the Trustee's Deed for you or they will send you the deed along with any excess funds from your checks. Sales are sometimes invalidated by legal reasons such as last minute bankruptcy, if so, you will receive your funds back. Expect to have everything done one to two weeks after the sale.

I know that was a whole lot of technical detail but it is important for you to understand the process of foreclosure when you are considering investing in defaulted paper.

Banks can be a great resource for finding homeowners in foreclosure. Yes, we can buy from the bank at a discount but it can be more difficult than working with an individual that was acting as the bank (Jill in our previous example) and the buyer (Jack). When dealing with the bank you need to locate the right bank, make contact with the appropriate parties who have the authority to sell you the paper, but most importantly sell it to you a large discount. Not all banks are willing to take large discounts. Remember most banks will do anything to stop the foreclosure and get it off their books as a loss. A workout or forbearance is the answer to their problems. When that fails a short sale is the only answer left.

The upside to all of this is that you could actually end up with the property for pennies on the dollar. An easy alternative is that you could bring the deal to Mike and when we buy it we will pay you a substantial finders fee or we can provide you with an investor who will partner in your area.