Norman and Oklahoma City Houses and Real Estate
view properties why use SoldOk.com houses, homes, land and real estate in the Oklahoma City area

Buying foreclosures The easiest example.

Posted: February 8, 2010 12:37 pm.

Buying foreclosures The easiest example

Buying foreclosures is a high risk endeavor. We at SoldOK.com recommend that you consult with your attorney before entering this high risk market (If you don’t have an attorney see our services page for some attorneys that advertise with SoldOK.com)

To understand how a property is taken or “foreclosed on” it is perhaps best to first understand how ownership is obtained and some terms and concepts. (Please read our “ownership” article before our “foreclosure” article, as you will better understand property ownership by reading it.
It is always best to understand a property’s history before attempting to buy it at a foreclosure sale. To know when it sold, to who money is owed and who has been owed helps to make sense of your potential position and risk in the property.

Generally foreclosure works as follows:

1) The owner does not make his payment on the “note” to the bank.

2) The bank takes the owner to court for their breach of contract (the “note”).

3) The bank wins the court case by proving the owner has not made the payments as agreed to in the note.

4) The bank wins and the court issues a judgment against the owner. (Even though winning in court the bank does not yet own the property.)

5) The bank then institutes a foreclosure proceeding where the bank “publishes” that a foreclosure sale is going to happen. (Foreclosing on the mortgage which was used as the security device.)
6) The foreclosure sale happens. (This is often called a Sherriff’s sale)

7) The Sherriff’s sale is usually an auction and often there is a minimum bid price (the minimum price is usually set by state statute and is often 2/3 of the appraised value.)

8) The auction occurs with the bank usually bidding up to the point of what is owed to them. (however, sometimes the bank screws up and does even show up at the sale.)

9) The bank will bid up to what is owed to them because if they take the property back and then later sell it, lower than what they paid for it at the foreclosure sale, mortgage insurance will pay them the difference.

10) If no one bids higher than the bank then the bank gets the property and then usually sells it. (There are often deals to be had from the bank once they own it.)

11) If another buyer is the successful bidder they must be able to prove within a certain period of time that they have the funds to close.

12) The new owner pays and the sale is “confirmed” by the court.

Example 1, the simplest example. A single bank mortgage
On 01-01-08 Dave buys a piece of land from Joe. Dave and Joe agree on a price of $100,000. Dave does not have $100,000 cash but Dave has talked to the bank (Bill and Ted’s excellent bank) and they will loan him $100,000. When Dave and Joe “close” on the property Joe will convey title to the property and show that Dave has title by giving Dave a deed that says Joe grants Dave title. At this closing Dave will give Bill and Teds excellent bank a “note” (the promise to pay) and a “mortgage” (the security instrument that lets the bank take away the property if Dave breaks his promise.) At this point it is crucial to understand the bank does not own the property they merely have a mortgage on it. (Remember this point, it will come back.)

Okay at this point Dave has ownership (title) of the property, Joe is in Hawaii with his money, thus out of the picture and Dave has promised to pay Bill and Ted’s excellent bank back for the property.

OH- NO

Dave now has succumbed to the Obama economy and is in the giant ranks of the unemployed. He cannot fulfill his promise to pay (the “note”) to Bill and Ted’s excellent bank. What happens now?
Bill and Ted’s excellent bank want their money, can you blame them? Dave promised to pay them. They don’t give a rat's behind about Dave’s personal situation, they have shareholders to answer to. They decide to foreclose.
If Dave, the owner, does pay the debt as agreed to in the note, (remember the note is their borrowe’s promise to pay.) Bill and Ted’s excellent bank will file a lawsuit regarding Dave’s failure to pay the note.

Dave did not show up or dispute this court case and Bill and Ted’s excellent bank receives a judgment form the court saying, in essence, the court finds the Dave owes Bill and Ted’s excellent bank the money. It is important to understand Bill and Ted’s excellent bank still does not own the property they, have a judgment on the note against Dave and still hold the mortgage.

That doesn’t seem very powerful does it? However, in addition to the judgment Bill and Ted’s excellent bank can now take action on the mortgage (the security device). Bill and Ted’s excellent bank will now foreclose on the mortgage by advertising (“publishing”) and filing the paper work to hold a “sheriffs” sale to satisfy the court’s judgment on the note.

At the sheriff’s sale there will be a minimum bid set by state statue (often it is 2/3 of the appraised value) Remember, the property is still Dave by owner hence you cannot see the condition of the property without trespassing, so you are buying it “blind”, and Dave is trashy.

Since Dave bought the property for $100,000 in 2008 and has paid it down to $95,000 and the court has appraised it for $120,000 the minimum bid will be 2/3 0f the appraised value or $80,000. Guess who opens the bidding at $95,000, that’s right, Bill and Ted’s excellent bank starts the bidding there because $95,000 is what is owed to them. How much over that will you bid – remember you could not go into the property because it was still owned by Dave, and he might shoot you for trespassing.

What if Dave bought the property for $100,000 in 2008 and has paid it down to $95,000 and the court has appraised it for $90,000 (less than what is owed on it and a reality in today’s market.) the minimum bid will be 2/3 0f the appraised value or $60,000. Guess who opens the bidding at $95,000, that’s right, Bill and Ted’s excellent bank starts the bidding at $95,000 (more than it is worth) because they are owed the $95,000 and will sell it later, maybe fixing it up . How much over $95,000 will you bid? – remember it only appraised for $60,000 and you could not go into the property because it was still owned by Dave, and he might shoot you for trespassing.

Why would Bill and Ted’s excellent bank bid $95,000 if the property only appraised at $90,000? They do this because ---- If Bill and Ted’s excellent bank buys the property at the sale for $95,000 and then they sell it for $90,000, because that is all the property is worth, the mortgage insurance will pay them the difference. But if the property sold to someone else at the foreclosure sale for only $90,000 Bill and Ted’s excellent bank would not collect the difference of what is owed from the mortgage insurance.
Remember this is a risky business! What if there is a second mortgage too ! See our other foreclosure articles.

Dave W Houck, J.D.
permalink: Buying foreclosures The easiest example.

Bozeman By Owner · Central WI By Owner · Columbia MO Homes · DwellWell · FSBO Dayton · FSBO Desoto
FSBO Fargo Moorhead · FSBO Saint Paul · Iowa City Real Estate · Mountain Land & Homes FSBO · Polk County By Owner · Real Estate Eastern Oregon