Financial Foundations

Foreclosure is the sequence of legal proceedings by which a lender sells or repossesses a home when the homeowner has stopped making payments on the mortgage. As a homeowner, understanding the individual steps of the sequence is critical to understanding your rights and responsibilities along the way.

These days, very few states require the lender to take the homeowner to court to foreclose on the home. The process in most states is known as nonjudicial foreclosure.

Stage One: Missed Payments In most states, a homeowner must fall 90 days behind on their mortgage before the mortgage lender can legally initiate the foreclosure process. So if you have missed fewer than three payments, you’re not actually in foreclosure. However, this phase is very important, because (a) you have to go through it before the foreclosure process can start, and (b) this is the phase in which you as a homeowner have the most options at your disposal.

If you are in the missed payment stage, this is the best time to rework your finances, to call your lender to work out a compromise, and to put your home on the market for a fast sale. Check out “7 Steps to Avoid Foreclosure” for specifics on what to do in the missed payments phase.

Stage Two: Pre-Foreclosure Once a homeowner’s mortgage payments have not been made for at least 90 days, the lender records a public notice that the owner has defaulted on their mortgage, and then mails the notice to the homeowner. In some states this notice is called a Notice of Default (NOD); in others, it is a Lis Pendens. Depending on the law in your state, the lender might be required to post the notice on your front door.

This pre-foreclosure stage is really a grace period; it gives a homeowner three calendar months to “cure” your default. What’s the cure? You can either work out an arrangement with the lender, sell the place or come up with the cash you owe. Read “5 Ways You Can Stop the Foreclosure Process” to kick-start your plan.

Stage Three: Auction If the default is not cured within three months after the Notice of Default is issued, the lender or their representative (the foreclosure trustee) sets a date for the home to be sold at an auction called a Trustee Sale. The Notice of Trustee Sale is recorded with the County Recorder’s Office, delivered to the homeowner, posted on the door of the property and published in a local newspaper — to make sure everyone knows when and where the auction will be.

This auction is either held on the steps of the county courthouse or in the trustee’s office. In many states, the homeowner has the “right to redemption” (he can come up with the outstanding cash and stop the foreclosure process) up to the moment the home is sold at the auction.

At the auction, the home is sold to the highest bidder. The big catch is that these auctions require cash payment in most states; few third-party buyers can afford to bring enough cash to the courthouse to pay in full. As a result, many lenders either simply ink an agreement with the homeowner to take the property back (called a deed-in-lieu of foreclosure — see No. 4 in “5 Ways You Can Stop the Foreclosure Process” ) or buy it back themselves at the auction.

Stage Four: Post-Foreclosure If a third party has not purchased the property at the foreclosure auction, the lender takes ownership of it. Then, the property becomes what is called a bank-owned property, also known as REO, short for Real Estate Owned (by lender).

REOs are sold in one of two ways. Most often, they are listed with a local real estate agent for sale on the open market; they are usually put on the multiple listing service (MLS) so that local buyers’ agents can show and sell the property to a qualified buyer for a commission. Some lenders prefer to sell their REO properties at an REO liquidation auction, often held in auction houses, at convention centers or at the property.

Steve’s Tip: If you are interested in buying a property in one of these stages of foreclosure, check out “The Advantages (and Disadvantages) of Buying a Foreclosure.”
NEXT: Read the 7 Steps to Avoid Foreclosure

When foreclosure looms, many homeowners try to sell their homes. For them, the goal is not just to get the home sold, but to do it quickly. Foreclosure rates are the highest in buyer’s markets, when homes take a longer than average time to sell. What’s a homeowner to do? Get aggressive, and get your home sold fast!

As a seller, you control the only three factors that influence whether your home sells quickly: pricing, marketing and condition. Here are some easy steps and insider secrets to make your home fly off the market in record time!

Pricing Your House

1. Don’t try to salvage equity that does not exist. The fact that you bought your home for thousands more than homes are currently selling for in your neighborhood is irrelevant to the current fair market value of your home. You have to get clear on your goal: Are you trying to eke dollars out of your home by holding out for the highest price, or are you trying to avoid the black mark that a foreclosure will leave on your credit report?
2. Don’t overprice your home. Get clear about what you want. If you’d like to get your home sold, make sure you price it aggressively and that means low. If your home is overpriced, some buyers won’t even see it because it will appear to be out of their price range. Other buyers will focus on seeing properties whose sellers seem more realistic about pricing. Your house will sit on the market longer than it should and then the lowballers will crawl out of the woodwork.
3. Get real about what your home is worth. Have your real estate agent prepare a Comparative Market Analysis (CMA) that shows recently sold, similar homes in your neighborhood. If you’re serious about getting it sold fast, take the sales prices (not the list prices) from the most recently sold homes in your area, and then go down 10 percent or so from there to get your list price. When a home is slightly underpriced, it seems like a bargain. More buyers will come out to see it, and chances of getting a qualified offer skyrocket.
4. Make sure you have an accurate understanding of how low you can go. A buyer is not going to pay a premium price for your home just because that’s what you owe. If you owe more than your home is worth, give your lender a ring, complete a short sale application (see “How to Get Your Lender to Agree to a Short Sale” ) and ask your lender to give you some indication of how low a sale price they will accept. Conform your list price to that (don’t forget to take closing costs into account); a short sale blemishes your credit but not as badly as a foreclosure does!

Next: Marketing Your House

1. Make sure your home is well-marketed on the Internet. This is your real estate agent’s responsibility, but you should make sure that it gets done. More than 80 percent of house hunters start their home search on the Web. So your listing should be on all of the top real estate listing sites like FrontDoor.com, Yahoo, Craigslist and Realtor.com. Internet marketing is virtually free; if your real estate agent posts your home on five sites, it costs you nothing but time to post it on 10 more. Some sites will actually syndicate your virtual flier to dozens of other sites.
2. There is no such thing as too many pictures. Property listings that have no pictures are skipped over by the majority of buyers. The more photos of your home are associated with the listing, the longer time buyers will spend looking, and they will be more likely to come see your home.
3. Condition, condition, condition. Clean it up, spruce it up, fix it up, but don’t spend too much. If you are facing foreclosure you probably can’t afford the time or the money it would take to do major work. Focus on the things that are inexpensive, but make a major cosmetic difference, like paint and carpet. Have your real estate agent refer you to a handyman who can caulk cracks in the tile, fix minor leaks, and patch scrapes and holes in the walls. These things are cheap to fix and make a negative impression if you don’t fix them. Make sure your place is immaculate every time a buyer steps inside. Piles, messes and odors are extremely distracting to buyers and can even cost you a sale.
4. Offer creative concessions and/or financing perks. Some house hunters who want to buy your house might have a hard time doing so. Help them out! Offer such concessions as assuming your mortgage (with the lender’s consent), a lease with option to buy, or closing cost credits that will help the buyer defray closing costs or buy down the interest rate.

NEXT: 5 Ways to Stop the Foreclosure Process