WHAT IS A FORECLOSURE?
A foreclosure is a legal action that occurs when the homeowner defaults on their home loan and can no longer make payments to their lender. The lender is then forced to take the property back in an effort to recoup their investment. Once the lender takes the home back from the seller, they can try and sell it in a Trustee Sale at auction. If the home does not sell at auction, the lender becomes the owner of the property and now must market and sell the property themselves. This is called Bank Owned or Real Estate Owned (REO) property.
When buying a luxury foreclosure, it is best to avoid auctions because you do not have the opportunity to inspect the property you are buying. You are also buying the home as-is without any seller warranties and are expected to put up a large amount of non-refundable earnest money. It is usually much wiser to wait for the home to go up for sale through the Multiple Listing Service and utilize the services of a Buyer’s Real Estate Agent who is experienced in luxury foreclosures to represent you in the purchase of your luxury foreclosure property.
WHAT IS A PRE-FORECLOSURE?
Pre-foreclosure is the step just prior to a home being taken back by a lender in a foreclosure action. In a pre-foreclosure, the lender notifies the property owner that they have defaulted on their loan payments and that if they do not bring their loan balance current, foreclosure proceedings may be initiated. The owner usually has up to 90 days to bring their payments up to date before the foreclosure actually takes place.
A home in pre-foreclosure may or may not be offered as a short sale. A short sale is when the home owner owes more money to their lender than their home is worth. In this case, they need lender approval to sell the home because the lender will need to accept less than is owned on the loan in order for the sale to go through.
Not all pre-foreclosures are short sales however. Just because an owner has fallen behind on their payments and is in pre-foreclosure does not necessarily mean they owe more on the home than the home is worth. They might have plenty of equity in the home and just be facing a temporary cash crunch meaning they can still sell the home to a willing buyer without needing to obtain their lender’s approval since the lender will not be losing money on the sale. (For more on short sales see “Short Sales Defined.”)
