The mechanism of foreclosure is put in place at the moment of financing. It is ready to be activated as soon as there is payment default. In the event of default, the beneficiary is entitled to exercise, through the deed of trust, the payment of his principal plus interest. In other words, the beneficiary (lender) will ask the trustee to foreclose the grantor (homeowner) in order to use the collateral (property) for making the loan perform (get paid). When this happens, the following events, timeframes and effects take place.

1. Succession of Trustee. The original trustee is usually the title company which handled the lending transaction. This arrangement remains in place through the life of the loan until default. The original trustees are title companies such as Ticor, Fidelity or First American Title. Title companies, although they can do it, are usually not in the business of foreclosing. Because of this, at default, the beneficiary usually selects a successor trustee. A successor trustee is usually an attorney firm specialized in the business of foreclosing. Northwest Trustees and Shapiro & Sutherland are two examples of such firms. The successor trustee is in charge of all matters related to foreclosure. From now on the successor trustee will be referred to as the trustee.
2. Service and Publication of Notice of Default and Election to Sale (NOD). The trustee must record and send a letter to all parties with a recorded secured financial interest in the property stating that the subject property will be sold in order to satisfy the secured loan. This letter is commonly known as the NOD letter. This letter must be sent to all parties by certified mail or served in person. Failure to not serve all secured parties may invalidate the process. The secured parties are usually second mortgages, lien holders, child support beneficiaries, tax lien holders, etc. The letter shall state the property description, amount of the principal, payoff value in full, amount needed to cure, and all contact information, as well as time, date and location of the scheduled auction sale.
3. Sale of Property. The sale of the property is held as per the time, date and location set in the notice of default and election to sell letter (NOD letter). Anybody can bid on the property except the trustee. The winner pays cash at the time of sale and receives, within 10 days a “trustee deed” demonstrating his ownership of the property. The new owner is entitled to possession of the property on the 10th day after the sale.

Timeframes: This is the time available for pre-foreclosure investing. You can download a foreclosure time line graphic from www.bestshortsales.com. This graphic give a clear, easy to read view of the foreclosure time frames.

1. Total Length of Process. In Oregon a minimum of 120 days between the date of service of NOD letter and date of auction.
2. Notice of Sale Publication. A notice of sale is published in a newspaper of general circulation, once a week for four consecutive weeks. The last publication can be no later than 20 days prior to auction.
3. End of Right to Cure. The mortgagor (or homeowner) as well as any other party secured by the property is entitled to cure the loan in default until up to 5 days prior to auction. Within those five days before auction, the only recourse to retain the property is to pay the loan in full. The beneficiary (or lender) is not obligated to accept the loan to be cured. They can do so according to their convenience.

Disposition of Proceeds of Sale: The proceeds of the sale are distributed according to the following priorities. The very fact that the junior liens may not be paid creates the pre-foreclosure investment opportunity.

Compensation for attorneys and trustees. 2 – Payment of obligation secured by the trust deed. 3 – Payment to all recorded junior liens by order of priority. 4 – Payment to the grantor (homeowner) if anything remains for him.

Basically, the lawyers get paid first, followed by the first mortgage holder, then everybody after that. If there are any bones left, they go to the owner.

Effects of the Sale: This is where buying at auction gets tricky and creates the pre-foreclosure investing opportunity.

Termination of Interests. All interests on property by liens junior to the foreclosing trust deed are terminated. All interests on property by liens senior to the foreclosing trust deed remain in force and must be satisfied. This means that the highest bidder at the auction, by buying the property, must now pay all taxes, senior mortgages and senior liens. These are not foreclosed out. For example, if the foreclosure is on a first mortgage, the buyer will not have to pay for the second mortgage and anything that came after. Most likely the buyer will only have to pay for the unpaid taxes, HOA and city liens. If, on the other hand, the foreclosure is on a second mortgage, then the buyer will have to pay for the first mortgage in addition to everything else.

Satisfaction of Obligation: The foreclosing trust deed is satisfied in full even if the lender does not get full payment of principal and interest or if there is a loss. All other interests in the property are foreclosed-out and have no further rights over the property.

Unpaid Parties: Any parties with secured interests foreclosed-out of the property and not paid, partially or fully, by the auction proceeds lose that secured interest in the property. Basically, they have nothing else to do with the property. However, the promissory notes of these obligations remain in force. Because of this, the foreclosed homeowner remains responsible for the payment of any unpaid balance. The result is that any party still owed on the property has to try to collect an unsecured loan. This is not easy. What are the chances that someone will pay a debt owed on a property that they no longer own? This is where the investor comes in.

Short Sale. The Pre-Foreclosure Business Opportunity: Clear understanding the foreclosure process enables the pre-foreclosure investor to unravel the entanglement created by all the parties involved with the property in foreclosure. Usually, the total value of all of the principals and interest, taxes and liens is greater than the value of the property. As a result, there will be losses to everybody, including, sometimes, the senior lienholders. The goal of the pre-foreclosure investor is to obtain the property at a very convenient price by reducing the losses of all secured parties. This is called a short sale. A short sale happens when the creditors authorize the homeowner to sell a property for less than what they are owed. You, the investor, makes this happen through knowledgeable and skillful negotiation. Look forward to my future article on these negotiation techniques.