| The investment quandary as to the best method | | | | Trust process involves a trustor (or borrower) |
| for acquiring foreclosed property at heavily | | | | that gives a promissory note to the beneficiary |
| discounted prices inevitably surfaces at the same | | | | (or lender), and the trustor also gives title through |
| stage in the real estate cycle every ten to | | | | a trust deed to a trustee (neutral third party) as |
| twenty years. After housing booms and home | | | | security for the note. The important difference |
| prices correct back to affordable levels, real | | | | here is that title to the property is held by the |
| estate investors are suddenly inundated with an | | | | trustee rather than the borrower. The trustee is |
| almost overwhelming supply of potential homes to | | | | typically a neutral third party designated by the |
| choose from. These prospective buyers peruse | | | | lender to hold the deed of trust during the loan |
| city blocks searching for evidence of distressed | | | | period with the power to more easily administer a |
| properties that might lead to investment | | | | foreclosure sale in case of default by the |
| opportunity by taking dead lawns, unpaid utility | | | | borrower. |
| notices, and default notices all into account. They | | | | It is clearly important to determine whether one |
| investigate "For Sale" signs with "Bank Owned" or | | | | is bidding on a property that was subject to a |
| "Foreclosure" riders attached. Technologically | | | | mortgage or a trust deed at a foreclosure sale. |
| savvy bargain hunters browse websites online to | | | | This differentiation can often be confusing as |
| identify properties in default. These opportunists | | | | many real estate professionals and experts in |
| also compare notes with one another at various | | | | deed of trust states will often casually refer to |
| social functions, water coolers, chat rooms, and | | | | home loans as mortgages. Many lenders in these |
| anywhere else real estate is spoken. Here they | | | | states will refer to themselves as mortgage |
| may learn that in order to obtain the most | | | | brokers or mortgage companies when they |
| lucrative price, investors are best served to | | | | actually originate promissory notes secured by |
| purchase property directly at a foreclosure sale | | | | deeds of trust. Deed of Trust states also refer |
| on the court house steps. Regardless of the | | | | to foreclosure sales as trustee's sales, where the |
| preferred method for locating distressed | | | | highest bidder purchases the property in an |
| properties, it is imperative to thoroughly | | | | auction setting. However, purchasing a home at a |
| comprehend the different foreclosure processes | | | | trustee's sale can be a risky proposition as the |
| in order to develop and implement a successful | | | | buyer has little or no opportunity to inspect the |
| investment strategy. | | | | home prior to purchase. Further, the buyer must |
| If a homeowner fails to make prescribed loan | | | | pay with all cash as financing is typically not |
| payments to the bank, the borrower is deemed | | | | permitted at trustee's sales. There is also no |
| to have defaulted on the loan. If the delinquent | | | | guarantee that the property is not currently |
| payments are not cured in a timely fashion, the | | | | occupied by tenants or a previous owner. Finally, |
| lender is permitted to foreclose on the property | | | | purchasers at a trustee's sale are not protected |
| to acquire title to the home as security for the | | | | against clouds on the property's title like tax liens |
| unpaid debt. For national investors it is important | | | | from a previous owner's unpaid property taxes, |
| to understand that lending practices and | | | | so title insurance is often unattainable for buyers |
| foreclosure procedures vary from state to state. | | | | at trustee's sales. |
| For example, some states are considered | | | | REAL ESTATE OWNED (REO) |
| "mortgage" states while other states prefer the | | | | If a home is not sold to a new buyer through the |
| "deed of trust" method of lending and holding title | | | | foreclosure process, the lender holding the |
| as security for the loan. | | | | promissory note will often acquire the property |
| MORTGAGES | | | | and attempt to sell it on the open market to a |
| Mortgage states utilize a two party security | | | | new buyer. Once title to the home that once |
| system where a mortgagor (or borrower) | | | | served as security for the unpaid promissory |
| provides a promissory note to a mortgagee (or | | | | note is transferred to the bank, the property is |
| lender), along with a voluntary lien called a | | | | deemed real estate owned (REO) by the bank. |
| mortgage that serves as security for the | | | | The bank will then typically retain a |
| borrower's promise to make the loan payments | | | | REALTOR® to market the property for sale |
| described in the promissory note. Since title to the | | | | at a price below market value, remedy any |
| property resides with the borrower when the | | | | defects on title, remove any tenants or squatters |
| mortgage is created, foreclosures in mortgage | | | | occupying the property, and often retain |
| states can be relatively lengthy and costly for | | | | contractors to repair any major physical defects |
| banks to pursue. Further, mortgages also provide | | | | in existence on the property. Although the typical |
| borrowers redemption rights that allow borrowers | | | | price paid for an REO property may in theory be |
| a specified period of time after the foreclosure | | | | slightly higher than buying at a foreclosure sale, |
| and ultimate sale to a third party to pay off the | | | | purchasing an REO property is clearly a much less |
| original loan amount and regain title to the | | | | risky proposition. REO sales also provide investors |
| property. As a result, buyers at foreclosure sales | | | | adequate opportunity to inspect homes prior to |
| in mortgage states must be aware that they will | | | | making offers to purchase, and buyers are |
| often be unable to obtain clear title to foreclosed | | | | permitted to utilize financing when purchasing |
| homes as the previous owner will likely be | | | | these bank-owned properties. |
| afforded the opportunity to pay off the original | | | | Whether purchasing foreclosed or REO properties, |
| promissory note and reclaim the property. | | | | the various risks and rewards associated with an |
| DEEDS OF TRUST | | | | investment may not only depend on the |
| A minority of states that include California favor | | | | characteristics of the home itself, but also the |
| the three party deed of trust system due to the | | | | type of security the home provided to the |
| relative cost efficiency and expediency provided | | | | previous owner's lender. In order to avoid the |
| to lenders in the foreclosure process. Additionally, | | | | displeasure of telling foreclosure horror stories in |
| lenders are often able to provide buyers of | | | | real estate investment circles, an ounce of diligent |
| foreclosed property clear title as no right of | | | | research into a property's financial history can |
| redemption exists for borrowers. The Deed of | | | | prevent a pound of investment headaches. |