| To confidently compete in the pre-foreclosure | | | | parties are usually second mortgages, lien holders, |
| arena, every investor must master the | | | | child support beneficiaries, tax lien holders, etc. |
| mechanics of foreclosure. The events of | | | | The letter shall state the property description, |
| foreclosure, the timeframes, the disposition of the | | | | amount of the principal, payoff value in full, |
| proceeds of sale, and the effects of the sale - | | | | amount needed to cure, and all contact |
| these are all important landmarks in navigating | | | | information, as well as time, date and location of |
| through the foreclosure process. To be effective | | | | the scheduled auction sale. |
| in pre-foreclosures, the investor must see through | | | | 3 - Sale of Property. The sale of the property is |
| the foreclosure process as clearly as through | | | | held as per the time, date and location set in the |
| glass. Understanding the mechanics of foreclosure | | | | notice of default and election to sell letter (NOD |
| allows the investor to effectively evaluate an | | | | letter). Anybody can bid on the property except |
| opportunity, develop a strategy, provide a solution | | | | the trustee. The winner pays cash at the time of |
| that satisfies all the parties involved and, as a | | | | sale and receives, within 10 days a "trustee deed" |
| result, come out with a profit. | | | | demonstrating his ownership of the property. The |
| Washington State law Title 61 RCW "Mortgages, | | | | new owner is entitled to possession of the |
| deeds of trust, and real estate contracts" | | | | property on the 10th day after the sale. |
| governs foreclosure procedures in Washington | | | | Timeframes: |
| State. Oregon State law chapters ORS 86.705 | | | | This is the time available for pre-foreclosure |
| through 86.770 govern foreclosure procedures in | | | | investing. You can download a foreclosure time |
| Oregon. This is a must-read for all pre-foreclosure | | | | line graphic from This graphic give a clear, easy to |
| investors. With the understanding of this law and | | | | read view of the foreclosure time frames. |
| specialized real estate legal counsel, the | | | | 1 - Total Length of Process. In Oregon a minimum |
| pre-foreclosure investor will be well-equipped for | | | | of 120 days between the date of service of NOD |
| profiting in this arena. | | | | letter and date of auction. |
| This article is oriented towards pre-foreclosure | | | | 2 - Notice of Sale Publication. A notice of sale is |
| success. I, the author, am very effective in this | | | | published in a newspaper of general circulation, |
| field, I'm not a lawyer. This article should not be | | | | once a week for four consecutive weeks. The |
| taken as legal advice. The purpose of this article is | | | | last publication can be no later than 20 days prior |
| to provide a clear view of the foreclosure | | | | to auction. |
| process through the scope of pre-foreclosure | | | | 3 -End of Right to Cure. The mortgagor (or |
| investing. With that in mind, the reader will find this | | | | homeowner) as well as any other party secured |
| material informative, entertaining and valuable. | | | | by the property is entitled to cure the loan in |
| Most pre-foreclosure investing takes place in the | | | | default until up to 5 days prior to auction. Within |
| single family, and up to the 4-plex markets. These | | | | those five days before auction, the only recourse |
| loans are secured by residential trust deeds, and it | | | | to retain the property is to pay the loan in full. |
| is here where we will focus. | | | | The beneficiary (or lender) is not obligated to |
| The seeds of the foreclosure process are really | | | | accept the loan to be cured. They can do so |
| planted at the moment a real property is financed | | | | according to their convenience. |
| by a lender through a secured loan. The lender, in | | | | Disposition of Proceeds of Sale: |
| order to feel confident of recovering the principal | | | | The proceeds of the sale are distributed according |
| plus interest, requires the property owner to | | | | to the following priorities. The very fact that the |
| pledge the financed property as collateral. If the | | | | junior liens may not be paid creates the |
| loan is not paid or defaults, the lender is entitled to | | | | pre-foreclosure investment opportunity. |
| use the collateralized property to get paid. This is | | | | 1 - Compensation for attorneys and trustees. |
| called securing a loan by mortgaging a property. | | | | 2 - Payment of obligation secured by the trust |
| This system was most likely invented by the | | | | deed. |
| Babylonians at least 2000 years before Christ. | | | | 3 - Payment to all recorded junior liens by order |
| Mortgages and foreclosure are indeed a very old | | | | of priority. |
| business. | | | | 4 - Payment to the grantor (homeowner) if |
| Well executed, legal, real estate financing has two | | | | anything remains for him. |
| components. These are the securing instrument | | | | Basically, the lawyers get paid first, followed by |
| and an obligation. | | | | the first mortgage holder, then everybody after |
| In the state of Oregon, the preferred instrument | | | | that. If there are any bones left, they go to the |
| to secure real estate loans is the trust deed or | | | | owner. |
| deed of trust. The trust deed secures the | | | | Effects of the Sale: |
| financed property as collateral. The preferred | | | | This is where buying at auction gets tricky and |
| instrument to delineate an obligation is the | | | | creates the pre-foreclosure investing opportunity. |
| promissory note. The promissory note dictates | | | | Termination of Interests. All interests on property |
| the terms of payment of the secured loan. If | | | | by liens junior to the foreclosing trust deed are |
| there is a default in the terms of payment | | | | terminated. All interests on property by liens |
| delineated by the promissory note, the trust deed | | | | senior to the foreclosing trust deed remain in |
| will be used to secure performance by using the | | | | force and must be satisfied. This means that the |
| collateralized property. This is called foreclosure. | | | | highest bidder at the auction, by buying the |
| A trust deed is a means to convey an interest in | | | | property, must now pay all taxes, senior |
| the financed property to a trustee in order to | | | | mortgages and senior liens. These are not |
| secure a loan. The trust deed involves three | | | | foreclosed out. For example, if the foreclosure is |
| parties: Beneficiary, Grantor and Trustee. | | | | on a first mortgage, the buyer will not have to |
| Beneficiary is the person financing the property or | | | | pay for the second mortgage and anything that |
| its successor. This person is the lender, also | | | | came after. Most likely the buyer will only have to |
| known as the mortgagee. Grantor is the person | | | | pay for the unpaid taxes, HOA and city liens. If, |
| obligated to perform (pay) as per the promissory | | | | on the other hand, the foreclosure is on a second |
| note. This person is the homeowner, also known | | | | mortgage, then the buyer will have to pay for the |
| as the mortgagor. Trustee is a person employed | | | | first mortgage in addition to everything else. |
| by the beneficiary to make sure that the grantor | | | | Satisfaction of Obligation: The foreclosing trust |
| performs. Financing a property is the equivalent of | | | | deed is satisfied in full even if the lender does not |
| a shotgun wedding; if the groom does not | | | | get full payment of principal and interest or if |
| perform he will be shot by the bride's brother. | | | | there is a loss. All other interests in the property |
| The trustee in the trust deed is usually the title | | | | are foreclosed-out and have no further rights |
| company which handled the real property financing | | | | over the property. |
| transaction. | | | | Unpaid Parties: Any parties with secured interests |
| As you can see, the mechanism of foreclosure is | | | | foreclosed-out of the property and not paid, |
| put in place at the moment of financing. It is | | | | partially or fully, by the auction proceeds lose that |
| ready to be activated as soon as there is | | | | secured interest in the property. Basically, they |
| payment default. In the event of default, the | | | | have nothing else to do with the property. |
| beneficiary is entitled to exercise, through the | | | | However, the promissory notes of these |
| deed of trust, the payment of his principal plus | | | | obligations remain in force. Because of this, the |
| interest. In other words, the beneficiary (lender) | | | | foreclosed homeowner remains responsible for |
| will ask the trustee to foreclose the grantor | | | | the payment of any unpaid balance. The result is |
| (homeowner) in order to use the collateral | | | | that any party still owed on the property has to |
| (property) for making the loan perform (get paid). | | | | try to collect an unsecured loan. This is not easy. |
| When this happens, the following events, | | | | What are the chances that someone will pay a |
| timeframes and effects take place. | | | | debt owed on a property that they no longer |
| Events of Foreclosure: | | | | own? This is where the investor comes in. |
| 1 - Succession of Trustee. The original trustee is | | | | Short Sale. The Pre-Foreclosure Business |
| usually the title company which handled the lending | | | | Opportunity: |
| transaction. This arrangement remains in place | | | | Clear understanding the foreclosure process |
| through the life of the loan until default. The | | | | enables the pre-foreclosure investor to unravel |
| original trustees are title companies such as Ticor, | | | | the entanglement created by all the parties |
| Fidelity or First American Title. Title companies, | | | | involved with the property in foreclosure. Usually, |
| although they can do it, are usually not in the | | | | the total value of all of the principals and interest, |
| business of foreclosing. Because of this, at default, | | | | taxes and liens is greater than the value of the |
| the beneficiary usually selects a successor trustee. | | | | property. As a result, there will be losses to |
| A successor trustee is usually an attorney firm | | | | everybody, including, sometimes, the senior |
| specialized in the business of foreclosing. | | | | lienholders. The goal of the pre-foreclosure |
| Northwest Trustees and Shapiro & | | | | investor is to obtain the property at a very |
| Sutherland are two examples of such firms. The | | | | convenient price by reducing the losses of all |
| successor trustee is in charge of all matters | | | | secured parties. This is called a short sale. A short |
| related to foreclosure. From now on the | | | | sale happens when the creditors authorize the |
| successor trustee will be referred to as the | | | | homeowner to sell a property for less than what |
| trustee. | | | | they are owed. You, the investor, makes this |
| 2 - Service and Publication of Notice of Default | | | | happen through knowledgeable and skillful |
| and Election to Sale (NOD). The trustee must | | | | negotiation. Look forward to my future article on |
| record and send a letter to all parties with a | | | | these negotiation techniques. |
| recorded secured financial interest in the property | | | | I hope this information puts you one step closer |
| stating that the subject property will be sold in | | | | to achieving your own success in pre-foreclosures. |
| order to satisfy the secured loan. This letter is | | | | Mastering the mechanics of foreclosure has |
| commonly known as the NOD letter. This letter | | | | worked for me and will work for you. Great |
| must be sent to all parties by certified mail or | | | | profits will be your reward. |
| served in person. Failure to not serve all secured | | | | (C) 2006 -2007 Advanced Real Estate Concepts, |
| parties may invalidate the process. The secured | | | | LLC., Portland OR. All rights reserved. |