Foreclosure is never a good thing for a property owner. A foreclosure happens when someone borrows money to buy real estate and doesn't repay it according to the contract terms. In California, there are two types of foreclosure, judicial foreclosure and nonjudicial foreclosure. Most lenders opt for deeds of trust in order to have access to nonjudicial foreclosure. Anyone interested in buying a pre-foreclosure home needs to understand how foreclosure works in order to be able to step in at the right time.
Financing Real Estate
Most people are not prepared to buy a home in California with an all-cash offer. And as California real estate values soar, the idea of buying a home for cash seems increasingly remote, especially for first-time buyers. Instead, a person planning to buy a California house saves up for a down payment and borrows the rest from a financial institution.
The financial institution making the loan secures the loan by taking a lien against the property. That means that if the property owner doesn't make the payments due on the loan, the lender can have the property sold to pay off the loan. In California, a lender can use a mortgage or a deed of trust to secure the loan. These terms refer to different ways of giving the lender a security interest.
Mortgage Vs. Deed of Trust
Both a mortgage and a deed of trust are legal documents that secure repayment of a real estate loan by placing a lien on a property. A lien gives the lender a remedy in case the borrower defaults on the loan, allowing the lender to sell the property to recoup its money.
There are several differences between mortgages and deeds of trust. One is the number of parties. A mortgage involves two parties, the borrower and the lender. A deed of trust involves three parties: the borrower who is termed the trustor, the lender who is termed the beneficiary, and the trustee. The trustee is an independent third party who holds the deed of trust. The other difference involves whether the foreclosure must occur through a court action.
Judicial Vs. Nonjudicial Foreclosure
When a lender secures its interest in a property with a mortgage, it must use a judicial procedure to sell the property if the buyer defaults. That means it must file a lawsuit and ask the court to sell the property. If the sales price does not cover the loan, the lender can get a judgment against the borrower for the difference. A judicial foreclosure can be an expensive and lengthy process for both the borrower and the lender. It is rarely used in California, where lenders prefer using deeds of trust.
Under California law, a lender can foreclose on a deed of trust without going to court, which is why this is called a nonjudicial foreclosure process. The deed of trust includes a power-of-sale clause. This gives the trustee legal authority to sell the property to pay off the loan balance if the borrower fails to make payments.
Not having to go through the courts makes the process faster and less expensive than a mortgage foreclosure. That is why it is preferred by lenders in California even though no deficiency judgment is available — if the sales price isn't enough to pay the loan, the borrower is not on the hook for the difference.
Nonjudicial Foreclosure Procedure
The vast majority of foreclosures in California are nonjudicial. While each one is slightly different, all involve the same basic steps:
- The lender contacts the borrower to advise her of the default and discuss options to avoid foreclosure.
- The lender cannot begin foreclosure before 30 days after this contact.
- If the lender and the borrower do not work out a plan, the lender can file a Notice of Default in the county where the property is located, beginning the formal foreclosure process.
- The borrower has 90 days from the date the Notice of Default is recorded to pay what is owed.
- If the borrower does not pay during that 90 days, the lender can record a Notice of Sale to advise the property owner that the trustee will sell the home atpublic auction in 21 days.
- At least 21 days after the date the Notice of Sale is recorded, the lender can sell the property at a public auction. The borrower can pay what is owed and stop the process until five days before the sale. At the auction, the property is sold to the successful bidder for cash or a cashier’s check. The successful buyer gets a trustee’s deed.
Buying a House in Foreclosure
There are three stages at which a real estate investor can purchase a property during foreclosure: she can buy during pre-foreclosure; she can bid at the public sale; or she can buy a bank-owned property after the sale. While it is possible to get a great deal during pre-foreclosure, this is the most difficult stage in which to purchase the home. That's because a property is not necessarily for sale during this stage.
Buying pre-foreclosure means buying the property during the period after the Notice of Default is issued, but before the foreclosure auction. The problem is that the owner is often hopeful at this stage that he can pay what is owed, rather than contemplating a sale. That means that a person interested in buying at this point must first learn about the foreclosure in process and locate the distressed property.
Various businesses provide online lists of properties in pre-foreclosure, together with the address and owner contact information. When a potential buyer sees a property listed online that looks interesting, she can drive by to take a look. If she likes the property, she can contact the owner, arrange for inspections and try to negotiate a purchase.
- California Courts: Foreclosure
- Legislative Information: Civil Code Section 2924
- Stimmel Law:The Basics of Foreclosure on a Deed of Trust in California
- Viva Escrow: Deeds of Trust Explained
- Sacramento Law Library: Real Property as Security for a Loan
- Nolo: What's the Difference Between a Mortgage and Deed of Trust?
- Foreclosure.com: How to Buy California Foreclosures