Insight 8
Understand the Fundamentals of the US Foreclosure Process
If you're a Canadian who's been thinking about investing in real estate, you're probably a Canadian who's been thinking about investing in residential home foreclosures south of the 49th parallel. And why not? American residential real estate foreclosures are a hot topic in today's investment circles, and wealth gurus on both sides of the border are asking their students to take a serious look at foreclosed real estate in the United States.
Before you take that step, let's look at how the US foreclosure process works and explore the market basics that make it worth your time and money.
Foreclosure Defined
Generally speaking, a US residential real estate foreclosure involves a situation where a homeowner holds legal title to a property and the bank places a lien or mortgage on the house for the amount owed. The lien remains with the bank/lender; the borrower holds title. In the event of a default on the loan, the bank notifies the borrower and requests that the borrower make up payments. After ninety days, or three missed payments, the bank has the legal right to begin the foreclosure process and take back the house in lieu of missed payments.
Depending on the state, the actual foreclosure can take anywhere from 112 days to two years. In today's economy, the process can take even longer because the banks don't really want to take back more houses. This reluctance to get the property off their books is not a business-as-usual approach to how banks usually sell foreclosed property!
The Homeowner's Rights
If you are buying houses that have been foreclosed on in the United States, you should know that the homeowner has some rights. First, the bank cannot take back a house unless one of the following conditions is met: the house goes into a foreclosure auction or the borrower voluntarily deeds the house back to the bank in lieu of a foreclosure. As the foreclosure auction is more common, we focus on that here.
Foreclosure Auction
In a foreclosure auction, the bank auctions the house at the local county courthouse for the amount it wishes to receive. If no one bids on the house, or if the opening bid set by the bank is too high for any bidders, the bank gets the house back and lists the property with a local real estate agent. Such properties—those owned by a lender, usually a bank—are placed in a class called real estate owned (REO).
The Big Picture
A great many American homeowners found themselves in tough situations, as housing prices in general fell because people weren't buying houses. Although some markets and the economy overall are showing signs of recovery, let's face it, if people don't have money, they're not buying houses. In what can only be described as a vicious economic cycle, some people may, however, still have to put their houses on the market for any number of reasons, in spite of soft prices.
Since numbers tell the story better than any market insider or wealth guru, let's take a look at some US foreclosure stats from 2012. We saw in Insight 1 that from September 2008 to April 2012, there were 3.6 million foreclosures across the United States. According to CoreLogic, the five states with the largest number of completed foreclosures for the twelve months ending in April 2011 were California (142,000), Florida (92,000), Michigan (60,000), Texas (58,000), and Georgia (57,000). These five states account for 48.8 percent of all completed foreclosures nationally. In addition, there are presently 1.6 million more homes in shadow inventory—homes that could be foreclosed because they are technically in default.
What the Numbers Really Mean
Taken at face value, those numbers are shocking. But as you will learn in the next Insight about national housing prices, numbers tell only part of the story. Indeed, Insights 12 and 13 on “bad” and “good” neighborhoods will give you some valuable perspective on why some US neighborhoods have weathered the economic downturn and residential housing market corrections much better than others.
In the meantime, remember that the very worst state in the entire United States reached a foreclosure high of 3 percent, but is now down to 1.45 percent. That's still high when compared to the normal historic rates, which sit at less than 1 percent. When Canadians are asked to estimate the rate of foreclosures in states like Nevada, however, they routinely cite figures of 15, 20, and 30 percent. Some go even higher—and those estimates are dead wrong. The actual number in the worst state was 3 percent. Period.
From an investment perspective, that means a lot of American homeowners are still paying their mortgages. And that means that while foreclosures equal investment opportunities, you shouldn't expect to be shooting fish in a barrel! And be aware that according to the US Census Bureau, 32 percent of Americans own their homes without mortgages.