“Hi, Andy. I was just looking at a property in San Rafael, a pre-foreclosed home. How does it work to buy a home in that financial state?”
When a property is in pre-foreclosure, that means the owner has been unable to pay their mortgage and a Notice of Default has been filed on the property. At that point, the owner has 90 days to cure the default, otherwise they will be issued a Notice of Trustee Sale. 21 days after the Trustee Notice, the property is auctioned on the steps of City Hall in San Rafael to all-cash buyers who typically purchase the home sight-unseen with cashier's checks in hand. These sales are often delayed, as owners work with lenders to cure their defaults. There can be more than one notice on a property if it has a second mortgage or is part of a homeowner's association that hasn't gotten their dues.
When a house is in default, it is usually also in physical distress. If an owner can't pay their mortgage, they always put off expensive repairs that need addressing in the home. Consequently, Purchasing a home at an auction can be very risky and isn’t something recommended for anyone adverse to significant amounts of work that require further substantial capital investment.
When the Notices are filed with the County, they become public record and can be accessed either at the Marin County Civic Center or online. There is a delay between recording times and when the notices appear online, so people gain 'first mover advantage' by going directly to the Civic Center on a regular basis. The biggest issue is that homeowners in default are under extreme pressure, and they will often be bombarded by potential investors as soon as they get their notice. I've heard separate stories about both an agent and investor who tried to go on a property in default to approach an owner and ended up getting guns pulled on them.
Sometimes when an owner is in default, they will sell their property either on or off the market. If there is enough equity it's just like any other sale, with the title company curing the defaults for the new owner. If there is not enough equity and the debt on the house is more than what it's worth, the property becomes what is known as a 'short sale'. In a short sale, the lender(s) agree to take losses on the notes. There may be more tax consequences in a short sale than a foreclosure, each situation is different and sellers are well advised to speak with CPAs about their situations.
If a property doesn't sell at auction or in a short sale, it becomes a bank owned property, or REO (Real Estate Owned). REOs can be sold in bundles to investors, or they can be sold on the Multiple Listing Service (MLS). I started selling short sale properties in 2007 and by 2009, I had transitioned to the REOs and worked with an asset management companies who represented several banks. Most of the homes I sold were owned by Bank of America or Chase.
In the event of a foreclosure, the bank will offer the former owners 'Cash for Keys'. When I got my assignments, I established contact with the former owners and made offers on behalf of the bank, then delivered checks for vacant and 'broom swept' houses. Most often, the REO homes were sold 'as is' with no improvements. However, if there were safety issues associated with accessing the home, we needed to get those fixed prior to going on the market.
BTW in the past online postings of properties in default were often out of date. I'm not up to date on the reliability of the online notice postings. The property you mentioned on in San Rafael currently has a Trustee Sale Notice. There are two loans on the property, from 2015 and 2013. There is most likely equity in the property. However that particular street can be quite busy, so the location is less desirable.
I hope that helps! Please let me know if you have any more questions.