MISSION IMPOSSIBLE PART 1
I don't think you'll be confusing me with Tom Cruise anytime soon but I recently had my own version of Mission Impossible regarding one of my sales in North Redondo Beach.
I did what no rational agent would do and accepted the assignment to list a property that was going to Auction (Trustee Sale) 8 days later. The Sellers had around $100,000 of equity which would have been lost in addition to the inconvenience and stress of losing their home and being evicted.
Before I get into the case study, for those reading this who aren't familiar with the foreclosure process in California, let's take a deep dive into what happens and what your options are.
CALIFORNIA FORECLOSURE PROCESS
The foreclosure process in California is different than in some other states because of the way what we call a "mortgage" is structured. The way we secure loans for real property is through a promissory note and deed of trust. When the home owner "defaults" ie doesn't make timely loan payments, the trustee sells the property at an auction on the courthouse steps. In other states, there might be a court proceeding and different process. No matter where this is happening, though, it is stressful. for the party being foreclosed on.
One of the biggest mistakes many homeowners make is ignoring one or all one of the notices I'm going to reference. Another is misinterpret what's going on. Here's what happens.
Notice of Default: The Notice of Default (NOD) is the first step on the part of the lender to initiate foreclosure actions. The Notice of Default in California is recorded once the borrower fails to meet the agreed upon terms of the loan. Typically, this simply means missing a payment, although in practice the NOD period extends for 90 days before the lender officially moves to the next step in the process.
At this point, the property is considered to be in "pre-foreclosure," and the homeowner may receive a notice through the mail with a projected sale date. Sometimes homeowners will opt to do a short sale or offer a deed in lieu of foreclosure. Those options are discussed below.
Notice of Trustee Sale As soon as 90 days have passed from the NOD being recorded, the lender can then issue a Notice of Trustee Sale. Unlike the NOD, which is essentially a courtesy window to allow the borrower to become current, the notice of sale in California is an actionable notice. It serves as a declaration of intent to sell the property at auction right out from under the homeowner.
Auction: Depending on a variety of factors, the actual auction date for the property can vary widely. Technically, however, the lender/trustee only needs to wait 20 days after the Notice of Trustee Sale has been issued. However, there are several ways to postpone the actual auction, and many homeowners don't face their actual sale date for about a year after the initial date.
Outcome: There are four main outcomes that can follow the auction phase of the foreclosure process:
- sale to bank
- sale to a third party
Let's look at each of these outcomes separately.
Postponement: If you are able to secure a postponement (often with the help of a foreclosure attorney), a new auction date is set and the process starts all over again. A postponement can be sought for a number of reasons: to simply buy more time in the property before moving; to give yourself more time to restore your finances and become current; or to prolong the window for formulating a legal strategy to fight against the foreclosure. The legal strategy is often bankruptcy.
Cancellation: There are several reasons why an auction sale can be cancelled entirely. For example, the owner may decide to initiate a short sale of the property. Perhaps a loan modification was agreed upon at the last minute. At any rate, a cancellation is typically good news for the homeowner, but it doesn't necessarily mean that they get to keep the property when all is said and done.
Sale to Bank: A frequent outcome of the auction sale is that the lender is the only one to bid on the property. Often, the home will go right back into the lender's possession. It may then subsequently be listed as REO; Real Estate Owned (by the bank).
Sale to Third Party: Properties in foreclosure are often attractive to third party buyers who seek to capitalize on the distressed nature of the property in order to get a good deal.
As mentioned above, before the process gets to the courthouse steps, some home owners will opt to do a short sale or a deed in lieu.
Short Sale: a sale of real estate in which the net proceeds from selling the property will fall short of the debts secured by liens against the property. In this case, if all lien holders agree to accept less than the amount owed on the debt, a sale of the property can be accomplished.
Deed in Lieu of Foreclosure: a transaction in which the homeowner voluntarily transfers title to the property to the lender in exchange for a release from the mortgage obligation. Sometimes when this is done the owner may receive some help with transitioning and other releases.
MISSION IMPOSSIBLE (continued)
Now that you've got all that, back to my case study of helping a client avoid foreclosure in Redondo Beach.
So I go to the appointment with the homeowners knowing well in advance that they are facing an imminent foreclosure.
As I get the background information I realize that there is a slight chance that I can pull everything together and get them their equity and not see the bank grab it all. Well a brief foot note on that. If the bank held the auction and the proceeds were enough to pay off the liens, penalties, legal fees and what not, the homeowners could potentially see some money. But the chances of that happening are about the same as me going sky diving with Tom Cruise!
Because the first and second loan were with the same lender and because they had never had a postponement, and most lenders will provide at least one, I felt reasonably confident that once the home was listed we could buy some time.
I was able to get my photographer at the property the next day after the listing was signed and the same day it was in the MLS. The very next day we held a Broker's Open and the following weekend did two days of extended open houses from 12-5 instead of the usual 1-4.
A little bit about the subject property. It was relatively new and very sellable under any circumstances. But even facing what we were, the Sellers still wanted to price at the top of the range. So some things stay the same no matter what the situation is. My advice is always to price to get multiple offers the first week on the market. Listings aren't fine wines and they don't get better with age.
Even tough it was highly possible that I would never see a dime of commission because there was no guarantee the home wouldn't be foreclosed on, I went all in on my typical media package of professional photos and flyers, 3D virtual tour and cinematic video. When I tell people I market every listing as if it is the most expensive property in LA, I really live by that.
Once the home was listed we were able to get a short extension from the lender so we had some breathing room.
I also was able to line up a "hard money" loan for the Sellers if they chose to take it. That would have allowed them to pay the reinstatement and bring the NOD current and would have given them more time to sell. Or they could have decided not to sell and start the process over again. Whatever. I always do what is best for my clients. They opted not to go the hard money route and we went ahead with the Open Houses.
Literally the first couple who came to see it on Saturday became the eventual buyers. But they didn't submit an offer, which was great in that it was "all cash", until the end of the weekend on Sunday.
The Sellers, even though they were in danger of losing their home, did want to counter the offer (which was low), and even wanted to wait for the next week's Open House to see if someone was going to offer more. This is a trend I see from many sellers right now and I have yet to see it play out to anyone's advantage. That is, there is not likely to be a better buyer come along than the one you have now.
So after around 3 rounds of negotiating we finally opened a 30 day escrow which allowed us to successfully close 3 business days before the Auction. My clients got their net proceeds of around $100K and avoided foreclosure. Mission Accomplished.
MISSION IMPOSSIBLE PART 2
I have another Redondo Beach listing coming where the Seller is not only in the early stage of foreclosure but getting divorced also. And the spouse has vanished! Cue the music.
and now the obligatory video
Unrelated to absolutely anything Real Estate related except my Tom Cruise references above and to enjoy a good laugh, check this out.......