How Does Foreclosure Work?

Did you ever ask yourself how does foreclosure work? I always assumed that everybody knew how it worked, but it turns out that most tend to mistake it for declaring bankruptcy or liquidation. 

There are many similarities in the processes involved in a foreclosure and in liquidation. The end result differs according to what was being foreclosed or liquidated. 

Before we analyze how foreclosure works, I would like to say that I am not a lawyer nor am I playing down the seriousness of filing a chapter 11, being foreclosed and being liquidated. I have not personally undergone any of the processes and I am not drawing on my experience, but my own research.

Back to the main question; foreclosure is a name given to a process when a mortgage lender reverses a sale of property after the ownership has been transferred to the new owner who missed his or her payments for some reason. 

Let me say this very clearly, the problem is missing regular payments. If you go out and buy something you need to pay the full price or pay the installments on time, every time. You cannot miss payments and expect the seller to accommodate you. It’s like going to work, doing the work and getting told that your paycheck is in the mail for 3 months. 

I have the greatest sympathy but you have to be honest with yourself and if you cannot afford your home or investment you will lose it. 

Now, let’s say that you have a property that you sold to a decent buyer who couldn’t organize enough money. You take pity on the buyer (your first mistake) and you agree to take a seller’s note on the remaining portion of the purchase price (your second mistake). 

The fact that you took the risk that a licensed mortgage lender would rather not take is a big red flag in my books. A few years go by and let’s say the seller gets severely injured but loses time at work to recuperate. 

His medical bills are through the roof and his salary insurance pays him only 2/3 of his original salary while he is still undergoing rehab. The guy had to decide; pay you on time, the bank, his normal living expenses and the hospital co-payments. He decides that you are least likely to mind because you are a nice guy.

You contact him and he tells you his story and even has the proof of his bills and reduced income. What do you do? 

Do you: 

1)   Trust that he will recover and back pay you for the full amount when he starts working again? 

OR

2)   Start a foreclosure proceeding to recover your money before you continue to lose more? 

The answer is you have to contact a lawyer and an accountant to get some advice.

Please read the above advice again before you continue. It is very important to know what you are getting into because you may have avoided this mess if you paid the $500 for professional advice when the buyer fell short when acquiring financing.

The lawyer will inform you of your options, the costs to you and the prognosis of coming out a winner in the end. The accountant will look at your financial situation, the buyer’s financial situation and whether it will make financial sense to wait or start foreclosure procedures on the buyer. 

When you decide to foreclose on the property you will have to find a lawyer who specializes in winning foreclosures. You do not want to get this step wrong or you could be in court for years. 

Is it wrong to foreclose on a buyer who is clearly down on his luck? That is why I asked you to consult your advisors first. It is not wrong but a necessary business decision. It is the same as when you need to protect your family from financial hardship, there are unpleasant steps that need to be undertaken despite the pain they cause.

Besides, nobody held a gun to his head and demanded that they buy a house they can’t afford. 

The process to foreclose is a legal process that is the realm of foreclosure attorneys and you need to be ready to pay them about $10 000 to see the whole thing through. I can only tell you that it has to do with proving that the defendant (buyer) failed to meet his obligations and forfeits the right to continue as the owner of the property. 

The onus to prove who is wrong depends on which state or country you are in. Other countries require you to prove that the buyer skipped payments and he or she needs to disprove that it’s not true. Once that is settled then the question remains if it was intentional or accidental. The outcome can be decided in a matter of weeks or years.