Foreclosures – The defaulting borrower has lost all rights to the house and the bank has taken possession.  The bank is now responsible for selling the property. 

The Foreclosure Process:

1. Notice of Default
2. Cure Period – Borrower can bring the loan back to current
3. Acceleration of Loan – remainder loan amount comes due!  (if Borrower can’t bring loan current)
4. Foreclosure Begins
5. Advertise for a Period of Time – (Noticed Up) – a title search is performed and all lien holders are notified – laws are very strict during this step – can’t stop the procedure – cost too much money to start and stop
6. Pay Off Entire Loan or present a Deed in Lieu of Foreclosure – Superior loan gets paid off, the rest of the liens remain in effect
7. Auction – at the courthouse steps – looking for bids higher than the amount of the Superior Lien – bank usually buys it’s own loan
8. Property becomes REO – real estate owned

Virginia performs both Judicial and Non-Judicial Foreclosures.  Foreclosures due to mortgage default are typically Non-Judicial.  The mortgage paperwork that a borrower signs at the closing table usually has a Power of Sale Clause that allows the trustee to sell the property if the borrower fails to make their mortgage payments.  It takes as little as 45-60 days to process a foreclosure in Virginia.

The property only needs to be advertised for 14-28 days.  The newspaper in which the foreclosure is advertised must be approved by a court order and proven to be a publication in the area the property is located.  The notice of sale must include the legal description of the property, the terms of the sale, and the location, date, and time of the sale.  The defaulting borrower also must receive notice that the property is going into foreclosure.  This notice can either be a copy of the advertisement or a copy of the notice of sale.  The notice must be received by the borrower at least 14 days prior to the foreclosure sale.  

The Trustee conducts the sale at the local courthouse between 9am - 5pm.  An opening bid is announced. The opening bid is typically the amount owed on the note.  In today’s market this can mean that the opening bid is for more than what the property is now worth.  The property usually sells to the highest bidder, provided the highest bid at least matches the opening bid amount.  If there are no bids or the opening bid can not be matched, the foreclosing lender has the property transferred to them.  If a bid is accepted, the Trustee usually requires a cash deposit of 10% or the terms specified in the deed of trust.  The property is typically not available for inspection during this process.  The new purchaser may also be getting a property that is still occupied.  It will now be the new owner’s responsibility to evict the occupants.  The new purchaser may also be responsible for other liens that have been filed against the property.  It is very important to work with an attorney who is familiar with foreclosure proceedings and foreclosure law if you are trying to purchase property at the courthouse steps.  REALTORS(R) are not involved in courthouse step purchases.  

There is no redemption period for mortgage foreclosure in Virginia.  This means that once the property sells at the courthouse or wonership is transferred to the foreclosure bank, the defaulting borrower has lost all rights to the property.  Again, there is no right of redemption for mortgage foreclosure properties in Virginia.  The foreclosing lender can also pursue a deficiency judgment against the defaulting borrower.  The deficiency judgment can include the deficiency amount – the amount not covered by the sale or the amount of the defaulted loan, and all applicable fees.  Declaring bankruptcy does not save your home from foreclosure in Virginia.  Virginia has a very small homestead exemption – $5000 plus $500 per dependent.  If the borrower is not paying the mortgage after filing for bankruptcy, a judge can order the sale of the property. 

If the deed of trust can not be produced in Virginia, it does not prevent a forclosure.  The Trustee can still proceed with the sale.  Written notice must be given to the defaulting borrower that the instrument can not be produced.  The notice will be mailed to the last known address of the borrower.  A request for sale can be made 14 days after mailing this notice.  The Trustee can then proceed with the foreclosure. 

A landlord who is going through foreclosure is required to give notice to the tenant within 5 days of receiving notice from the lender.  If the tenant receives such notice, they should immediately notify the property management company if the property is professionally managed.  There are federal guidelines that allow tenants to remain in the home for up to 90 days, however, some banks are ignoring these guidelines.  If you suspect your landlord is defaulting on their mortgage, you should contact a real estate attorney immediately! 

When you purchase a home in REO you will be given a Sheriff’s Deed.  This deed does not warrant the house for any time period, except that which the bank held the property.  These properties are sold “as-is.”  A Buyer will be filling out a traditional Purchase Offer when trying to contract for an REO home.  The bank will then review the traditional contract and either accept, negotiate, or deny the contract.  If the bank accepts, they will send the Buyer a new contract that they have drafted.  The terms of this new contract supersede all previous contracts.  There is no negotiating the bank contract.  It is what it is, read carefully!  Most banks allow you to do a home inspection; however, you can’t get out of the contract because of the results of the home inspection.  For the most part, the only way out of a Foreclosure contract is financing.  The Purchaser will also be responsible for turning on the utilities and de-winterizing and re-winterizing the home.   

Keys to Remember:

• Virginia is not a “Right to Redemption” state.  Once the property has gone to the courthouse steps, the defaulting party has lost their rights to the property.  Times up.
• The home is being sold “as-is” and “where-is.”  Some structural issues and mold problems will be handled by REO banks.  Significant problems with a property that can affect your ability to obtain financing should be addressed with the REO bank.
• Buyer Beware!
• You will get a Sheriff’s Deed, not a General Warranty Deed.
• Purchaser is responsible for turning utilities on and paying for utilities for a home inspection.  Purchaser also pays to de-winterize and re-winterize the home before and after the inspection. 
• You may not get keys to the house!  Be prepared to rekey the home regardless.   
• Some banks are exempt from paying state/ county/ city transfer fees and recording fees.  This will be an additional cost to the Purchaser.  Be prepared to pay 3.5-5% in closing costs. 
• Use your own attorney, not the bank’s attorney, to close the deal!  Some banks require the Purchaser to use the bank’s attorney to close the transaction.  This is a violation of RESPA.  It is the Purchaser’s right to choose their own settlement company.  Be prepared to deal with this obstacle. 
• The only “out” in the contract is financing.
• Banks want pretty short closing times, 30 – 45 days.  It is also best to close the 3rd week of the month.
• Banks want Buyer to have a direct lender, no mortgage brokers!
• Junior liens are wiped clean!  This is an advantage for the Purchaser!
• The bank has probably priced the house below market value.  There may not be a lot of negotiating room.  Don’t get too greedy!  The bank is also hoping to get multiple offers; be prepared to compete with several other purchase offers.  You need to put your best foot forward.  Many Foreclosures are now being sold for well over list price.  The highest price with the least amount of contingencies usually wins.  Your offer price should be on target with the market prices in the area.        

Foreclosures are stressful transactions.  They are not for the faint of heart!  But, if you hang in there and are patient, you can get a really good deal on a great house!