In the Event of a Default
What happens if the borrower doesn’t perform?
A default occurs when the borrower fails to make an interest or principal payment, or fails to live up to some other provision of the loan agreement. At this point, the lender instructs the loan servicer (an independent company that deals with the borrower) to file a notice of default. This is the first step in a series of events that culminates in a foreclosure sale. In California, it takes about four months to hold a foreclosure sale after the notice of default is filed.
At any time prior to the foreclosure sale, the lender and borrower could make arrangements that would obviate the need for the foreclosure sale. For example, the borrower could cure the default by bringing all of his or her payments current. Or, the lender could give the borrower an extension on the loan maturity.
When a foreclosure sale takes place, there are two main outcomes. Either the lender ends up owning the property; or, someone else makes an all-cash bid to purchase the property and the lender accepts that bid instead of taking back the property.
What is the foreclosure process like and how difficult is it to manage?
The foreclosure process varies from state to state. In California it takes about four months from the initial default by the borrower until the foreclosure sale. The key to handling a foreclosure smoothly is to have an experienced trustee and real estate lawyer. The trustee’s job is to provide proper notices at each stage of the foreclosure process to ensure that the process is deemed valid. The real estate attorney helps negotiate any special circumstances such as a bankruptcy by the borrower.
Trust deed investors need to be prepared for a default on any given loan. The foreclosure process takes time and money but the key processes are outsourced and can be managed by the investor fairly easily.
How long does it take to exit a trust deed investment in which the borrower defaults?
The amount of time varies by state. In California, it takes about four months to foreclose, if the lender takes action immediately at the time of the default. The property is then fixed up, if necessary, and listed for sale. The selling process itself should take 45-60 days if the property is priced properly. Therefore, the entire process of exiting a defaulted trust deed investment is about six months. In other states the timeline and process vary and can be longer. A bankruptcy by the borrower adds time to the process, possibly 30-90 days.
On the other hand, expert handling of the default could shorten the exit time substantially. For example, if the lender and the borrower work together, instead of a foreclosure, the home can be sold without a foreclosure, cutting the process down to about 60 days instead of six months.
Someone I know has been trying to sell her house for over a year with no success. How can a trust deed investor sell a foreclosed house in a few days?
There is a price at which every property will sell. The reason that someone might be having difficulty selling a house is that the asking price is too high. A trust deed investor who has foreclosed on a house is interested in selling the property quickly and will price the house to sell.