A borrower signs a deed of trust when a loan is made to buy a house, and the deed of trust gives the lender a security interest in the property being purchased with the loan funds. If the borrower fails to make payments or otherwise fails to perform the obligations under the promissory note, the deed of trust spells out how the lender may proceed with foreclosure on the property. A lender uses the foreclosure process to enforce its rights in the property that was given by the borrower to obtain a home purchase loan.
The foreclosure process requires the Public Trustee of the county where the property is located to advertise and conduct a public auction for the sale of the property. There are three distinct time frames when you might be able to buy property that is involved in a foreclosure, and the requirements and processes differ at each stage.
1. Before the Foreclosure Sale
It’s possible to purchase the property from the owner before the Public Trustee conducts the sale of the property. It is not uncommon for a property headed for foreclosure to be placed on the market. A purchase of property pre-foreclosure is like any other real estate purchase. Any lender who has a lien on the property must be paid from the proceeds at sale for the lien to be released from the property.
If there are insufficient funds to pay off the lender, the lender may nonetheless agree to release its claim on the property. This situation is known as a “short sale.”
2. At the Foreclosure Sale
At the foreclosure sale, the highest bidder gets a Certificate of Purchase to show that he or she purchased the property at the sale. The purchaser must immediately pay the purchase price to the Public Trustee (which is generally done by a certified check). It can be very difficult to find a lender who is willing to make a loan to someone to purchase property at a foreclosure sale.
Moreover, buyers at foreclosure sales are bidding against the lender that started the foreclosure in the first place. The lender can bid in the total amount of its debt and interest and late fees, plus the costs incurred to conduct the foreclosure (such as attorney fees, title work, postage, etc.) The lender does not have to pay the Public Trustee, but merely has to tender a written bid. It is the exception, not the rule, that the lender’s bid is significantly below the market value of the property.
3. After the Foreclosure Deed is Issued
After the property owner’s redemption period expires, other lienholders may hold rights to redeem the property. Once all of the rights to redeem expire, the holder of the Certificate of Purchase can request a deed from the Public Trustee. Once the public trustee’s deed is issued, the grantee on the deed is the title owner to the property and may sell it just like any other owner may sell property.
For more information on buying a home in Colorado, check out “Colorado Home Buyer’s Guide ” by Vicki S. Porter