The possibility of foreclosure has been a persistent reality for real estate owners for some time. Foreclosures often occur when property owners default on their mortgages. County or state authorities may also foreclose on a property after the owner fails to pay property taxes. In some situations, a homeowner’s association may foreclose for failure to pay fees or assessments, or for other breaches of the applicable covenants, conditions, and restrictions. For California real estate investors, foreclosure auctions could present an opportunity to acquire property below market price. Investors should be aware of the significant risks that often come with properties sold at a foreclosure auction, and they should carefully research any property before the auction date.
Judicial vs. Nonjudicial Foreclosure
California allows two types of foreclosure: judicial and nonjudicial. In a judicial foreclosure, the creditor or its agent must file a lawsuit and obtain a court order before they may conduct an auction. Nonjudicial foreclosure, which does not require a court order, is possible when the deed of trust signed by the mortgage borrower includes a “power of sale” clause. This clause authorizes a designated trustee to conduct a foreclosure, and essentially waives the borrower’s right to a court proceeding. Creditors must still meet numerous requirements regarding notice and opportunity for the borrower to cure a default.
Right of Redemption
From a real estate investor’s point of view, the most important distinction between judicial and nonjudicial foreclosure involves the borrower’s right of redemption:
– In a judicial foreclosure, the defaulting borrower can get the property back by paying the full amount owed to the lender, plus additional costs. The deadline to exercise this right is either three months or one year after the auction date.
– In a nonjudicial foreclosure, the borrower has no right of redemption. All sales are final, so to speak.