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Foreclosures Defined

The word foreclosure can mean several different things.

Pre-Foreclosure/Short Sale:

In Arizona, foreclosure can be a swift and simple procedure by a mortgage company. Foreclosure is the legal process by which a mortgage company can obtain legal ownership of a property. It relinquishes a home owner from any an all rights to the property and evicts the homeowner from the premises.

In most cases, foreclosure can begin as soon as a home owner is late with the mortgage payment. However, most institutional lenders will try to work out alternatives with a home owner in default before trying to repossess a home. If a home owner works with his or her lender, the lender may wait an additional three months, on average, before foreclosure is initiated.

In situations where the home owner is just not in a position to work out any solution with the lender, due to the inability to make up past payments or be financially capable of making payments under a re-structured mortgage, the home owner may try to dispose of the property through a sale.

If the home owner has some equity in the home based on current market conditions, then they should try to sell the home, even if it is as at a“paper-loss” from previous market values.

Many current scenarios in today's market involve the situation where the home could not be sold for enough to cover the indebtedness and selling costs. Known as a “Short-Sale”, this can be a complicated and tedious process which usually requires the home owner to seek the assistance of a professional Realtor, legal advice and income tax consultation.

If an alternative cannot be arranged between the lender an homeowner and the home owner is unable to dispose of the property, the lender will begin the foreclosure process. Because most home owners have a trust deed, the foreclosure timeline is expedited because the lender does not have to go to court to foreclose on the home.

This leads to the Trustee's Sale or Auction.


In Arizona, a lender must instruct its trustee, the person or entity that has the legal right to sell the home in a trustee sale, to handle the appropriate paperwork. By law, the trustee must record in the county recorder's office a “Notice of trustee's Sale” or “Notice of Default”. This is the legal notice that the home is to be sold no sooner than 90 days from the recording date of the notice. This notice must also be published a minimum of once a week for four consecutive weeks in a “newspaper of general circulation” in that county. The trustee will mail a notice within five days of the recorded notice of trustee sale to the home owner and other parties affected by the foreclosure.

Assuming that the home owner has not reinstated the loan, the trustee will conduct the sale at a previously disclosed location. Each bidder is required to provide a $1,000 deposit to bid on the home. At such time, the home is sold to the highest bidder, which may include the mortgage company. The successful winning bidder has until 5:00 p.m. of the following day to pay the remaining balance in cash or other acceptable forms of payment as determined by the trustee.

Should the bidder fail to pay by 5:00 p.m. of the following day,their $1,000 deposit is forfeited and the second highest bidder is given until 5:00 p.m. of the next day to consummate the purchase. In addition to the forfeit of deposit, the winning bidder who fails to pay the amount bid by that bidder is liable to any person who suffers a loss or expenses as a result,including attorney fees.

Proceeds from the sale are used to pay off the primary lien (trust deed) against the home. If any proceeds remain, payment is made to junior lien holders in order of priority. In the event that any remaining balance is leftover from the sale, the trustee will remit the balance to the ex-homeowner.

Title is conveyed to the winning bidder by a trustee's deed. This transfer relinquishes any right the previous owner has from reinstating the mortgage or redeeming the property after foreclosure. In addition, the trustee's deed clears the title of any liens and encumbrances that were junior to the trust deed.

In certain situations, junior lien holders may pursue a deficiency judgment against the previous owner to recover the balances owed. However,Arizona law may protect the home owner against said judgments from the primary lien holder.

Very few options exist under the law that prevent or impede a foreclosure.

Image Hosted by ImageShack.usBank Owned/REO:

Once the property has been “foreclosed” or sold at the trustee's sale, the priority lien holder (bank or mortgage company)will usually be the successful bidder. They are now the legal owners of the property.

Since banks and lending institutions are in the business of loaning money and not in the business of real estate investing, they will try to sell the property as quickly and for as high a price as they can.

The value of properties at this stage will be dictated by: a) the condition the previous owner left the property in, b) the amount of clean-up or rehabilitation the lender chooses to or not to do, and c) current market conditions including; current supply of homes on the market, decreasing or increasing home values, and current demand.

Most lenders wish to dispose of these non-performing assets quickly, thus, they will usually aggressively price these homes to attract buyer/investor interest. Pricing will almost always take into consideration the amount of rehabilitation the property currently needs and the market factors outlined above.

These homes will be sold “As-Is”, with no warranties, expressed or implied. However, the buyer retains the right to conduct any inspections necessary to satisfy them that the agreed upon purchase price is acceptable based on all known facts.

With a highly motivated seller and a knowledgeable, ready, willing, and able buyer, a successful transaction can be consummated to the benefit of both parties.

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