Understanding the process called foreclosure is crucial if one plans on making it a business. I believe you must understand it for two reasons. One, to help your client if you choose to go that route and two, to maximize your profits.

I will use the Nevada foreclosure process as the model for how foreclosures work, since the opportunities for purchasing foreclosures there are so huge right now. You must first realize foreclosure is governed by state laws. Some states use codes while other use statutes. Nevada uses statutes while their neighbor, California, uses codes.

In Nevada, and other trust deed states, the theory behind property title is simply that the property title remains in trust until payment in full occurs for the underlying loan. It is no more complicated than that. In laymen terms the property title is held by the lending bank until you fully pay off the loan.

The process called foreclosure however is a diferent kind of beast. Foreclosure is denominated as a non-judicial remedy. This means the lender does not have to go to court to start the process.

To tie all of the loose ends together requires a document called the deed of trust. It is the deed of trust that secures the title. By the way, Nevada, although primarily a trust deed state, also permits mortgages to serve as liens upon real property and for judicial foreclosures to occur through the courts.

However, a straight mortgage is rarely used because the power of sale provisions in trust deeds is a faster mechanism to effectuate foreclosure. Under a trust deed foreclosure, the right to redemption (more on redemption below) can be severely restricted. Pay attention to your state’s laws as they govern every foreclosure.

Since a lender in Nevada does not have to go to court to foreclose, this type of foreclosure is called non-judicial foreclosure. The absence of going to court does not relieve the lender from other statutorily prescribed duties. For example, the borrower must receive notice.

This notice is commonly called foreclosure by advertisement. This means the lender actually has to advertise in a paper of general circulation in the area in which the property is located that a foreclosure has been instituted against the homeowner.

This is possible because when the trust deed is initially signed at escrow it almost always contains a provision called a power of sale clause. This power of sale clause allows a trustee (see below) to sell the property in order to satisfy the underlying defaulted loan.  

Said another way all that is happening is the homeowner didn’t make the required monthly payments so the lender is exercising the power of sale clause to claim the collateral in the place of the payments.

The person who performs the sale is called a trustee. This trustee is a representative of the lender. Generally, the sale occurs in the form of an auction on the county court house steps on a stated publicized date at a stated time.

A non-judicial remedy carries with it very stringent notice requirements. It also requires the underlying legal documents to contain the power of sale language. This is to prevent fraudulent foreclosures by unscrupulous lenders.

Your state law may vary but in Nevada prior to initiating a foreclosure the lender must serve a notice of default. The notice of default is commonly called a NOD.

Under a NOD, the borrower has 35 days to cure any default. The foreclosing entity must send the NOD by certified mail. Without proper notice, the sale can be stopped and the lender can face legal action.

Once the defaulting borrower receives the NOD, he has 15 days prior to the sale and after receiving this notice to cure any default. The foreclosure will stop if an intent to cure is filed with the lender’s trustee during this time frame. The NOD period is almost always 90 days in length.

The second part of the foreclosure process involves another legal document called A Notice of Foreclosure Sale or A Notice of Intent to Sell. The time frame of this part of the process is 21 days. In other words, after or on or about the 90th day of the NOD term, this notice must be made within 21 days of the date of the sale and at a time, place and manner as stated in the notice of default.

Basically, the borrower will get this notice about 10 to 15 days before the 90th day. It will tell the borrower the date of sale, the place of sale and the manner of sale. It must mirror the NOD and the sale must take place as if it was a judicial sale. This protects the borrower.

If you add the time frame in the above process, you will get 111 days. However, it is really 120 to 121 days because of the time the lender must advertise the sale.

Foreclosure isn’t over simply because it went to sale on the court house steps. There is something called a right of redemption. Nevada, unlike some other states, has no post-sale statutory right of redemption.

A right of redemption after the sale would allow a party whose property has been foreclosed to reclaim that property by making payment in full of the sum of the unpaid loan plus costs. This right is generally only found in mortgage based states.

Under a judicial foreclosure there is a one (1) year right of redemption. This is why you must know the foreclosure laws of your jurisdiction.

There is another factor common in foreclosures. It is called deficiency judgment. This type of judgment may be obtained when a property in foreclosure is sold at a public sale for less than the loan amount which the underlying mortgage secures.

As with all foreclosure actions, deficiency actions have a defined time line. They must be brought within 90 days of a foreclosure sale. Also, if the loan was a non-recourse loan, no deficiency attaches to the sale. Hence, no deficiency judgment can be sought by the lender.

While not the exact steps in every jurisdiction, you still can consider the Nevada process a blue print. It is a blue print because all jurisdictions with deeds of trust will follow this procedure very closely.

Please read your laws very carefully and become familiar with them. Otherwise, you may find yourself on the other side of a lawsuit.