Foreclosure laws vary from state to state. Generally, foreclosures are conducted by either judicial sale or non-judicial sale such as a trustee sale depending on each state’s laws. Some states allow both procedures depending on what language is contained in the mortgage or deed of trust.

The following is an overview of the procedures:

Foreclosure by Judicial Sale
Judicial proceeding foreclosures are instituted by the lender filing a lawsuit (lis pendens) against the borrower. Copies of the paperwork must be sent to the borrower and any junior lien holders. The lender must prove that the borrower is in default. The borrower is given an opportunity to respond to the action within the prescribed statutory period.

If the court finds that there are sufficient grounds or cause for a foreclosure action, the court will issue an order setting forth the terms and the conditions of the sale. A notice of sale will be published in a newspaper of general circulation in the county where the property is located and posted at the courthouse and at the property advising of the public of the date, time and place of sale and the contact person. Judicial foreclosures are conducted at the courthouse steps by either the sheriff or an auctioneer.

The court must approve all the terms of the sale once the sale has been conducted. Some states allow a statutory redemption period in which the foreclosed owner may cure the default by paying the amount owed to the lender as well as any other fees incurred and in arrearage and acquire back their ownership interests in the property. If the foreclosed owner does not redeem their property, then the new buyer/investor is issued a certificate of title. Judicial foreclosure processes can take anywhere from six months to one year. Especially right now since the courts are backed up with so many foreclosure actions it could even take longer.

Judicial process foreclosures are sometimes better choices for lenders because may also be able to obtain a deficiency judgment against the foreclosed owner to recover the deficiency amount from the sale and what was owed on the loan balance plus fees and costs.

Bidding Process
Properties purchased at judicial foreclosure sales are usually purchased for cash. The auctioneer will request to see the bidder’s cashier’s check prior to making a bid. Typically a 10% deposit of the purchase price is required in order to bid, but the laws vary so bidders should check their own state’s rules and regulations. The property will then be sold to the highest bidder.

After the sale, the new buyer may be required to pay the entire purchase price in cash right then and there. Some states will allow the new buyer to make arrangements to pay the balance within 30 days.

REO’s
Properties that do not sell at judicial foreclosure auctions, becomes bank-owned REO properties, those properties are listed with a Realtor for sale.

Non-Judicial Foreclosure or Trustee Sales
The process starts once the property goes into default and the lender records a notice of trustee sale with the County Recorder’s office. A copy of the notice must be sent to all interested parties on the deed. A copy of the notice is then placed on the property and usually at the courthouse or a public place where the auction will take place. By law, the notice must be published in a newspaper of general circulation in the county where the property is located usually for four consecutive weeks. To identify the property, all properties are issued a trustee sale number in order to make it easier to find information and track the property. The notice of sale contains the date, time and place of the sale, any postponed dates and the contact person.

Properties that have IRS tax liens or other claims require additional procedures that the lenders must take. Bankruptcy properties are under the jurisdiction of the bankruptcy court and cannot be sold at auction until the court issues an order. Since there are no real estate commissions paid to Realtors at trustee foreclosure auctions, you will not find any real estate agents involved in the transaction.

Redemption Periods
Some states allow the foreclosed owner an opportunity to redeem the property prior to the sale and sometimes even a period of time after the sale. The laws vary from state to state.

Foreclosure Trustee Auction
Most auctions are held on the courthouse steps and conducted either by the trustee or the sheriff. In order to qualify to bid, a bidder must show their cashier’s check to the auctioneer. Each state has different trustee sale rules and regulations. Generally, though the bidder will need to bring a cashier’s check equal to approximately 10% of the purchase price. Some states require the highest bidder to pay for the entire property after the sale. Smart bidders will bid the deficiency amount only as they do not want to have to pay the bank’s attorneys’ fees and costs. Banks generally do not accept bids for less than the amounts owed on the loan though so many properties do not get sold at trustee auction sales and end up as bank owned REO properties. However, if the property is sold at the foreclosure auction, the new bidder will receive a deed once the property has been paid by them in full.

Find out more information about the foreclosure laws in your state.