What is a Zombie Foreclosure?
When a property owner defaults on a mortgage obligation, the bank or mortgage company that holds the mortgage may file a foreclosure action. If the property owner does not bring the loan current or work out a payment plan with the lender, the foreclosure may be completed and the lender can take title to the property.
Foreclosure laws vary from state to state, some requiring a very lengthy process before the foreclosure is completed. A very quick foreclosure can be accomplished in some states in as little as forty-five days after the default has been declared. However, some states with laws favoring the borrower in a foreclosure action can take years to complete. Throughout the entire foreclosure process the borrower retains title to and responsibility for the property.
So what really is a “Zombie” foreclosure?
A zombie foreclosure is created when a homeowner abandons a property prior to the completion of the foreclosure by the bank. Abandoning a property prior to the transfer of title is unwise. The property owner may think that by leaving the property for the lender to take he is being relieved of his responsibilities with respect to the property, but this is not the case. All of the obligations of the mortgage documentation remain in effect during the entire time of the foreclosure process. That means that the interest clock continues to tick forward, and maintenance of the property, and payment of real estate taxes and homeowner’s association fees as required by the loan documentation continue.
Some properties may not have enough value for the lender to pursue taking title through foreclosure. The lender will study its position and consider:
What condition is the property in?
What condition is the title to the property in?
Does the property have enough value that by investing more money into it like maintenance costs, unpaid real estate taxes, hazard insurance premiums and marketing expenses, there will still be an opportunity to recoup some of the money it invested in the loan?
The lender is under no obligation to take title to the property and can simply abandon its interest in it and write off the value of the mortgage. So long as the property owner is in title, all financial obligations related to that property remain in effect. Further, an abandoned property may be an attractive nuisance for trespassers that can lead to more liability. If someone enters that vacant property and is injured, the homeowner could be held liable for damages or injuries. In such a case there could be no end to the property owner’s exposure to financial liability.
There are also instances where the lender can be granted a default judgment against the property owner after the completion of the foreclosure. That judgment becomes a personal obligation of the borrower even after the title to the property has transferred to the lender. Walking away from a property, whether as a zombie foreclosure or otherwise, is risky for a property owner, and can cause grave financial problems even after the title to the property has passed to the lender.
Why invest in zombie foreclosure properties?
For the real estate investor interested in purchasing a property that has been abandoned and is in foreclosure, there are a few precautions that should be observed. One thing that can be easily quantified is how much it will take to satisfy the lender. An estoppel letter from the lender will state the unpaid principal balance of the loan and accrued interest and other charges. (Late charges on unpaid mortgage obligations can add up fast.) A real estate title specialist should be engaged in order to discover what other liens may exist on the property. By this late in the process it may also be assumed that real estate taxes are in arrears, and there could also be junior mortgages or homeowners’ association fees that are past due that represent a lien.
There are ways for a real estate investor to successfully acquire a property that is the subject of a zombie foreclosure. A property that has a defaulted loan, and has been abandoned, places the lender at a disadvantage. Lenders are not in the business of owning real estate. Real estate creates a liability on the lender’s books, which detracts from its bottom line equity. Costs that the lender must consider, include:
How much will the lender have to pay in attorney’s fees and other legal expenses to complete the foreclosure?
How much is past due in real estate taxes, which are not extinguished through foreclosure?
How much will it cost to market the property including title expenses and real estate commissions?
How much deferred maintenance must be corrected to make the property habitable?
These considerations leave the lender at a financial disadvantage, which may make it amenable to negotiations favorable to the property owner or an investor interested in purchasing the property. In such a case the real estate investor should approach the property owner and suggest he discuss the possibility of a short sale with the lender. That is a request that the lender accept less than the amount owed on the loan in exchange for a release of its lien. Lenders placed in the position of having to own a property that creates unlimited and unforeseeable losses will often agree to an early but certain loss that gets them out from under a problematic loan.
The foreclosure.com website specializes in opportunities for real estate investors in the foreclosure market. This website lists hundreds of foreclosure properties that are available in neighborhoods, cities, counties, and states throughout the country. Whether it’s a traditional foreclosure, a zombie foreclosure, or a short sale, foreclosure.com has the most complete catalogue of properties anywhere.
Take an organized approach to help simplify the process to purchase a Zombie foreclosure house, use the checklist at this location: Click to get the Home Buyers Checklist