Most of the foreclosures we handle at Total Lender Solutions are non-judicial foreclosures.
Non-judicial foreclosure is the most common type of foreclosure, whether you’ve invested in residential or commercial real estate.
The non-judicial foreclosure process generally involves 5 steps:
- Preforeclosure
- Notice of Default
- Notice of Sale
- Trustee Sale
- Post-Auction
Of course, the actual foreclosure process is much more complicated than this.
For anyone dealing with foreclosure, it’s always best to enlist a foreclosure firm or real estate attorney to guide you unless you’re keen on navigating a legal minefield all on your own. No online guide can truly prepare you for the intricacies of the process.
However, we will do our best to explain the non-judicial foreclosure process in very general terms so you can understand how it works and what you’ll need to do to achieve a good outcome.
| About Us Total Lender Solutions provides comprehensive foreclosure services for commercial real estate lenders. |
We mostly handle non-judicial foreclosures on commercial properties—not residential properties.
However, commercial and residential properties have a similar foreclosure process, so if you’re dealing with a residential foreclosure then the process outlined below will mostly apply to you, as well.
Non-Judicial vs. Judicial Foreclosures
First and foremost, what’s the difference between judicial and non-judicial foreclosure?
- Judicial Foreclosure: The foreclosure process is handled entirely through the courts. In order to begin the foreclosure, the lender must file a lawsuit and receive a judgment from the court. If the foreclosure is approved by the judge, the lender is allowed to sell the property at auction.
- Non-Judicial Foreclosure: The lender does not need court approval to begin the foreclosure process, although there may be rules, regulations, and timeframes that need to be followed. Non-judicial foreclosures are usually more beneficial for lenders because they’re faster and the lender doesn’t have to pay for court costs and attorney fees.
You can pursue a non-judicial foreclosure if the mortgage contract includes a power of sale clause. If there’s no power of sale clause, then you’ll have to pursue a judicial foreclosure through the courts.
| Definition: Power of Sale Clause A clause in the mortgage contract that allows the lender to sell the foreclosed property to recuperate their investment. |
The vast majority of residential and commercial foreclosures are non-judicial. However, there are a handful of states that do not allow non-judicial foreclosures:
| States That Do Not Allow Non-Judicial Foreclosure Connecticut Delaware Florida (may be allowed under certain circumstances) Illinois Indiana Iowa (allowed for certain types of property) Kansas Kentucky Louisiana Maine (allowed for certain types of property) New Jersey New Mexico (only allowed for commercial properties) New York* North Dakota Ohio Pennsylvania South Carolina Vermont (allowed for certain types of property) Wisconsin *In 2009, New York outlawed power of sale clauses in mortgage contracts. However, they are still valid in mortgages established before this date. |
How Long Does Non-Judicial Foreclosure Take?
It all depends on the state.
For example, non-judicial foreclosures usually take 4 months in Arizona and California, but they can be significantly shorter in Texas. Every state has different rules and regulations that impact how quickly foreclosures can proceed.
| The timeframe depends on: Your state’s laws and processes that govern the foreclosure processWhether or not there’s adequate communication between the lender and borrowerWhether or not the borrower and lender reach an agreement to avoid the foreclosureWhether or not the lender delays the public auction |
Differences In State Law
Before we explain the non-judicial foreclosure process, there’s one point that we’ve got to hammer-in:
Foreclosure laws vary dramatically from state to state.
The differences can be small or significant, but you must adhere to them. You could be severely penalized if you don’t; in some cases, you may be forced to start the process all over again, or you could trigger a lawsuit that forces a judicial foreclosure—a much longer process that requires you to pay for court fees and attorneys.
| States We Service | Total Lender Solutions Arizona California Missouri Nevada Oregon Texas Washington |
Always enlist a foreclosure firm when you’re dealing with foreclosure. A foreclosure firm can make sure that you’re following your state’s guidelines as you move through each step of the process.
The Non-Judicial Foreclosure Process: 5 Steps
Let’s walk you through each step of a non-judicial foreclosure.
Remember that we’ve simplified the process to make it easier to understand; the actual process is more complex and varies by state.
1. Preforeclosure
Many foreclosures get started when a borrower breaches the loan agreement in some way.
Common Breaches in Mortgage Contracts
| Missed Installments | Missed Balloon Payment | Non-Monetary Reasons |
| The borrower misses one or more installments and doesn’t pay them within the allotted grace period. | Hard money loans usually feature a large balloon payment at the end of the loan term. Sometimes, the borrower can pay the installment, but doesn’t have the money to make the balloon payment. | Many commercial real estate loans have additional stipulations for the borrower, such as:Compliance with local lawsA minimum debt-to-income ratioProperty maintenance obligations |
Most foreclosures get started when the borrower misses one or more payments on the loan.
However, lenders can also trigger foreclosure if the borrower does not comply with the terms and conditions established in the mortgage agreement—this is called a non-monetary breach. For example, the borrower may be required to comply with local laws and also keep a minimum debt-to-income ratio.
| “Many of the cases we manage involve balloon payments that the borrower couldn’t afford. They’re earning enough money to pay the loan installments, but not enough to pay the lump sum at the end of the loan. Lenders are surprised at how quickly a profitable investment can enter preforeclosure.”— Randy Newman, Founder and CEO of Total Lender Solutions |
In most cases, the lender is required to send a breach letter to the borrower that details how they’ve breached the terms of the loan agreement, and provides a timeline for the borrower to comply with the loan terms. However, this may not be required in all states.
The borrower usually has a grace period to regain compliance with the mortgage agreement. They’ll have a certain amount of time to pay the missed installments (usually with accompanying late fees) or resolve any other breaches of the agreement.
How long is the grace period?
In most cases, the grace period lasts anywhere from 30 to 60 days, or even longer. The exact terms will be specified in the mortgage agreement.
Some loans may not provide grace periods at all, which would allow lenders to foreclose on a property immediately after a missed payment.
2. Notice of Default
What happens when the grace period ends, and the borrower has still not complied with the terms of the loan?
At this point, you can issue a Notice of Default (NOD). The notice is typically filed with the local registrar, and the borrower must also be informed.
The Notice of Default will specify a period in which the borrower may cure the loan. Most states require a waiting period of 90 – 120 days, and if the borrower doesn’t cure the loan within that period then the lender can issue a Notice of Sale.
| Differences in State Law “Every state has procedural differences.Some states allow lenders to foreclose directly on the outstanding loan balance, while other states require lenders to accelerate the loan first, and then foreclose on the accelerated amount.“In some states, lenders need to issue a notice of default, but in other states they only need to issue a notice of sale.The legal variances can make your head spin, which is why you should let a foreclosure firm guide you.”— Randy Newman |
During this time, the borrower and lender may try to reach an alternative solution to avoid foreclosure, which may include:
- A deed in lieu of foreclosure
- Loan forbearance
- Short sale of the property
- Refinancing or loan modification
In some states, the borrower can apply for mediation, which is then scheduled and overseen by local administrators. Mediation provides a more formal bargaining process between the lender and borrower.
States like California require lenders to complete a foreclosure avoidance assessment before issuing a notice of default. Basically, the lender needs to ensure that the borrower has exhausted all other means of avoiding foreclosure, and that foreclosure is the last and only solution.
| Failure to Communicate “Communication between the lender and borrower can break down very easily, and that’s really the most challenging aspect of non-judicial foreclosure.“Because there’s no court involved, it can be difficult to compel either side to come to the bargaining table and reach an agreeable solution. If one party files a lawsuit, the whole process could be dragged out longer than necessary.“At Total Lender Solutions, we maintain communication and cooperation between all parties so a best-possible outcome can be reached as quickly as possible.”— Randy Newman |
3. Notice of Sale
Once the waiting period is over, the lender can issue a notice of sale. This will set up an auction where the property will be sold to help the lender recuperate the outstanding loan balance and interest.
In most states, the auction will be held 3 weeks (21) days after the notice of sale is issued, but state processes vary.
In California, auctions are held from 9 AM – 5 PM, Monday through Friday.
In Texas, auctions are only held on the first Tuesday of each month (locally known as “Super Tuesday”).
It’s important to know your state’s foreclosure auction laws to ensure the auction is valid and that you draw as many bidders as possible. Foreclosure firms are helpful for setting up and advertising these auctions.
Speaking of advertising—some states require the auction to be publicized repeatedly in the weeks leading up to the sale. For example, Arizona requires that you advertise the auction in a local publication for 4 consecutive weeks leading up to the sale.
In the days leading up to the sale, the borrower still has the opportunity to cure the loan. In most states, the borrower can cure the loan up until 3-5 days before the sale.
4. Trustee Sale
If you’re a lender, then the foreclosure auction (also known as a “trustee sale” or in some cases a “UCC sale”) has one primary goal: help you recover the principal and interest that you’re owed.
Ideally, the property will sell for a sufficient amount, and if it sells for more than what’s owed to you, you’ll be entitled to the surplus profits.
Who can buy the foreclosed property?
Pretty much anyone, including the lender.
In some states, like California, there’s special consideration given to bidders who intend on using the property as their primary residence.
In other words, if you wanted to buy a foreclosed property in California that you intended to live in as your main residence, then you would only need to match the highest bidder and you’d win the auction.
| Differences in State Law “As you might expect, each state handles foreclosure auctions in different ways.“Can you make a credit bid, or do you need to pay in full at the auction? Can the lender postpone the sale, and for how long?“State governments will set regulations for each aspect of the sale.”— Randy Newman |
5. Post-Auction
After the auction, titles are transferred, money switches hands, and all sorts of administrative work is completed. [This is sometimes known as the asset recovery process.]
If there are tenants living in or renting the foreclosed property, they will most likely receive an eviction notice after the auction (unless the new owner allows them to stay).
When tenants are evicted, they’ll be given a short amount of time to pack their belongings and vacate the premises. Anything left behind will be confiscated by local authorities.
If the sale went well, you’ll have recovered all your principal, plus interest. But what if the sale doesn’t produce enough money to pay you what you’re owed?
In that case, you may have to go to court and seek a deficiency judgment, which allows you to seize the borrower’s other assets to recover the money that’s owed to you.
This can be a costly and contentious process. It’s advisable to enlist a real estate attorney if you need to go this route.
The Best Advice for Non-Judicial Foreclosure
If you’re a commercial real estate lender, you should contact a foreclosure firm like Total Lender Solutions as soon as there are signs that your borrower is in financial distress: missed payments, legal entanglements, poor debt-to-income ratio, etc.
Total Lender Solutions can help you manage every aspect of a non-judicial foreclosure, including:
- Foreclosure processing
- UCC sales
- Compliance with local regulations
- Communication with borrowers
We can help you protect your investment and simplify a process that can be enormously challenging. Contact us today to get the foreclosure assistance you need.
