Foreclosures: An Overview of the Wisconsin Process

I've been getting a lot of inquiries regarding available foreclosures in Madison, WI right now from folks looking to get a deal or make an investment. Inspired by that, I decided to write a post on how the foreclosure process in Wisconsin happens! 

Now, before we get started, there are a few things that I want EVERYONE to know:

1. The "Foreclosures" on websites such as Google Real Estate, Trulia, and Zillow do not necessarily provide accurate information. Those sites draw their information from public Notices (see Act II), which does not necessarily mean that the homes are available for purchase as foreclosures, or that they will ever be available as such - or the information is outdated and the bank sold the home months ago.
2. You get what you pay for. Many foreclosures need A LOT of work because they haven't been inhabited for at least six months, and if someone can't pay their mortgage, then they most often can pay for say, a new roof. Stripping homes of valuables such as kitchen appliances and flooring and selling them on craigslist is also not uncommon. If a foreclosure is in decent shape, it will be priced as such - often lower than normal, but not necessarily the "screaming deal" some think they will always find when a house is in foreclosure.
3. The foreclosure route may not be your best option for investment. With so many homes on the market, prices are at historic lows, so it is still a great time to invest, and a non-foreclosure may be just as good of an opportunity as a foreclosure.

Act I: The owner misses a payment.
When an owner misses a mortgage payment, the bank issues a Notice of Default. This is not publicly filed, and it tells the owner that they missed a payment (or more than one) and to please please please pay them.

Act II: The Foreclosure is filed.
If the owner then continues to fail to make payments, the bank will go forward with a Foreclosure Filing - this is public and in fact can be searched on CCAP. The owner is served and has 20 days to "answer" the filing, or basically admit to everything written in the filing.

Act III: Lis Pendens is filed.
This is a written notice to creditors that foreclosure is being filed. It doesn't mean much to the owner or really the bank for that matter - it's just required by the State of Wisconsin.

Act IV: Judgment.
A judge decides that the owner is in foreclosure and this signals the end of the foreclosure process, and the beginning of the Redemption Period.

Intermission: The Redemption Period.
During this period of time, the owners are allowed to try to pay back the loan in full to prevent foreclosure - this nearly never happens. So how long does this period of time last? Many people will tell you that you have a year - in most cases, this is not true. State law says that the Redemption Period is one year long, unless the bank waives their right to a deficiency (the money owed the bank from the original loan after the home is sold if there isn't enough to cover it). If they do waive that right - and the banks always do - then the time period is shortened to six months. Why would a bank bother to wait an extra six months for a debt that the owner would most likely not be able to repay? Banks can also decrease the time period to two months if they claim abandonment of the property - that is, the owner either moved out completely or is renting the home.

Act V: The Sheriff Sale.
If the Redemption Period ends without a sale of the property (usually a short sale) or some other agreement, the property goes to auction. I'm sure you've probably seen the commercials - "Get this property for only $20,000!!!" Does that actually happen? Ummm.....no. Generally, the bank sets the minimum bid at what they are owed on the property and "buy back" the property if there are no higher bidders. If there are higher bidders, they are required to put 10% down immediately upon winning the auction. If not, the bank buys the property and is free to market it.

The Finale: The Sale of the REO
Here's a little political correctness for you: the real estate industry prefers to call foreclosures "REOs" instead (Real Estate Owned). Is there a difference? Not really, it just sounds better on a listing description. Once the bank gets the property, they hire a Realtor and put the property on the market. From there, the sale goes forward like a regular listing, except for some more paperwork to go with the offer to purchase.

If you are interested in buying a REO, there are a few things to think about when making your offer:

• Put forth your highest and best offer first. Banks don't want to go back and forth with long negotiations, and you are most likely going to get a good deal on the property anyway, so don't mess around.
• Understand that you may be buying a property "As Is." Beware that the bank may not want to fix problems in the home, so the property may not pass the inspection with flying colors. Talk to your lender to see how your loan is affected by problems in the home. For example, FHA loans will fall through in some cases if the inspection finds paint chipping and it is not rectified prior to closing.

If you think you may be going into foreclosure,  speak with an attorney immediately to discuss your options.