There are many ways for investors to find real estate opportunities throughout the District of Columbia (DC). One of these ways is through foreclosures. Foreclosures occur when a homeowner fails to make their mortgage payments and defaults on their home loan. The lender then has the right to seize the property and sell it to recoup their investment.
For investors, foreclosures can be a fantastic opportunity to find properties at a discount. However, understanding the foreclosure process in DC is crucial to success. The following guide will provide everything you need to know about the foreclosure process in DC.
The Basics Of DC Foreclosure Law
In DC, several rules and guidelines exist to help protect property owners and provide them with a chance to protect their homes from foreclosure. For example, DC law requires that lenders contact borrowers to explore all their options to avoid foreclosure before initiating foreclosure proceedings.
Homeowners can also file for bankruptcy at any point before their foreclosed home is scheduled to go up for sale. By doing so, lenders will be obliged to cancel any planned auction. Borrowers can also recover their property right up until the moment of sale by paying the amount owed to the lender (plus any fees and costs incurred by the lender during the foreclosure).
Some states also give the owner a certain amount of time (often six months) to redeem the property after the auction. However, DC does not have such a redemption period. Once the auction date arrives, the borrower can no longer redeem the property, and the lender will sell the house to the highest bidder.
Types of Foreclosures Available In DC
Lenders can utilize two types of foreclosures in DC: judicial and non-judicial. Although most foreclosures in DC used to be non-judicial, lenders currently prefer the judicial foreclosure process. The reason is simple – a non-judicial foreclosure now requires mediation, which can make the process take longer.
With this in mind, the following is a brief explanation of both types of foreclosures:
Judicial foreclosure is the process where the lender files a complaint against the borrower in the DC Superior Court to obtain a judgment of foreclosure.
As a result, the borrower will receive the Initial Order, a Summons, and a Complaint. The Summons will notify the borrower that they have 20 days to file an answer to the Complaint. If the borrower does not file a response in time, the court will grant a default judgment against the borrower, and the foreclosure can proceed.
If the borrower does file an answer, the case will go into litigation. The lender will present their case, and the borrower will have an opportunity to defend themselves. After each side has an opportunity to present their arguments, the judge will decide whether or not to grant the foreclosure.
Once the judge grants the foreclosure, they will issue a Final Judgment and Decree of Sale. This decree will outline a date for the foreclosure sale. The borrower will be given notice of the sale date and have a chance to redeem the property until the day of the sale.
Non-judicial foreclosure is the process where the lender avoids going through the court system to obtain a judgment of foreclosure. Instead, the lender can utilize a Power of Sale clause in the mortgage or deed of trust. This clause will give the lender the authority to sell the property if the borrower defaults on their loan.
To initiate a non-judicial foreclosure, the lender will first provide the borrower with a Notice of Default. This notice will inform the borrower that they are in default and have a certain amount of time to bring their payments up to date. The lender can schedule a date for the foreclosure sale if the borrower pays what is owed within the specified time.
However, it’s worth noting that the non-judicial foreclosure process is a little different in DC. In DC, the lender must provide details about a foreclosure mediation program. The borrower will then have a chance to participate in mediation and find an alternative solution to foreclosure.
If the mediation process fails, the lender can then proceed with the foreclosure sale. The lender will need to send a motion of intention of the foreclose to both the borrower and the Office of The Mayor at least 30 days before the scheduled sale date. The borrower will be given notice of the sale date and have a chance to redeem the property until the day of the sale.
The Rights Of Property Owners In DC
Property owners in DC have rights that help protect them against foreclosure. Knowing these rights is vital when considering whether you want to invest in a foreclosed property. The rights of property owners in DC include:
- Must get a pre-foreclosure notice (breach letter): Property owners must be sent a breach letter by the lender before the foreclosure process can begin. This letter provides details about the amount of unpaid debt there is and how to bring the payments up to date.
- Can apply for loss mitigation: Property owners must have the opportunity to apply for loss mitigation as part of the mediation process. The loss mitigation application allows the lender to see if the borrower qualifies for a loan modification or to determine if there are any other alternatives to foreclosure, such as a short sale.
- Must get notice of foreclosure: If the mediation process fails, the lender will send the borrower a Notice of Intention to Foreclose. This notice will provide the date and time of the foreclosure sale and must be sent 30 days before the scheduled auction.
- Can receive special protection: If the borrower is in the military, they have special protections against foreclosure. For example, the Servicemembers Civil Relief Act allows the foreclosure to be delayed if the borrower is on active duty.
- Can keep the debt current: Property owners have the right to cure their default within 30 days of receiving a Notice of Default in DC. As such, the borrower can bring their mortgage payments up to date within this time frame to avoid foreclosure.
- Can pay off the loan to prevent foreclosure: If the borrower can’t cure their default, they still have the right to redeem the property until the day of the foreclosure sale. The redemption amount is the outstanding balance of the loan plus any additional fees and costs associated with the foreclosure.
- Will get excess money after the foreclosure sale: If the property sells for more than the outstanding loan amount, the borrower is entitled to the excess funds.
What Happens At The Foreclosure Sale
Generally speaking, if a foreclosed property makes it to the auction in DC, you can purchase it without worrying about the owner redeeming the property. However, you’ll want to understand what happens at a foreclosure sale to know what to expect.
First, the lender often makes a credit bid. A credit bid is a bid that uses the amount of the outstanding loan as credit towards the purchase price. This means the lender will start the bidding at the amount of the outstanding loan. If nobody else bids on the property, the lender will be the winning bidder and the property will become Real Estate Owned (REO).
However, if the lender is the highest bidder but bids less than the total debt, the property is said to be “sold short.” In this case, the borrower would still owe the lender the difference between the credit bid and the total debt. This situation is known as a deficiency judgment.
Alternatively, suppose the highest bidder is a third party (such as a real estate investor), and they bid more than the total debt. In that case, the borrower is released from further obligations to the lender and the excess funds go to the borrower.
Whatever the case ends up being, if an investor wins the auction, they become the owner of the property.
The Foreclosure Process In DC
Investors often look for opportunities to buy foreclosed properties. When a property goes into foreclosure, the investor has the chance to purchase the property at a discount. If you’re considering this line of investment, you must understand how the foreclosure process works from an investor’s point of view.
- When foreclosure sales are conducted: In DC, foreclosures will only occur if the mediation process fails or the judge rules in favor of the lender.
Even then, the borrower will have every chance to redeem the property or bring their payments up to date before the foreclosure sale. Not to mention, if the borrower files for bankruptcy, the judge will cancel the foreclosure sale.
As such, investors should be aware that the scheduled sale can be canceled any time before the auction.
- How foreclosure sales are posted: Finding foreclosure opportunities isn’t difficult if you know where to look. According to the law, lenders must advertise any foreclosure sales at least three times in a public forum (such as in local newspapers) during a period of 15 days leading up to the sale.
As such, finding foreclosure auctions in DC won’t be challenging if you’re looking for them.
- Lenders’ obligations: As an investor, you won’t have to worry too much about the lender’s legal obligations during a foreclosure. The law requires lenders to observe the legal process of both mediation and foreclosure.
Of course, if the lender does not follow through with their legal obligations to the borrower, it could result in delays or even a cancellation of the foreclosure sale.
- The role of third parties: As a third-party bidder, one thing you’ll need to be wary of is overbidding on a foreclosed property. There will often be multiple investors at these auctions, which means there will be a chance of getting into a bidding war.
The last thing you’ll want to do is overpay for the property, especially if it’s for more than the value of the debt.
- Guidelines for purchasing: If you’ve decided to invest in a foreclosed property in DC, there are a few guidelines you’ll need to follow.
First, you may not be able to inspect the property before the auction. If this is the case, you’re buying the property as is. Secondly, if you spot an advertisement for a foreclosure that you’re interested in, understand that the auction could be canceled any time before the sale date.
Finally, be sure to follow the same guidelines you follow when buying real estate of any kind. If you can’t inspect the house, then instead try to assess the local housing market and evaluate the neighborhood to determine if the investment is worth the risk.
Get A Good Grasp Of The Foreclosure Process
When investing in foreclosed properties, it’s essential to have a good grasp of the foreclosure process, especially in DC where the process is somewhat complicated. That is why it’s always a good idea to seek the advice of professionals before making any financial decisions.
At Pine Financial Group, we have years of experience working with real estate investors. Our team can help guide you through the process of investing in foreclosed properties. We can also help you better understand the foreclosure process and teach you how it works from an investor’s point of view.