How To Research and Buy a Kauai Foreclosure
In the current buyer’s market on Kauai some of the best deals on Kauai property are found among the foreclosures. Here is everything you need to know about Kauai foreclosures including what to look for as well as what to avoid.
What is a foreclosure?
A foreclosure is a legal process initiated by a lender (e.g., bank) after a home mortgage loan borrower fails to comply with the loan’s terms resulting in the lender filing a public default notice called a Notice of Default.
Since the home was pledged as an asset to secure the loan, the lender forecloses in order to ensure that they can repossess the property in an attempt to recover their money.
When does foreclosure on a property occur?
Foreclosure typically occurs after a homeowner misses mortgage payments that are due on the promissory note secured by a lien on the property.
The lender may initiate the foreclosure after a pre-determined period of time after the loan goes into default. This time period is specified in the mortgage documents.
Can a foreclosure be avoided after the Kauai homeowner defaults on the loan?
Yes. Once the public notice of default is issued the borrower may pay off the default amount during the pre-foreclosure period or sell the property during the pre-foreclosure period using the proceeds to pay off the loan and also protect their credit.
The Kauai homeowner may attempt to arrange a refinancing or alternate financing, or come to an arrangement with the lender (e.g., temporary reduction in payments) to avoid foreclosure.
What happens if the homeowner/borrower can not reinstate their loan during the pre-foreclosure period?
If the Kauai homeowner fails to reinstate the loan during the pre-foreclosure period then the home may be sold at public auction at the end of the pre-foreclosure period.
Anyone wishing to purchase the home may bid for it at the auction. The minimum bid will include the loan balance and any interest accrued along with lawyer fees and foreclosure costs. Issues that arise include having enough time to research the title to the property as well as the property’s condition.
The reward for a buyer of a foreclosure may be a great price on a premium Kauai property. The swiftness of the transaction also means that the buyer does not have to deal with the homeowner/borrower.
What are the different ways that the lender can take possession of a property when a mortgage loan is in default?
When a loan goes into default the lender may take ownership (repossess) the property through several methods including an agreement with the borrower during pre-foreclosure, through a short sale foreclosure, or by purchasing the property at public auction.
If the lender purchases the property at public auction because no one meets the minimum bid, then they will likely attempt to sell the property to recover their money.
Once a Kauai property has been repossessed by a lender it is known as REO (Real Estate Owned) property, which is a property owned by the lender (e.g., bank). The lender will then usually work to clear the title to the property and may also complete any needed repairs before putting the home on the market as a Kauai REO property.
What happens during a Kauai foreclosure?
When a lender (e.g., a bank) forecloses on a residential mortgage loan on Kauai it repossesses the property, and may then sell the property to recover the balance due on the mortgage as well as legal costs.
What if the amount of money generated by the sale of the foreclosed Kauai property does not equal the money owed?
Typically there is a recourse clause in the promissory note allowing the lender to file a claim for a deficiency judgment if the sale of the property does not generate enough funds to cover the money still owed.
Thus the Kauai homeowner will be responsible for any deficiency in the repayment of the mortgage loan, and will also be responsible for foreclosure costs including attorney fees.
If a deficiency judgment is issued then it may be used to place a lien on other property owned by the borrower (mortgagor), and the lender may seek to collect the money due from the borrower’s other assets if there are any.
If the lender forgives all or some of the debt is it considered taxable income?
If the lender agrees to cancel any of the borrower’s remaining debt the borrower this is reported to the IRS on a Form 1099-C, Cancellation of Debt and it is considered taxable income received by the borrower.
If the home was the borrower’s principal residence the Mortgage Debt Relief Act allows up to $2 million of forgiven debt to be excluded (or $1 million if married and filing separately). The canceled debt must also be directly related to a drop in the value of the home or the borrower’s financial duress.
Are there different types of Kauai foreclosures?
Yes, there are various types of foreclosures. Two of the most common types of Kauai foreclosures are foreclosure by judicial sale (judicial foreclosure), also called foreclosure by action, and foreclosure by power of sale (non-judicial foreclosure).
A typical in-court foreclosure takes about 11 months while an out-of-court foreclosure usually takes about six months, although an uncontested non-judicial foreclosure typically takes 60 to 90 days if there are no delays.
What happens in a judicial foreclosure?
In a judicial foreclosure the lender files a lawsuit against the borrower and the court supervises the sale of the property. Proceeds of the sale go first to pay off the mortgage, and next to other lien holders. If any money remains it goes to the borrower (mortgagor).
What happens during a non-judicial foreclosure?
A non-judicial foreclosure allows a sale of the property without court supervision, and at considerably less cost than a judicial foreclosure.
The proceeds of a non-judicial foreclosure are distributed just as in a judicial foreclosure with the mortgage holder taking precedence over other lien holders.
What happens after I purchase a property in a non-judicial foreclosure?
Once you have purchase a foreclosed property and paid the auctioneer you become the owner of the property, free and clear of any interest the former homeowner had in the property.
The title to the property may still be encumbered, however, by liens that are superior to the mortgage that was foreclosed upon, such as unpaid property taxes.
If someone is living in the home and refuses to leave then eviction proceedings may be necessary. Consulting a knowledgeable Realtor will help you determine which foreclosures are free of major complications.
Why would a homeowner sell the property during the pre-foreclosure period?
Selling the property during the pre-foreclosure period allows the homeowner/borrower to possibly gain something from any equity they may have in the property and also avoid a negative mark on their credit report.
Why would a home buyer want to buy a property during the pre-foreclosure period?
Buyers considering a purchase during the pre-foreclosure period will likely have time to research the property’s title and the overall condition of the property, and then attempt to negotiate a low sale price relative to the home’s probable value.
Out of Court Foreclosures
Out-of court foreclosures take place in accordance with a clause in the mortgage and typically includes a requirement that the lender notify the borrower of the default status of the loan previous to initiating any foreclosure.
Non-judicial foreclosures are used when the mortgage or deed of trust has a power of sale clause in which the borrower/homeowner has pre-authorized the lender to sell the property to pay off the loan balance if it goes into default.
In an out-of court foreclosure a notice of foreclosure sale will describe the property, the place and time of the sale, the terms of the sale, and also the names of those involved.
A copy of the notice of foreclosure sale is also given to the borrower and posted on the property at least three weeks before the sale, and the notice is published weekly for three consecutive weeks in the local paper, the last time being at least two weeks before the sale date.
The foreclosure sale takes place as an auction with the highest bidder being allowed to purchase the property.
A court foreclosure is used when there is no power of sale present in the deed of trust or mortgage.
In a court foreclosure the lender (e.g., bank) files papers with the court requesting a ruling affirming that the borrower is in default on the mortgage loan. Notice of this court filing is also delivered to the borrower, and the lender may publish the notice in the case that the borrower cannot be contacted.
The homeowner then has 20 days to respond to the court filings or they are found to be in default and the lender may arrange a foreclosure sale. The homeowner/borrower has until three days before the sale to pay off the loan as well as any associated fees to cure the default and halt the foreclosure sale.
In a court foreclosure a commissioner is appointed to sell the property at a public auction. A notice of the sale is published in the local newspaper including the auction date and the dates of any open houses to view the property.
Anyone can bid at the auction, and the highest bidder will be expected to pay ten percent of the bid either in cash or a cashier’s check.
A confirmation hearing may then be held where additional bidding may occur, and the court will confirm the sale of the property if the sale price is considered to be fair.
Bali Hai Realty Offers Full Range of Kauai Realty Services
If you have any questions about Kauai foreclosures, short sales, or Kauai REO properties (bank-owned properties), please feel free to call the Bali Hai Realty staff as we have Realtors trained in these types of transactions with a strong knowledge of the current Kauai foreclosure market.
Affordable Kauai foreclosures, short sales and REO properties available in today’s market conditions provide a unique opportunity to own a piece of paradise. If you are interested in upcoming REO’s and foreclosures not yet on the market, please contact our REO Expert Scott Goddard Sieverts.
Also fee free to browse through our Foreclosure Galleries to see some premium Kauai properties available now for an excellent price.