We’ve all seen them: houses that look forlorn, decrepit, unlived in. Maybe the weeds are tall and the paint is peeling. These are signs of a zombie foreclosure: a homeowner essentially abandons the property, often after receiving a notice of impending foreclosure.
What Is a Zombie Foreclosure?
A zombie foreclosure typically occurs when a homeowner defaults on their mortgage and believes they must vacate the premises immediately. In other cases, the homeowner may leave for any number of other reasons.
Even if someone defaults on a mortgage, they are not absolved from all responsibilities until the lender completes the foreclosure process. Until then, the homeowner is usually still responsible for the mortgage, maintenance, homeowners association (HOA) fees, and other costs.
At last count, more than 8,000 zombie homes existed nationwide, with overall numbers increasing 5.4% from late 2022 to early 2023. The greatest number of zombie foreclosures is in New York, Florida, and Ohio. Although the number of zombie homes remains small, it will likely continue to increase as foreclosure rates increase.
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How Does a Home Become a Zombie Foreclosure?
A zombie foreclosure can sound scary, but it’s best to be aware of how they happen to avoid the worst consequences. A home often becomes a zombie foreclosure after the homeowner defaults on the mortgage. When this happens, the homeowner typically receives a foreclosure notice from the mortgage lender. They might believe they must leave immediately, abandoning their home as a result.
But while they turn their back on a home they believe has “died,” the home lives on and still has a laundry list of responsibilities. This means mortgage payments, maintenance, HOA fees, property taxes, and more. The current homeowner still holds the title and is still responsible for all these items until the foreclosure process is complete.
Complicating the picture, lenders sometimes decide not to complete the foreclosure process. There can be many reasons for this, but the most common is that the lender determines that foreclosing on the home isn’t worth it. Foreclosed homes often need significant repairs, and there might be a large amount of back taxes to pay.
While zombie foreclosures only make up a small percentage of all foreclosures, they do happen. Just because someone receives a foreclosure notice doesn’t mean the home is no longer their responsibility. That’s why it’s wise to follow up with the mortgage lender and await official communication before leaving for good.
Consequences of a Zombie Foreclosure
A zombie foreclosure is not a good thing for anyone involved. There can be a range of issues for the owner and the home’s neighbors.
Impact on Homeowners
As mentioned earlier, you are still responsible for your home if you receive a foreclosure notice. If you abandon the property before the foreclosure process is complete, you might face some serious consequences:
• Penalties and fees: If the foreclosure process drags on, it could result in the accrual of interest, penalties, and fees. These can increase the financial burden you were already experiencing.
• Damage to your credit: A zombie foreclosure can seriously damage your credit because it may result in a home mortgage loan default. This can make it very difficult to obtain loans in the future, including new mortgages, auto loans, and personal loans.
• Legal consequences: Not making your payments could result in a variety of lawsuits. For instance, the city might sue you over unpaid property taxes. Or the homeowners association might sue you to collect its fees.
As you can see, the consequences of a zombie foreclosure can be significant. Therefore, seeking legal advice to understand your rights and responsibilities in these situations is best. In addition, you should ensure all paperwork is complete before you leave the property for the last time.
Impact on Neighbors
The homeowner who abandons a property may not be the only one who suffers. There may also be consequences for neighbors:
• Increase in crime: Squatting, vandalism, and theft are just a few of the types of crimes that might occur after a zombie foreclosure.
• Public health issues: Foreclosed homes are often neglected, leading to overgrown yards. This can attract mosquitoes and other pests that can spread diseases.
• Costs for the local government: Someone must take care of a neglected home, and that job often falls to the local government. This can then lead to higher taxes for people in the area.
Impact on the Housing Market
The broader housing market can also be impaired due to zombie foreclosures. However, some opportunistic investors may also take advantage of the situation. Here are some of the potential impacts on the local housing market:
• Decrease in property values: A zombie foreclosure can cause a home to become an eyesore and a hazard to the local community. This can make the neighborhood less desirable as a whole, leading to a decrease in property values across the board.
• Decrease in new construction: New builders may be hesitant to pursue projects where there are zombie foreclosures. They might believe they can’t compete with the low prices of foreclosed homes.
• Opportunities for investors: While zombie foreclosures’ impacts are mostly negative, they can also lead to opportunity. Investors can purchase these homes at bargain-bin prices, renovate them, and either sell or rent them.
While they can create opportunities for investors, most zombie foreclosures’ impacts on the housing market are negative. As a whole, local communities generally suffer the consequences as a result. One way for owners to reduce the risk of a zombie foreclosure is to ensure a home is affordable for them from the outset.
Considerations If Purchasing a Zombie Foreclosure
While zombie foreclosures may have a discounted price tag, there is much to consider before moving forward. First, there can be legal complexities that complicate the process. For instance, the home may be in pre-foreclosure, the foreclosure may not have been properly completed, or there may be liens on the property. You must understand these complexities when purchasing a zombie foreclosure. Working with a real estate attorney with experience in this area is best.
You should also consider the condition of the property. Those that have been abandoned can have a range of issues, such as structural damage, mold, or vandalism. Some of these issues are more costly to fix than others. Thus, the home will need a thorough inspection to understand what repairs it may need.
Another important consideration is financing. Some lenders might be hesitant to finance homes in poor condition. You might need to explore alternative financing options, such as a renovation loan. Or you might even have to pay cash. Either way, more flexibility may be necessary when dealing with zombie foreclosures.
The Takeaway
Zombie foreclosures typically occur when a homeowner vacates the premises after receiving a foreclosure notice but before the foreclosure process is complete. Zombie foreclosures can hurt both homeowners and the local community. Therefore, homeowners may want to avoid this situation by remaining in their homes until they receive a notice to vacate and trying to stay current on mortgage payments, property taxes, and HOA fees.
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FAQ
What are zombie mortgages?
Zombie mortgages are outstanding home loans that borrowers have stopped making payments on, often because they thought the debt was forgiven or settled long ago. In some cases, these can be second mortgages that a borrower may not even be aware of. It is not always legal for lenders to try to collect on these debts.
What is the foreclosure rate in the United States?
The foreclosure rate is 1.3% in the United States, according to the second-quarter 2023 Vacant Property and Zombie Foreclosure Report from ATTOM Data Solutions. While an increasing number of homeowners have faced foreclosure since the nationwide foreclosure moratorium was lifted, foreclosure rates are historically low.
What city has the most foreclosures?
Among cities with a population of at least 200,000, the top three foreclosure rates for the first quarter of 2023 are in Fayetteville, North Carolina (one in every 526 housing units), Cleveland, Ohio (one in 582), and Atlantic City, New Jersey (one in 661), according to ATTOM Data Solutions.
Photo credit: iStock/Derek Broussard
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