Foreclosures – A Last Resort for All Parties: Part I

Last week I talked about servicing a real estate loan yourself. That was a prelude to the next couple articles, which are in response to a reader’s question about foreclosures and what other options may exist when a borrower stops paying his loan.

If a borrower misses a mortgage payment, there could be a perfectly innocent reason. Before you do anything dramatic, call the borrower to see what happened: did he forget to make a payment? Did the check get lost in the mail? These things do occasionally happen. If the borrower says the check is in the mail, go ahead believe him the first time, but file this information away for future reference.

Once in a while, a borrower will call to admit a payment will be late or that a personal emergency has prevented him from making a payment this month. While this is rare, again, I’d take him at his word the first time. (If you’re a borrower reading this, take note: lenders are generally much more forgiving when you call them rather than forcing them to track you down about a missing payment.)

As the lender, once you’ve concluded the borrower is no longer making payments on the loan, it’s time to begin foreclosure proceedings. They aren’t fun and they aren’t cheap, but they are sometimes necessary.

Two types of foreclosures exist: judicial and non-judicial, and both result in the public auction sale of the property in question. If you can go with the non-judicial option, it’s cheaper and faster, but depending on your circumstances, it isn’t always better.

A judicial foreclosure requires an attorney and a court order, and it’s the only way to go if flaws exist in the loan documents or the property’s legal documents. Also, if there is no equity in the property but your borrower has assets, and the note involved in the foreclosure wasn’t a “purchase money note” (the note used to purchase the property), then a judicial foreclosure opens the door for a deficiency judgment.

A deficiency judgment helps you get your money back. Here’s how: if the foreclosed property is sold for less than the total amount owed, the court can order the borrower to pay the difference between the foreclosure sale price and the amount owed. If you choose a judicial foreclosure in hopes of recouping your money, be sure the borrower has some assets with which to pay you. If you’re relatively sure he does, once you’ve completed the judicial foreclosure, you can call the borrower into court for an examination of debtor, where you can ask the borrower about his holdings. If he lies under oath, he’s perjuring himself, and courts really frown on that.

Do not go down this path without consulting an attorney and someone who can give you good advice about the true value of your property, because while a non-judicial foreclosure usually takes four to six months, a judicial foreclosure is likely to last at least a year—maybe two. And the judicial option is significantly more expensive.

In addition, the borrower in the judicial foreclosure retains the right of redemption. That means that for the whole time the foreclosure is in effect, the borrower can pay you what he owes you to bring the loan current (paying any outstanding loan payments, late fees, advances plus interest, and fees or costs associated with the foreclosure). In most situations, that’s not a problem, because the property is worth less than is owed and you’d be happy to get all your money back. But here’s the downside: even though the borrower will never pay you what he owes, he still has the option, so you cannot sell the property until the redemption period expires.

More next week!

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.