Last week I talked about the two types of foreclosures. This week, I’ll walk you through the most common type: non-judicial foreclosures.
As the lender, once you’ve concluded your borrower is no longer paying on the loan, your only course of action is to foreclose. To do so, you’ll need to contact a foreclosure service company. Basically, they will substitute themselves in as trustee in the deed of trust and sell the property for you. It sounds simple, but it rarely is.
The foreclosure service company will require all the information you have concerning the borrower and the loan on the property: the note, deed of trust, outstanding principal (amount borrowed), any outstanding interest (cost of the loan), and any outstanding late fees or advances.
The foreclosure company will then record a substitution of trustee and a notice of default. At this point, the foreclosure service company will have incurred a small amount of expense on your behalf, which you’ll pay—along with what they call the trustee fees. The trustee fees are typically on a sliding scale based on the remaining principal due on the loan. The percentage of the outstanding principal that goes to the trustee decreases as the overall amount of the remaining balance increases.
Ninety days after the notice of default, the trustee will record the notice of sale and post a notice on the property (on the front door, gate, or a tree, so long as it is on the property). The trustee will also advertise the full notice of sale in the local newspaper. These two actions often get a little pricey. Someone must be paid to post the notice; plus the full text of the notice must run in the newspaper; this includes the time, date and location of the sale and a complete legal description of the property that may be pages long. Newspapers charge by column inch.
Until five days before the sale, the borrower still has the right to bring the loan current by paying any outstanding loan payments, late fees, advances plus interest, and fees or costs associated with the foreclosure. If you decide to delay the foreclosure sale, that five-day window moves with the date of the sale.
When the day of the sale arrives, you’re probably thinking your worries are over: the property will be sold and you’ll be paid.
Here’s how the sale actually goes. You have the right (and responsibility) to make the opening bid on the property. It is generally not a good idea to make a bid for the full amount owed to you. There’s an argument that if you bid the full outstanding principal plus accrued interest, and you acquire the property at that price, you may have just recognized several thousand dollars worth of interest income you didn’t receive, creating a tax obligation to add to the other frustrations surrounding the foreclosure.
In addition, under rare circumstances, had the borrower committed fraud or created waste, or perhaps had hazard insurance proceeds pending, you may be able to recoup some or all losses from the borrower or his insurance company. If, for example, the house burns down prior to the foreclosure sale and the insurance company hasn’t paid the loss, then if you bid the full amount owed to you (called a full credit bid), the insurance company might contend—successfully—that your bid pays your debt off in full.
Consequently, I suggest you do your best to determine the current fair market value of the property and bid 80-90 percent of that value, unless you would truly like to have your property back; in which case, I’d bid up to the fair market value.
More next week!
If you have questions about real estate or property management, please contact me at firstname.lastname@example.org 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.