Last week I reviewed non-judicial foreclosures, but since this is a complicated subject, there’s more to be said.
To bring you up to speed, here’s what happened so far: you determined your borrower will no longer pay on the loan, so you began foreclosure proceedings by contacting a foreclosure service company. They did their part to get your property to auction and you did your part by paying for their services and making the opening bid on your property at the foreclosure sale (auction).
Remember, I suggested you bid 80-90 percent of current market value, unless you would truly like to have your property back; in which case, you should bid up to the fair market value.
Bear in mind that in a foreclosure sale, the buyer gets no title insurance. For you, the prior owner, this isn’t a major consideration, because the condition of title reverts back to the condition when you sold it. Any monetary liens, judgments, or easements recorded after your loan (assuming you didn’t subordinate—or give permission for any of those to take a higher priority than your loan) will be eliminated from title.
If, when you sold the property and provided financing, there was already a loan on the property or if the buyer got a loan from a third party when he purchased the property, that loan will still be in place, and the prevailing party (including you) at the foreclosure sale will still be obligated for that loan.
Regardless, at the end of the day, the property is sold. Let’s say you purchased the property back. You are now, once again, the proud owner of 123 Main Street. However, the prior owner still lives in the house. You are now a landlord, and if you don’t want to be a landlord to the person who proved unreliable when it came to making loan payments, you must begin the eviction process. (I’ll talk about that in a future column.)
If the person you just foreclosed on had rented to a third party, you probably have a tenant for the remaining term of their lease agreement, so long as the agreement was at arm’s length and bona fide. That means the terms of the lease agreement are at fair market value and that this wasn’t done to take away the value of the property at the foreclosure sale. For example, if the owner leased the property to his brother-in-law on a 99-year lease for $1/month, that lease won’t hold up.
Long story short, foreclosures are problematic for everyone involved. They cause major damage to the borrower’s credit and require the lender to go through the expensive and time consuming process of either selling the property at auction or repurchasing the property at auction. Both borrowers and lenders should do their best to avoid foreclosures. Talk to each other. Try to work something out.
If the borrower cannot make the payments, a short sale might be better than a foreclosure. A short sale occurs when a home is sold for less than is owed on it – for example, if the buyer owes $275,000, but the home will only sell for $250,000.
A short sale is usually preferable to a foreclosure. If you’re a seller, a short sale is better because it’s less damaging to your credit (and your privacy) than a foreclosure. Clearly, you won’t be too motivated to sell your home since you’re not making any money on the deal, but at least you’re not digging a deeper hole financially. Avoiding a foreclosure is worth some money. You just have to figure out how much.
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.