| By John L. Hosack and | | | | of the equity being auctioned, a court may |
| Joffrey Long | | | | invalidate the foreclosure sale. Opening your |
| | | | | bidding at a minimum of 20% of the equity being |
| | | | | auctioned creates some protection for a |
| At the opposite extreme, there’s another | | | | beneficiary in the event an irregularity with the |
| challenge. It occurs when a lender/servicer | | | | sale is later discovered. |
| who is owed $575,000 opens the bidding at a | | | | |
| minimal sum, such as $2,000, that has no | | | | How to proceed with your trustee’s sale: |
| relationship to the equity being auctioned. | | | | |
| | | | | |
| There are serious problems with either | | | | If there are other bidders, your bid is increased in |
| approach. The good news – either set of | | | | increments of $2,000 until you receive an |
| problems can be avoided with some relatively | | | | acceptable price or acquire the property. If |
| simple procedures. | | | | other bidder(s) stop bidding and you acquire the |
| | | | | property at a $325,000 credit bid, you’re still |
| Full Credit Bids – The Problem: | | | | better off than with a full credit bid. You’ve |
| | | | | now been “paid” only $325,000, leaving |
| 1. If $575,000 is the total of your principal and | | | | $250,000 ($575,000 less $325,000) that you can |
| accrued interest, late charges and other fees and | | | | attempt to collect from others. |
| costs, and the property reverts to you as | | | | |
| beneficiary after you credit bid that amount, | | | | |
| you’re deemed to have been “paid in | | | | There’s another possible benefit in starting |
| full.” Having just acquired a $500,000 | | | | with a lower bid. Although unlikely in this market, |
| house in exchange for a $575,000 debt, you (and | | | | a third party bidder could bid an amount that |
| especially your investors) won’t want to | | | | benefits you more than taking title to the |
| consider this arrangement as “payment in | | | | property does. Prepare for this by carefully |
| full.” | | | | thinking through the amount at which you’re |
| | | | | willing to allow a third party bidder to acquire the |
| There may be other ways to collect on your | | | | property. |
| note, such as insurance proceeds, proceeds from | | | | |
| title insurance claims, rents, personal property, or | | | | A procedure for setting your credit bids might |
| payments from a guarantor, if there is one. But | | | | look like this: |
| if the property has reverted to you under a full | | | | |
| credit bid scenario, providers of title or hazard | | | | 1) Take the market value (Fn2) of the |
| insurance, guarantors, and anyone else you intend | | | | secured property and subtract any senior liens. |
| to pursue for your losses will point to the fact | | | | |
| that you were already “paid in full,” when | | | | 2) Determine the equity being transferred at the |
| you acquired the property in exchange for a full | | | | foreclosure auction. |
| credit bid. Any amount that you credit bid at | | | | |
| the trustee’s sale is deducted from the total | | | | 3) Calculate 20% of the equity being transferred |
| amount owing. Acquiring the property for a | | | | as a possible opening bid. |
| lower credit bid, ($100,000, for example) | | | | |
| preserves the right to pursue other parties for | | | | 4) Instruct the trustee (in writing) as to your |
| the remaining unpaid portion of the debt. | | | | opening bid, increments in which you wish |
| | | | | the bid increased in the event there are |
| The Other Problem – “Minimal Opening | | | | other bidders, and your maximum credit bid. |
| Bids” | | | | |
| | | | | Also critical, any manner in which you instruct the |
| The term “minimal opening bids,” refers to | | | | trustee to bid on your behalf could |
| opening bids that have no relation to the value of | | | | Be challenged by your investors. You should |
| the property or the equity being sold at the | | | | have provisions in your loan servicing agreement |
| trustee’s sale, such as an opening bid of | | | | that cover this, or obtain their later authorization |
| $2,000 on our $500,000 property. Many lenders | | | | to proceed. Even with prior authorization, they |
| start with minimal opening bids, then instruct the | | | | should be informed in writing as to the manner in |
| trustee to increase their credit bid in the event | | | | which the bidding will proceed. the manner in which |
| there are other bidders at the sale. The problem | | | | bidding will proceed. |
| with a dramatically low opening bid is that the | | | | Fn 1: The “Restatement of the |
| “Re-statement of the Law-Property | | | | Law-Property Mortgages is a scholarly treatise |
| Mortgages” (Fn1) states that if it is | | | | published by The American Law Institute that is |
| determined there were any irregularities with the | | | | highly regarded and often followed by the courts. |
| sale, and the opening bid was for less than 20% | | | | |