My clients' property is in foreclosure and they have been approached by a foreclosure investor who wants to purchase their home. What alternatives does an owner have to selling to a foreclosure investor?
A. Alternatives to Selling to a Foreclosure Investor.
1. Redemption with the borrower's own funds. The law permits a borrower to redeem with his own funds. It is rare for a borrower who is not servicing the debt to pay off the entire loan with his own funds. However, such redemptions might occur, for example, where a borrower is an institution unaware of the foreclosure because an employee of the owner is embezzling the payments intended for the lender and intercepting the foreclosure notices. Other examples where an owner might redeem with his own funds are where the borrower receives a windfall after the foreclosure sale, or a financially strong borrower snaps out of some impaired mental state in time to save the property from foreclosure. When a borrower redeems with his own funds, he need not pay liens junior to the foreclosed deed of trust. Yet these scenarios are rare and the law recognizes that a borrower who has defaulted on his mortgage and who was unable to raise the funds to cure is unlikely to have the much bigger amount needed to redeem. A debtor can get the money to redeem in two primary ways.
2. Refinance. The debtor can obtain a new loan by refinancing the certificate of purchase. The debtor then keeps the property and has a new mortgage. In theory, when an owner redeems a certificate of purchase from the foreclosure of a senior loan, the owner does not need to pay off liens junior to the foreclosed upon loan. However, if a borrower is redeeming with borrowed funds, the new lender will not want be junior to deeds of trust junior to the foreclosed upon deed of trust. The funds from the refinancing lender need to be sufficient to redeem the certificate of purchase and satisfy junior liens.
If the funds from the refinance are not sufficient to cover the junior liens, then the borrower or his representative must try to educate the junior lenders who will not be covered that it is in their best interest to receive the reduced amount (a "short pay off"). Among the advantages of a redemption funded by a refinance is that it allows the borrower to keep the property. Among the disadvantages is that it generally does not produce a commission for a real estate broker.
3. Sale to a market Buyer. A debtor can sell the property to a purchaser and use the money to redeem the certificate of purchase. In a garden variety real estate sale, money comes into the closing from the buyer and the buyer's lender, and those sums are sent to the seller's lender to pay off the seller's loan. With a redemption, instead of the funds being payed to the seller's lender, they are paid to the public trustee to redeem the certificate of purchase. The debtor can then retain any money from the sale that remains after the original lender is paid.
Again, in theory, when an owner redeems a certificate of purchase from the foreclosure of a senior loan, the owner does not need to pay off liens junior to the foreclosed upon loan. However, the buyer and the buyer's lender(s) will not want to be junior to deeds of trust junior to the foreclosed upon deed of trust. The funds from the buyer need to be sufficient to redeem the certificate of purchase and satisfy junior liens. If the funds from the sale are not sufficient to cover the junior liens, then the borrower or his representative must try to educate the junior lenders whose debt will not be satisfied that it is in their best interest to receive the reduced amount. The proceeds from the sale might be more than enough to cover the existing debt against the property, in which case the seller may keep the extra proceeds.
Jonathan A. Goodman is a shareholder in Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm. His practice areas include Real Estate, Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance. He can be reached at contact Jonathan Goodman.
A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.
Disclaimer -- Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.