ForeclosuresMass - ForeclosuresMass Monthly - Feature Article - Will I Own the Property If I'm the Successful Highest Bidder? (May 2006)

As you may know, the laws governing real estate foreclosures vary from state to state; in Connecticut, simply being the highest bidder in a foreclosure auction does not necessarily mean that you own the property. The fact is, it's not uncommon for the successful bidder at a foreclosure auction to come away from the transaction either not owning the property fully, or... not owning the property at all!

If you're unfamiliar with the way things work in the state of Connecticut, keep in mind that any foreclosure sale is not final until the Court approves the sale. In other words, "winning the auction" is simply the first step.

In the time period between the auction and final approval by the Court, certain things can get in the way. For example, the prior owner may reach some agreement with the foreclosing party (e.g. the bank), to allow for a forbearance (a temporary postponement) of the foreclosure proceeding. Or, the prior owner of the property may intercede with a bankruptcy. Events such as these along the way can postpone - or stop - the sale.

* Next 37 17 investors only!

Next, even after the sale is confirmed by the Court, the successful bidder (i.e. you) may hold title to the property subject to a lien or mortgage "prior in right" to the party who commenced the foreclosure. In plain English, this means you don't own the property free and clear.

But don't run the other way yet! The good news is you can, with the assistance of an attorney specializing in foreclosure practice, greatly reduce the risk of post-auction pitfalls.

During the interim between the foreclosure auction and Court approval, the current owner is often desperate to save his property and may attempt one last ditch effort to work out an agreement with the mortgage holder who forced the foreclosure action. Although this is a rare occurrence, at least one court has found that the rights of the successful bidder (again, that's you) are superseded by that of the current owner. In doing so, it allowed an agreement with the mortgage holder to stay in place over the successful bidder's objection!

Fortunately, this maneuver can be countered with a few simple steps taken early:

As mentioned earlier, another possibility for post-auction interference is the bankruptcy court. Bankruptcy is a powerful remedy and is much more common and harder to counter. Fortunately, with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"), which became effective on October 17, 2005, the landscape for all debtors has changed for the worse.

This law may curb filings and reduce interference with the foreclosure process. That said, any time a bankruptcy is filed, there are so many technical details that need attention that the foreclosure may no longer look like a great deal. It may be that the debtor in bankruptcy is able to navigate the morass of new rules and requirements, and actually make a bankruptcy reorganization case work, thereby saving their property.

But keep things in perspective. Even before BAPCPA, the success rate for Chapter 13 cases was about 50%, and with the new law in place, that number is going down. For the successful bidder to obtain the property despite the bankruptcy filing, it may be a simple matter of an experienced and knowledgeable bankruptcy attorney gumming up the works, reducing the chances of a successful bankruptcy case.

The bottom line is that bankruptcy is a commonly invoked measure used to stave off foreclosure, but it is often only a temporary fix. In the words of one eloquent colleague, "bankruptcy is mostly theatre; at some point reality comes back."

The most common misconception (and pitfall) encountered in buying foreclosure properties is the "prior-in-right" lien or mortgage. Simply stated, a foreclosure does not affect liens or mortgages that are prior in right (i.e. recorded earlier in time) to that being foreclosed.

So, if a second mortgage is being foreclosed, the first mortgage is unaffected. The successful bidder takes "subject to" the first mortgage, meaning the successful bidder owns title to the property but it has a mortgage on it.

This situation is very common, but is also easy to diagnose. The prospective bidder can easily, for a relatively nominal fee, commission a title search that will show all the liens encumbering the property. Thereafter, to the extent that liens are prior-in-right, the outstanding balance must be ascertained so that this figure can be included in your bidding price. All funds paid by the successful bidder will be distributed to the foreclosing party up to the amount of its debt, then on to lien holders that are subsequent-in-right.

For example, let's take a fictitious property: 150 Main Street, Big Harbor, Connecticut. This property has been appraised at $350,000.00, and the second mortgage holder, Small Bank, is foreclosing.

Your attorney has found that the first mortgage is held by Big Bank, and has a current outstanding balance of $185,000.00. You have decided, based on your market research, that you do not wish to bid more than 90% of the appraised value, or $315,000.00.

Your bid at auction, then, must be not more than $130,000.00 because - and this is the critical piece - to clear title, you must now also pay Big Bank the amount of its debt ($315k - $185k = $130k). As a result of careful planning, you have obtained clear title to the property for $315,000.00.

Connecticut is a terrific place for real estate ownership and investment. As you can see however, obtaining the property, or obtaining clear title to the property, is not a given even if you are the successful bidder at the auction! The result of not planning could be the loss of your deposit, which is commonly 10% of the appraised value. Careful planning is required to make sure that you are getting exactly what you are paying for.

Greg Arcaro is a Greater Hartford attorney with the firm of Brown, Paindiris & Scott, LLP, in Glastonbury, Connecticut. He specializes in real estate, foreclosures, bankruptcy and business litigation. He may be reached by phone at: (860) 659-0700 or via email at: garcaro@bpslawyers.com

Did you like this article? You May Also Like:

	Feature Article: Appraising a Property Without Stepping Foot on the Premises Steve Krasnow, Certified Residential Appraiser Determining a property's value in order to make the right offer or bid takes practice and experience. Knowing how to evaluate a property when you dare not step foot past the boundary line is another whole kettle of fish. In this article, Steve Krasnow gives four strategies for determining value - without having to tour the property.
	Legal Corner: Banks are willing to work with investors to find equitable solution Bob Tenney, Cunningham Machanic Bob Tenney, attorney at Cunningham Machanic in Natick, is on the frontline of the foreclosure process. Tenney and his firm review claims by lenders to review properties for foreclosure. If proper conditions are not met, they are also the folks who send out demand letters—the step that begins the foreclosure process for the homeowner. "We send the demand letter and give the homeowner time to reinstate their loans. If that doesn't happen we proceed with the foreclosure," says Tenney...
	Interview With The Expert: Richard Cohen Richard Cohen, Negotiation Coach and Consultant For any real estate investor, negotiation is a part of everyday life. Whether with tenants, contractors or homeowners, any time you are trying to influence someone else, you are negotiating. This month we speak with Richard Cohen, a negotiation coach, consultant and real estate investor, to understand more about this critical skill...
	Feature Article: Conventional Financing for Less Than Stellar Credit Jeffrey Chalmers, Real Solutions LLC Have a so-so credit score and need financing but aren't ready to go the private money route just yet? You can still get conventional financing - if you use a combination of lender and seller monies. Mortgage expert Jeffrey Chalmers explains the lending process and what banks look at when determining your loan amount and how you can work with motivated sellers to help finance that next deal.
	Feature Article: Use Exit Strategies to Reach Your Investing Goals Joseph A. Roche Planning your exit strategies will help you anticipate potential opportunities and problems and how you'll deal with them - as well as ensuring that you don't lose money on a deal. Real estate investor Joseph Roche discusses the six most common exit strategies, including wholesaling and lease options, and how and when to use each one to reach your investing goals.
	Feature Article: Getting Clear For a Great Next Year Sharon Teitelbaum, MA, PCC Lots of people set goals, but as experienced career coach Sharon Teitelbaum explains, that alone is not enough. Read on as Sharon offers five specific recommendations - recommendations which go beyond simply setting goals - to help you start or grow your real estate investment business in the coming year.
	Feature Article: Using Direct Mail Lists to Reach Potential Home Buyers Lois K. Geller Rookie real estate marketers spend 90% of their time on creative when putting together a direct mail campaign. Lois Geller explains why this is a backwards approach - and why you should focus on building a targeted list instead.
	Success Story: One Deal, $90,000... Dominic Kirchner II, Exit Realty Center Full-time realtor and professional investor, Dominic Kirchner II, received his Foreclosures Mass email one Friday afternoon. After reviewing the stats, he quickly downloaded the data and sent out inquiry letters to the people who had received foreclosure notices...
	Interview with the Expert: Incorporate Real Estate Into Your Financial Plan Judy Carryl-Young, Ameriprise Financial Services, Inc. Financial planners often see clients who want to put everything they own into real estate . . . sometimes with disastrous results. In this interview, licensed financial planner Judy Carryl-Young explains why single asset allocation may not be the best choice for you and how you can maintain your financial security by keeping a diversified portfolio.
	Feature Article: How to Become Financially Literate - Without Getting a Degree in Finance Ann Bellamy Think you need a finance degree to understand the real estate "numbers" game? Think again. Ann Bellamy, real estate investor and hard money broker, gives you seven tips on how you can become financially literate and comfortable with real estate investing. (Hint: Don't be afraid to take chances.)