By Gregory F. Arcaro
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A Lot Can Happen Along The Way
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, 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.
Do What You Can Early On
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is a rare occurrence, at least one court has found that the rights of the successful bidder (again, that's you) are superseded by that of the current owner.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:
The Impact of Bankruptcy Has Lessened
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."
A Few Words Abut "Prior-In-Right" Liens
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
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