Contact the Owner in Pre- Foreclosure or before Auction day?

23 Replies

Hi guys  - can you analyse this scenario for me - thanks for your extremely helpful inputs!

I see a house listed for Sheriff Auction. 

The market value of house is 500K.

Owner's Equity is 200K

Judgement Amount is 300K.

1. My first question is - why is it on Auction in the first place? Instead of getting foreclosed - why cant the owner sell it for 300K - and walk away? When they foreclose him - he still has to walk away from the 200K equity. And am sure investors would gladly buy the 500K house for 300K - and pay the owner a little extra.

Btw - this is not a hypothetical example - I am seeing houses like this on the list. That are not in shambles - and are easy to bring up to mark.

Assuming theres a real answer why he cannot sell under the market - and it does land in auction. My questions are:

2 - Can I contact this owner and offer him 300K + some more, so he can pay off the Judgement and avoid foreclosure. What could be some reasons why he wont agree?

3 - Assuming he does agree - does this need lender's approval? If I paid less than Judgement - that would be Short Sale. But in this case I am paying a bit over the Judgement.

4 - Assuming both owner and lender are ok with this - can this be done once the house is already scheduled for Auction? Will they cancel the auction in that case?

5 - Can all this be done Before the Auction [ Pre-Foreclosure] - like - if I come to know the house has been served a Foreclosure Notice.

6 - Lastly - assuming its all done - will this be a normally scheduled closing, with agents and attorneys - so I get the deed and possession.

Thank you.

They are in foreclosure because they are not paying their mortgage. If he has equity, he has the choice of selling and avoiding foreclosure. He may not agree to an investor offer because he wants to keep his home or he wants to get top dollar. If the account is a full pay, you don't need mortgage lenders approval. Yes a home can be sold in foreclosure and no the bank won't always postpone to allow a standard sale to take place. If the bank is aware of a full pay, they may postpone, this will take reaching the right people with the right items at the mortgage servicer. If the home is in foreclosure and the deal is structured to be a normal sale then it would just be business as usual.

Thanks - but this does not explain - why has this house landed in Auction - when the judgement amount is way less than the market price. At this time there's no room for the owner to keep his home, or get this top dollar. So he is going to get foreclosed for the Judgement Amount.

This is simple for houses that have more debt than market price. I dont see why there are houses in Auction, that have debt way less than the market price. Investors can simply pay the bank judgement, and cut a deal for the owner to walk with some money - now that they're going to lose the house and equity at auction, in addition to getting foreclosed.

So again - this does not explain - why has this house landed in Auction - when the judgement amount is way less than the market price.

There's a million reasons why there's a situation like this. One could simply be he doesn't have the money to make his note payment, and no one has come along to solve his problem for him (not everyone makes rational decisions all the time). Another could be that he's dead and no is paying the note. But for all intents and purposes, the best way to go about it is to secure a contract with him to buy his house subject to the existing mortgage, which will absolutely get the trustee to call off the auction, then refinance it out in your name. But again, you need a rational seller to agree to that, and unfortunately, most people in that situation got their because they aren't seeing clearly.

Originally posted by @Jason Hirko :

There's a million reasons why there's a situation like this. One could simply be he doesn't have the money to make his note payment, and no one has come along to solve his problem for him (not everyone makes rational decisions all the time). Another could be that he's dead and no is paying the note. But for all intents and purposes, the best way to go about it is to secure a contract with him to buy his house subject to the existing mortgage, which will absolutely get the trustee to call off the auction, then refinance it out in your name. But again, you need a rational seller to agree to that, and unfortunately, most people in that situation got their because they aren't seeing clearly. 

You had me until the ..."Absolutely guarantee they will call off the auction". That's one helluva gamble with absolutely no guarantees that they will call off the auction. You forgot to mention the small detail that included with that scenario, there is the requirement for the loan to be brought current. THAT is the only absolute guarantee that you will get the auction called off. And then, if you don't refinance it out in the name of the new owner, you face going back into foreclosure again for the due on sale clause that no one thinks the lender actually does, but they actual do, daily.

Originally posted by @Ron S. :
Originally posted by @Jason Hirko:

there is the requirement for the loan to be brought current. THAT is the only absolute guarantee that you will get the auction called off.

Sure. I was saying, buyer pays the full outstanding balance on the mortgage. and then some more to the seller in default.

 And then, if you don't refinance it out in the name of the new owner, you face going back into foreclosure again for the due on sale clause that no one thinks the lender actually does, but they actual do, daily.

Totally lost on this one.

Originally posted by @James W. :
Originally posted by @Ron S.:
Originally posted by @Jason Hirko:

there is the requirement for the loan to be brought current. THAT is the only absolute guarantee that you will get the auction called off.

Sure. I was saying, buyer pays the full outstanding balance on the mortgage. and then some more to the seller in default.

 And then, if you don't refinance it out in the name of the new owner, you face going back into foreclosure again for the due on sale clause that no one thinks the lender actually does, but they actual do, daily.

Totally lost on this one.

@James...sorry.

So, doing "subject to" is illegal per the terms of the note. As you are a developer and lender, I'm rehashing what you already know. It's not illegal in a "legal" sense, it's illegal in the sense that it triggers the "Due on Sale" clause of 99.9999% of all notes written nationwide for the last ions of years. It is a violation of the covenants of the note. Cancelling insurance could trigger the due on sale. Selling Meth, converting it to a bed and breakfast, failing to pay taxes, having a fire and not using insurance proceeds to fix it back to the way it was, and a whole bunch of other rules specified in the note, that if violated, can trigger the due on sale clause. Selling a property subject to is not allowed. How is the lender going to find out? Well, if you are smart (and I think you are) you are going to put insurance in your name as the new owner to protect yourself. How are you going to list me as the loss payee? You aren't on the loan so you sure aren't going to call me for information and even if you did, I'm sure not going to give you any information as you aren't on the loan. That's the first way and usual way we find out you transferred property to someone else, subject to, and we send a nasty little letter to the borrower that we are going to foreclose if he/she doesn't transfer it back into their name immediately. You can get a borrower's authorization for you to call and speak to us about the loan and the minute you call us (Lenders in general) and tell us you need the loss payee clause, and we ask why, and you tell us because you are changing insurance, we accelerate the note. Or maybe you are hip to that and you just cut and paste the information from the previous owner's policy if by chance they give you a copy of the policy that they for sure are going to cancel (That's another way we find out) and then use the same language for your new policy. Well, that cancelled policy gets a notification to us from the old policy and we send a letter. Or maybe you and the borrower know that danger so you leave the insurance in place as is and think everything is fine but when you go to pay the taxes so you can take the deduction, we get notified at that time and send a letter.

My point is, if you are buying subject to, be prepared to have a quick exit strategy. The chances of a lender calling the note due are greater and greater. It's an risk in my experience doing subject to.

To answer the first question from the first post in this thread ...

Some homeowners are just hoping for a miracle that will save them; some are like the proverbial ostrich with their head in the sand so they ignore what is about to happen around them; some are just stubborn and will stay to the end until they have to be dragged out of the property. And sometimes they really can't sell it on the MLS because there is a big IRS lien sitting there that will take all that perceived equity to pay off.

Keep in mind that the auction process is just part of the legal requirements for the lender's collection activity of last resort - and that the auction process is somewhat designed so that the lender can "solve" some of the issues by following proper procedures (for example, IRS liens can be left with just a redemption period if proper notice is given to the USA that a foreclosure will happen and extinguish the IRS lien).

@Ron S. If the mortgage is current, and the lender is receiving their monthly payments on time, why would they call the note? Just because they can? And send it back into the foreclosure spiral? They have a performing asset on their books - In my experience, they've always been happy with that.

The biggest risk to me of doing subject to is that the original owner gets a home equity loan and splits - but in that case, you're only out the money it took you to catch up the mortgage.

Originally posted by @Jason Hirko :

@Ron S. If the mortgage is current, and the lender is receiving their monthly payments on time, why would they call the note? Just because they can? And send it back into the foreclosure spiral? They have a performing asset on their books - In my experience, they've always been happy with that.

The biggest risk to me of doing subject to is that the original owner gets a home equity loan and splits - but in that case, you're only out the money it took you to catch up the mortgage.

@Jason, good question. So, the reason is that the new owner has no obligation or liability to us and in turn, we have no obligation or liability to them so, when their loan payment goes up for lets say taxes or insurance (Just as an example), and the new owner calls in to find out why it went up, we can't tell them. Telling them would subject us to violation of a whole slew of state and federal rules about disclosing non public personal information. Let's say the borrower gives us permission to talk to the new owner? Ok, so maybe (maybe) we get away with the regulators breathing down our necks, we are subject to internal/external auditors reviewing the violation of our policies and procedures for disclosing information about a loan to a person not on the loan. I'd say that's the least of our worries. Continuing with the scenario, let's say the property gets damaged and the new owner has insurance and the insurance proceeds go to the new owner and not jointly to us. Get's $250M in a cashier's check for a burned down house. Decides, "Hey...wow...all I did was bring a loan current and now I have $250,000 in insurance proceeds to cover the loss of the home but heck, I only invested ten grand and I'm not on the loan! Heck! That's lottery money, I'm going to Vegas"! They take the money and run. We have a burned down house. The borrower has a foreclosure because the quitclaim/grant deed of whatever they did to sell the home doesn't absolve them of the liability on the loan. This scenario actually happens all the time and in that case, nothing we can do about it. Again, they have no obligation of liability to us.

You say they are going to do the right thing? The roads of the world are paved with good intentions and the reality is that money is a powerful motivator. Happens all the time.

They don't have a performing asset on their books. They have an impaired asset on their books. Potential legal issues, lender liability, regulatory issues and a whole bunch more. What the consumer thinks is a performing asset is a lot different than what a financial institution thinks is a performing asset or what a regulatory body thinks is a performing asset. Making matters worse if is the asset is investor owned (Like Fannie Mae or Freddie Mac).

That notwithstanding, what if the new owner is delinquent? I can't call to collect on the new owner. I'm subject to FDCPA rules on a Federal level and similar rules on a state level (Depending on the state). I call the borrower and he says he sold it. Now what?

Hopefully it's starting to make sense from a lender's perspective. No, we don't do it because we can. We do it to mitigate risk and loss.

@Ron S. great explanation from the institutional side of things. Thanks for that. What if you made a contract with the owner, brought the mortgage current to avoid foreclosure, then refinanced it into your own loan? Obviously from what you are saying the bank would still not 'want' you to do this, but from the investor side, it seems like you could get in and out before the bank could do anything or even find out. Am I missing something? If your goal with buying subject to is to buy something at a deep discount pre-foreclosure, and not because you have no ability to get a loan of your own, seems like it could still be a fruitful strategy?

are you sure it's not the judgement amount but the starting sheriff sale listing price? sometimes the bank will start a price at a lowball offer in order to attract interest. I saw one at $100.

also, be aware that the bank will sometimes attend these lowball offers and bid on it until they get their price. doesn't happen often but it does happen.

Originally posted by @Jason Hirko :

@Ron S. great explanation from the institutional side of things. Thanks for that. What if you made a contract with the owner, brought the mortgage current to avoid foreclosure, then refinanced it into your own loan? Obviously from what you are saying the bank would still not 'want' you to do this, but from the investor side, it seems like you could get in and out before the bank could do anything or even find out. Am I missing something? If your goal with buying subject to is to buy something at a deep discount pre-foreclosure, and not because you have no ability to get a loan of your own, seems like it could still be a fruitful strategy?

That scenario would be the most attractive resolution for all parties in my opinion. Doing it that way buys you a minimum of 6 months in case the bank does enforce the due on sale clause. It takes the lender 120 days before they are allowed to file the notice of default. There are arguments in the lender world as to whether or not the 120 day rule applies to non monetary default (Like if the guy was just late) but most lenders take the conservative approach and just wait the 120 days until the start foreclosure.

...and yes, that could get you in and out before we could take action. It's a valid strategy. Even when I'm aware and I default a borrower for doing this, if I can see that there is progress with a refinance, I'll usually file my NOD to "Alert" the parties that I'm not playing (and to start the clock in case the transaction falls apart...happens all the time) but, i'll hold off on publishing (my scenario assumes non judicial foreclosure, meaning, not using the court system) to give them time to facilitate the transaction.

Wow this is a lot of detail.

All I was hoping was that i can pay the defaulter owner the money to clear his dues. He pays the bank, avoids foreclosure, and i get the house. Apparently I cant do that? And the bank is calling a note upon this??

Wow. Talk about helping both the bank and defaulter - they wont take it! 

What is "calling the note" anyway?!

Originally posted by @James W. :

Wow this is a lot of detail.

All I was hoping was that i can pay the defaulter owner the money to clear his dues. He pays the bank, avoids foreclosure, and i get the house. Apparently I cant do that? And the bank is calling a note upon this??

Wow. Talk about helping both the bank and defaulter - they wont take it! 

What is "calling the note" anyway?!

 Calling the note means the bank is "calling" the loan balance fully due and payable. They are demanding the loan be paid off for a default. Usually a monetary default. Sometimes a non monetary default reason such as the scenario you posed on the forum. There are many other reasons a loan can be called due. Death of all obligors is another reason although recent CFPB rules have made that a bit more difficult to call a note due for the death of the borrower(s) if there are legitimate heirs.

Your motives aren't flawed James. Just the method of execution, but as others have pointed out, you might be able to make it work the way you want if you can quickly get the loan out of the borrower's name and into your name. The ONLY way that happens though is to pay the original loan off. You can't assume it (There are very very very rare and specific circumstances where you can do that but 99.999% of the time, you can't). You can't take it over. You have to pay it off with cash or proceeds from a loan.

If you pay the loan off in Full, it's just a regular sale. There may be additional mortgages/liens, so the equity may not be there that you think.

Well I am saying its a cash transaction. So no assuming the loan.

House is 400k. Equity is 200K. Default is 300K. I pay the seller 300K (bookmark here). Seller pays the bank. Loan is closed. I guess at this point Seller owns the home.

Bookmark - at this time - when I pay the seller or bank directly the 300K - seller can write a contract with me to transfer the title and deed to me with an attorney.

No?

So there's no transfer of loan here.

Again, it would be a regular sale....forget that it's in foreclosure.....you make a deal, go to closing, bank gets paid off, seller gets anything left over, you get the title. Again, this assumes there are no other mtgs/liens on the property.

@Wayne Brooks as long as there's time to do it. If it's 1 day before the auction, there may not be time to go through with a traditional sale, even if it is cash. If he makes a sale contract, executes it by paying the backed mortgage, the foreclosure auction is cancelled, thereby allowing him time to proceed with paying off the original loan and transferring title.

Originally posted by @Wayne Brooks :

Again, it would be a regular sale....forget that it's in foreclosure.....you make a deal, go to closing, bank gets paid off, seller gets anything left over, you get the title. Again, this assumes there are no other mtgs/liens on the property.

thats great then. thats what i thought. i think after making the deal we just get a RE attorney - and he should be able to pull in all parties and artifacts of closing.

thank you.

PS - this should be possible with a financed sale also, btw. but i dont want to keep on going.

Originally posted by @Ron S. :
Originally posted by @James W.:
Originally posted by @Ron S.:
Originally posted by @Jason Hirko:

there is the requirement for the loan to be brought current. THAT is the only absolute guarantee that you will get the auction called off.

 Sure. I was saying, buyer pays the full outstanding balance on the mortgage. and then some more to the seller in default.

 And then, if you don't refinance it out in the name of the new owner, you face going back into foreclosure again for the due on sale clause that no one thinks the lender actually does, but they actual do, daily.

Totally lost on this one.

@James...sorry.

So, doing "subject to" is illegal per the terms of the note. As you are a developer and lender, I'm rehashing what you already know. It's not illegal in a "legal" sense, it's illegal in the sense that it triggers the "Due on Sale" clause of 99.9999% of all notes written nationwide for the last ions of years. It is a violation of the covenants of the note. Cancelling insurance could trigger the due on sale. Selling Meth, converting it to a bed and breakfast, failing to pay taxes, having a fire and not using insurance proceeds to fix it back to the way it was, and a whole bunch of other rules specified in the note, that if violated, can trigger the due on sale clause. Selling a property subject to is not allowed. How is the lender going to find out? Well, if you are smart (and I think you are) you are going to put insurance in your name as the new owner to protect yourself. How are you going to list me as the loss payee? You aren't on the loan so you sure aren't going to call me for information and even if you did, I'm sure not going to give you any information as you aren't on the loan. That's the first way and usual way we find out you transferred property to someone else, subject to, and we send a nasty little letter to the borrower that we are going to foreclose if he/she doesn't transfer it back into their name immediately. You can get a borrower's authorization for you to call and speak to us about the loan and the minute you call us (Lenders in general) and tell us you need the loss payee clause, and we ask why, and you tell us because you are changing insurance, we accelerate the note. Or maybe you are hip to that and you just cut and paste the information from the previous owner's policy if by chance they give you a copy of the policy that they for sure are going to cancel (That's another way we find out) and then use the same language for your new policy. Well, that cancelled policy gets a notification to us from the old policy and we send a letter. Or maybe you and the borrower know that danger so you leave the insurance in place as is and think everything is fine but when you go to pay the taxes so you can take the deduction, we get notified at that time and send a letter.

My point is, if you are buying subject to, be prepared to have a quick exit strategy. The chances of a lender calling the note due are greater and greater. It's an risk in my experience doing subject to.

 Ron, are you suggesting that the better option is investor come in to pay the balance in full and then transfer the title to the investor? 

Originally posted by @Scott W. :

are you sure it's not the judgement amount but the starting sheriff sale listing price? sometimes the bank will start a price at a lowball offer in order to attract interest. I saw one at $100.

also, be aware that the bank will sometimes attend these lowball offers and bid on it until they get their price. doesn't happen often but it does happen.

 In Oklahoma, Sheriff Auction's price must be at least 2/3 of court appointed appraisal price. Otherwise, judge will not approve the sale.