There is a house I am looking to purchase at a sheriff sale in NJ. The ARV of the home is approximately $700k. The property has 3 mortgages against it. It has a first from 20 years ago who's face value was originally 300k. It has an equity line in second position from 15 years ago from the same bank (lets call them Bank 1) for 100k. It has an additional equity line in third position from 12 years ago with a 300k face value (Bank 2)
The 1st and 2nd mortgages are both in the foreclosure process. The 3rd mortgage is delinquent but the bank has not begun foreclosure proceedings. It looks like the 2nd mortgage will go to sheriff sale first.
Is it typical that the Bank 2 would send someone to bid at a foreclosure sale of the home to protect their position? Is it probable that the Bank 2 has already written off this loan as a loss and will not show up to the sale?
Looking at it from Bank 2's perspective, they would probably figure that without renovation, the home is worth around 450-500k as is in a worst case scenario, and would need to spend some money to get it sold, pay cash for keys, and any other costs associated with listing the home. Not sure if they know the upset price of both the 1st and 2nd mortgages due to Bank 1 or if they would just see the face value of both at 400k.
I know that every situation is different, and that there are always exceptions, but wanted to hear from some investors that frequent sheriff sales to see if its common for a big national bank in third position on a property to come and bid at a foreclosure sale.
@Joe C to answer your question, I've never heard of banks showing up at auction to secure their position. What type of loans are the 1st and 2nd? I believe typically one bank takes the house and the others lose out on the property and hit the previous owner in the area of income tax. You should check with bank(s) to see what they are willing to take and make an offer to purchase the property. Good luck!
@Carl Handy The 1st is the original purchase loan. Large bank, 22 year old note. Second is a HELOC from the same bank. The third is a HELOC from a different large bank.
How is previous owner hit with income tax if its not a short sale?
Forgiven debt is treated the same whether a short sale or the deficiency from a foreclosure. The second has no reason not to show up if their foreclosure is first....it cost them nothing to bid up to the amount owed, then they can decide whether it makes sense to pay off the first and resell it, or not. Besides, occasionally a uneducated bidder shows and bids their full amount owed, not realizing there is a first.
@Wayne Brooks my question was whether I had a good shot of bidding on the second mortgage's foreclosure and wiping out the third position. I am sure the second will show up to the sale or send their attorney to announce the upset price, but I am wondering if the bank in third position will show up to protect their position
@Joe C Your question seemed to be about the second. No way to know if the third might show up....especially since we have no idea of the 3 mtg balances or equity. You should be able to get an idea of the amounts due reading the foreclosure files.....even though I have noidea what is included in those files in non judicial actions.
@Joe C Why don't you talk to banks see if you can negotiate before the auction? Come up with a strategy to short sale all three loans or at least two junior loans, and then a separate strategy for the one in 1st position. First make sure the owner deeds the property (temp) to you. If the banks surrender, you're success. The owner's credit is saved, you keep the property. Win - win. I know it isn't that easy but it's a strategy that you can try before auction.
You said the second is the one foreclosing and is the same bank as the first? Well then that's why they are doing it that way. If anyone would happen to outbid them as a second, the bidder would get stuck with the first. Smart move on their part. If they foreclosed the first mortgage instead, they run the risk of having the second divested. The third hasn't done much because they know they are done. That money is gone. I have heard of bidders making the mistake of bidding on what they thought was the first mortgage simply by going off of the banks name. Come to find out it was the second they bid on which just so happens to be the same bank. I always double check the docket.
@Michael Knaus there is significant equity there for bank 3 to lose though. Thats why i was asking if they may show up to bid.
"Equity" is a relative term in this line of work. What would bank #3 have to do to turn that back into liquid capital? Well, they would have to invest a ton of money to acquire the 1st and 2nd. Deal with Sheriff's sale costs, clean out, renovation, listing fees/commissions. Once everyone gets a piece of the pie, that "equity" isn't so plentiful all the sudden. It's also not just about recuperating their loss either. The sizable investment to buy out 1 & 2 has costs involved too. They would need a return on that investment or their investors will be not so happy. Long story short, I highly doubt a 3rd would pony up.
When a third agrees to loan money, I am sure they know the risks and where they stand in line. I say they walk.
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