I Loaned Money On A Property, Borrower Defaulted, Then Passed Away
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
The title pretty much says it all. I hired a law firm to foreclose. I received a letter in the mail yesterday from the attorney handling the estate. Now what? What should I do if I want the property? Any comments, suggestions, helpful hints, or words of condolences to me as the lender?
Thanks!
MGJohn
My 35 cents* worth: Been making mortgages to probate estates and trusts forever.
@John Thedford - The basics have been covered here. Although your borrower pledged the real estate as collateral, it's unlikely that you will become the owner. You do have the right to continue pursuing foreclosure of the security instrument (mortgage) however at a 40% LTV there are likely to be other bidders.
As for someone else giving you a deed-in-lieu, well, that probably won't happen either. In order to pass marketable title, that person will need capacity, powers and authority to transfer, as typically provide via probate. Why would anyone open probate in order to give you the property? More likely, someone will open probate in order to devise a plan to either save the property from (your) foreclosure and sell it or distribute it to heirs or beneficiaries.
That's not to say that there are no profitable plays for you (I consider myself a master at these) however you'll be in an adversarial position with the estate and not held in high regard by the judge who will be asking why you're not just happy to get your investment back. Not my position, mind you, but how unsympathetic a court will look at your actions.
Good luck. Do the right thing. You'll get richer in the long run.
*Used to be 25 cents, but due to inflation...
A lender has a collateral interest in the property, unless the lender get a deed in lieu of foreclosure and fee simple interest they won't own the property in that manner, the collateral must be sold any excess of what the lender is due is equity of the borrower and the borrower is entitled to overages. The borrower can sue your tail off if you take the property and fail to attempt to secure property without sale. That's why there are public sales, an attempt to sell at the highest price possible, if it doesn't sell, the lender attempts to get the highest price for the owner.
In this case, I doubt you will end up with the property unless you buy it from the estate and use your loan as part of the proceeds. IMO
And if at the public sale, also known as foreclosure auction, no one bids except the lender, then the lender is the highest bidder. The lender then goes and records a foreclosure deed. The lender then owns the property, and if it is a conventional bank, it is, in colloquial terms, an REO. If it is a private lender, it is no different, the lender was the highest bidder at the foreclosure auction, there is no overage, and the lender owns the property once they record the deed, and can do with it as he/she wishes.
So I disagree with Bill Gulley, which is nothing new. And it would be completely irrelevant, since I am not an attorney. But when I discuss this with my attorneys (I work with many) it seems they don't agree with him either.
Once you, as lender, go through the foreclosure process, and are the highest bidder at public auction, and record the deed, you own the property. At least here in MA and NH. Maybe it's different in other states, that I wouldn't know.
I'm with Ann Bellamy here. If you're forced to foreclose it goes to the "sheriff's sale" or whatever its called there. If nobody bids, you get the property. End of story. That's how banks get REOs on their books. The bank turns around and sells the property for whatever they can get. If they get more than they're owed (unusual), its their money to keep.
OTOH, if there are bids are the auction and the net from the auction is more than the bank is owed, the excess goes to the former owners.
I've, fortunately, avoided having to foreclose as a lender. Our defaulting borrower gave us a deed-in-lieu. But we were far enough into the process I'm confident we would have ended up with the property if there had been no bids at the trustee sale, as they're called here. This process here in CO is handled by the "public trustee", which is a county position.
MY LTV's are figured using the county's assessment. Yes, my LTV's are extremely low. I have one where the property was purchased in the 360K range a couple years ago for cash. The property is assessed at roughly 460...300K+ on the land and the structure the difference. I have 100K loaned on that one which would make my LTV approximately 25% or thereabouts. I probably have the lowest LTV portfolio of loans around and they average about 15% interest. I am thinking this isn't bad for a rookie. Almost all of there are done through my 401K so the interest income is tax deferred. My two prong approach to retirement is my 401K and then rental houses. I am trying to defer as many taxes until I die. I just got a call today. I may be doing another one next week. LTV approvimately 20%. Interst 15% plus points. Two years interest only. Borrower pays all closing costs.
Thanks for all the advice on the other ordeal. When I talk to my attorney next week I will instruct him to make an offer to purchase the property. The estate may need money to pay bills such as medical bills, etc, so we will see what happens.
I find the entire real estate realm to fascinating....and real estate people to be the same. I am so glad I found this site. I look forward to making lots of friends through here!
MGJohn
Wow!!! Yet another way to calculate LTV. I wouldn't have thought of that one. Nor, would I wear this as the badge of honor you appear to be proud of, John. Just some friendly marketing advice.
If we announced that we loan at 20% LTV, it wouldn't interest most borrowers and we wouldn't have much business. From a marketing point of view, most borrowers want to hear that you loan at a high LTV.
When we're asked our LTV, instead we state the percent of the purchase price we lend at because that what most borrowers really want. In our case, it's very high. This is simply business decision to gain a competitive advantage, but you could pick your favorite number. In effect, we use the purchase price as the "V" in LTV, but we don't say it like that.
On a greater concern, I hope you're not using the assessor's value to determine the value of the property and therefore, the safety of your loan. It could be way off high or low. What's important to us is to be able to come out whole if we have to foreclose. We never want the property. Nor do we use appraisals. There have been several treads here on this but we rely on our relationship and expertise of our borrowers for value, and we pull our own local comps to get an idea of value. As lenders, we don't have to be that accurate, but we don't use the assessor. I suspect your LTV, using more typical values, is higher than you think and might still be safe, just not as safe.
Jeff
A lender has a collateral interest in the property, unless the lender get a deed in lieu of foreclosure and fee simple interest they won't own the property in that manner, the collateral must be sold any excess of what the lender is due is equity of the borrower and the borrower is entitled to overages. The borrower can sue your tail off if you take the property and fail to attempt to secure property without sale. That's why there are public sales, an attempt to sell at the highest price possible, if it doesn't sell, the lender attempts to get the highest price for the owner.
In this case, I doubt you will end up with the property unless you buy it from the estate and use your loan as part of the proceeds. IMO
And if at the public sale, also known as foreclosure auction, no one bids except the lender, then the lender is the highest bidder. The lender then goes and records a foreclosure deed. The lender then owns the property, and if it is a conventional bank, it is, in colloquial terms, an REO. If it is a private lender, it is no different, the lender was the highest bidder at the foreclosure auction, there is no overage, and the lender owns the property once they record the deed, and can do with it as he/she wishes.
So I disagree with Bill Gulley, which is nothing new. And it would be completely irrelevant, since I am not an attorney. But when I discuss this with my attorneys (I work with many) it seems they don't agree with him either.
Once you, as lender, go through the foreclosure process, and are the highest bidder at public auction, and record the deed, you own the property. At least here in MA and NH. Maybe it's different in other states, that I wouldn't know.
Ann Bellamy, and Jeff S, since you voted for Ann's post and Jon Holdman ;
Besides the condescending tone used in Ann's post, (which I think is a personal issue) I'm not seeing anything where she is being specific about which part of my post she disagrees with, but seems it is the aspect of the "equity of redemption"
Perhaps someone can tell us what kind of interest is transferred by a mortgage or a deed of trust.
This began with Sir Francis Bacon (17th Century) with the concept of a mortgagor having the rights of equity or equity of redemption, that a debtor had the rights to receive the equities from secured lands after the debt was extinguished.
This Common Law and has been adopted in the United States, in all states, yes, even in the Napoleonic Law state of Louisiana, that a mortgage or deed of trust is not an alienation of fee simple interests but rather a security interest as a lien upon real estate to secure the interests of the mortgagee.
The concept of a lender taking and keeping a pledged collateral asset or contracting to an interest beyond the debt created is a clog to the concept of equity ownership, a lender only has a security interest to collateral to the extent of the debt created and no further.
Now, that "foreclosure" was explained to me above, may I direct your attention to the security interest established by a deed of trust or mortgage and that the intent of the pledged security interest is made for the SATISFACTION OF THE DEBT, no more and no less. (Excuse my yelling :) ) It is NOT a conveyance of a fee simple estate to the property.
So, what happens at foreclosure....the lender enters the entry bid which consists outstanding principal, accrued interest and allowable expenses related to the foreclosure process as allowed by law in the state where the foreclosure takes place. As mention above if the is a higher bid the property is sold for the SATISFACTION OF THE DEBT. The amounts received from the foreclosure sale go to the lender to pay costs and any amounts remaining are due the borrower. The lender is ONLY entitled to amounts to be indemnified.
Now, if there is no bid, the property is taken by lender. The lender still has the duty to sell the property for cash and apply the proceeds to the outstanding debt. It is at this point that REO or ORE is held by banks and as Ann pointed out, there is no difference between any lender, that the property, a car, airplane, boat, home or office building is not obtained for the use or consumption of the lender but to sell the property at the highest price possible, again, to satisfy the debt.
The foreclosure process is not a purchase for the lender, it is a means to satisfy the debt, if the property does not sell at the public sale, the debt is not extingushed and remains outstanding until it is paid in full.
A lender may accept a conveyance of collateral and agree in lieu of payment in cash, thus, a deed-in-lieu-of-foreclosure. At that point the borrower has conveyed all of thier rights at law or in equity which they held as payment for the debt. Now, having all the fee simple interests that were held by the owner the lender may do anything they like with the property, the is no outstanding obligation as the property was accepted for the debt.
For a lender, as long as the debt is outstanding there is the obligation to cancel that debt and to dispose of the collateral to do so.
Did you every see a banker take a car back and then start driving it? No!
Did you ever see a bank take a property back as collateral and move in? No!
Now, some num nuts is going to pop up and say that the "redemption period" for a borrower to redeem a property has limitations, yes it does and the right to redeem is not the same as the redemption of equity after the debt is satisfied.
Any lender that attempts to take any property pledged as collateral and profit beyond the amount due that lender is in essence stealing the equity of the owner, something that was recognized in the 17th century.
Now, see if common sence surfaces, If I pledged a million dollar property for 200k and then droped dead do you really believe that lender is entitled to an 800k profit? If you really do, just move in and see how fast you get sued in any state for the redemption of equity owned!
Beyond that, one of the functions in examinations of a lender is to see if they follow the law, if notice of sale was given, and after the sale of collateral, if notice of that sale was given according to state law and if in the event any collateral was sold for MORE than what was owed, such amounts were credited back to the owner. I'm sure that some of these HMLs and fly by nights lending money and even the part time finance attorneys that may advise them, have taken properties back, sold the property and kept any excess amount without a word to the borrower, or just moved in, you may not have gotten caught, may have done so without ill intent, but you're wrong and it violates the security agreement to sell the property for the satisfaction of the debt!
Here ya go, start studying: http://en.wikipedia.org/wiki/Mortgage_law#.22Title_theory.22_and_.22lien_theory.22
Now, if anyone can show me any statute or authority where what I've said is not correct or where a lender can take a property back, sell it, make a profit and is entitled to keep it or where the lender can move in or take the fruits of the land, please post it up! This is for cash loans made, not from equity financed.
Hey Bill. This is hysterical. How did I get sucked into a discussion by voting for a post? No fair :-).
While I happen to agree with Ann and Jon, and have read a thousand heated discussions here, I really didn't sense any condescension among anyone. I think your skin might be a bit thin today? No?
And how did Sir Francis Bacon and Common Law enter in? Personally I would have begun with St. Thomas Aquinas’ opinions on lending and maybe the Magna Carta (in Latin of course), and gone on from there. But then the post would have run on.
I was actually afraid we'd get hung up on LTV, but must say I find this much more entertaining.
Going to get popcorn… This could get good!!
Jeff
Nah, no popcorn. Bill wins because I don't have the attention span or memory to read all of that. By the time I got to the end, I would have forgotten the beginning, because I have the memory of a fruit fly.
And Bill, no condescension intended, simply stating the truth. You and I disagree regularly, what's new about that? You have much more experience than I in these matters, but I have to listen to my attorneys, that what I pay them for.
Jef, Bacon is where the concept began in common law.
Ann, tell your attorney "A mortgage is always a mortgage" see if they can figure that out.
Sorry the post was soooo long.
The reason for the post was to ensure others know you don't buy a house as a lender through foreclosure, once a lender, always a lender.
Get a DIL, then you can play investor.... :)