A very unusual situation here.
2nd deed of trust trustee sale opened at $218k
At the same time the 1st deed of trust opened at $27k
No subord agreements - no other liens.
In NC we have a 10-day upset bid period that resets every time a new bid is placed.
The house is worth upwards of $650k
We are bidding on the 1st - we were just upset again. The bid is now $355k
The 2nd bid is up to $308k
After a ton of research I was able to discover the high bidders of each are the same company using different names to bid.
My question is this. Does the winner of the 2nd, who will have title to the home sub to, get to collect the entire surplus? (as it stands now that would be 355k - 27k = 328k) While the 1st will wipe out your ownership claims, that's a nice 20k profit for not doing anything!
They are using a brilliant strategy if this is the case. It is giving them a 308K bid credit that we can't match guaranteeing them the house.
I know the original owners will get the surplus from the second, but will the winners of that second collect the entire surplus from the 1st?
Anybody out there with experience in this?
Sorry, I understand foreclosures in general, but this makes no sense. I assume "deed of trust, trustee sale" is a foreclosure sale. The 10 day upset/delay rule sounds insane. I don't understand how there can be two simultaneous auctions, one for each note, running concurrently. Usually the first note that foreclosures determines what happens with the proceeds. But, in Any case, a surplus above the mortgages/liens on a property go to the Owner, not a bidder, and not a lien holder. At least here anyway, any surplus from a 2nd mtg auction, would go to the first mtg./gov't liens, taxes, then any junior liens, then to the owner.
A lot of companies will set up sub accounts in order to jack up the sale price, and that has been going on for ever.
So does the winner of the junior lien get ALL of the surplus from the senior lien foreclosure or only what they paid, and the remainder trickles to the original owner? (In NC when you are high bidder you get title to the property subject to all senior liens and encumbrances, so you are the new owner, for the time being at least)
In California the rule is "pro tanto" each lien holder has a order of priority and is paid up to the extent of the debt plus specified expenses. When all lien holders have been satisfied the homeowner is entitled to the excess if any.
Dan, the "winners" aren't buying the liens, they're buying the property. The current lien holders get paid, then if anything is left over, it goes to the current owner, not the "new" owners.
That is the way it works here as well.
Since the 2nd is foreclosing as well, the original homeowner will get the surplus since there are no other liens.
However, the 1st foreclosed as well and there will be a surplus too. Since the 2nd has already been made whole with their foreclosure and the surplus went to the original homeowners, who gets the surplus from the first, the original homeowner or the high bidder of the second, who in NC, is now the new homeowner subject to any senior liens.
Dan, if your numbers are correct, AND the 2nd forecloses first:
Any surplus, doubtful, goes to the 1st. If it's enough, the 1st is paid off, no foreclosure by the first. If not, the bidder on the 2nd will pay off the first, to avoid losing everything they just bid on the 2nd.
Yes that is correct, you are the owner sub to any senior liens
I dont want to stir things up but I dont agree that the original owners get all of the surplus. I want to think that the high bidder of the 2nd lien foreclosure gets at least their bid amount back then maybe the original homeowner gets that surplus.
I was hoping someone on BP has been through this so we can all stop guessing.
Wayne, I am 99% sure the senior lien will not see any surplus from a junior foreclosure. Their security and interest in the property is unaffected by a junior lien foreclosure therefore they are not involved in any of the foreclosure process.
Sounds like an interesting and quite confusing scenario. I'm accustomed to when the first lien position forecloses and proceeds with an auction, all junior liens are extinguished. Under that line of reasoning, the second having an auction almost sounds meaningless, since the purchaser / winning bidder of the first lien's auction gets the property - regardless of the outcome of the second lien's auction.
Maybe i'm mistaken since this is happening in a state with which I am not familiar ...
The second lien holder is now whole thanks to their auction. Opening bid was $218k, the bid is now at $308k.
The first was owed only $27k. That bid is now $355k. So they are now whole as well.
And there is still a ton of equity left.
Those bidders who bid on the second, should at least get there bid back from the surplus of the first lienor's sale. This would be a bid credit should they want to bid on the first, which they are doing. So they can now bid $308k higher than anyone else.
For example, if I bid $500k on the first, by owning the house sub to at $308k, they can bid $808k. Once the surplus funds are distributed, they get their $308k back if not all of the surplus, which would make them a nice little profit in of itself plus clear title since they just won the first lienor's sale.
This is how I am seeing as how it works. Please someone who has some experience chime in!
Dan, the confusion arises because you present this as both mortgagees having a simultaneous sale. We are now assuming the 2nd mtg auction occurs first, because if the 1st mtg auction occurs first-the 2nd mtg get wiped out, no longer exists, therefore no 2nd mtg auction.
I Have bought a property through a 2nd mtg foreclosure. The surplus, if any from the 2nd mtg auction, goes to the first mortgage holder and pays down their debt by that surplus amount. Unless the bidder on the second is an idiot, they know the first is about to foreclose, so their plan, and therefore their bid amount strategy, will be to immediately pay off the first mtg so as to avoid losing the property they just bought.
If there are 2 simultaneous auction"bids" going on, with some weird 10 day upset/delay issues, maybe they are bidding both of them since they don't know which one will happen first, therefore a different bid amount/strategy dependent upon which one goes first.
Sorry, let me be more specific with the dates.
Right now, the second mtg foreclosure ends 9/3/13 and the first ends 9/9/13.
So the second is scheduled to end before the first. However that could change! If the bid on the second mtg gets upset on 9/3/13, the new end date will be 9/13/13.
Yes, I know. I can not stand the upset bid period!!! It drives me crazy but it is not changing and we have learned to play the game.
We were actually high bidders in the 10th day and the the second was upset and scheduled to end after us, so we were loving it, then we were upset and that pushed the first back ending after the second again.
This is probably the only time this situation will arise as it is very unique.
My question really is why the hell did the owners not just sell??? Go figure.
Okay, curious...what "upsets" a bid, just a new bid? Can this go on forever?
I guess you bid the second realizing you need to immediately pay off the first, and you bid the first ignoring the second. I don't Even want to know what redemption periods thrown into the mix create.
The redemption period is the upset bid period.
A new, higher bid is an upset and resets the 10 days. Once the 10 days are up, that's it. The high bidder gets the property.
The homeowner being foreclosed on, within that 10 day period, can pay in full and the process stops. They can also file bankruptcy which stops the sale. That happens ALL THE TIME! Talk about frustrating.
Yes, this can go on forever. I talked to a clerk of court who accepts bids and she said they had one go on for two years.
Yea, we bid on senior liens and never worry about any junior liens. But on this property, the bidders are not stupid. They are actively bidding on the second which led me to ask the original question.
If they get paid any or all of the surplus from the first, then they are making a brilliant move gauranteeing them the property.
Let me see if I am clear on the scenario:
Home Value = $650k
1st Mortgage= $27k sale scheduled 9/9 current top bid =$355k
2nd Mortgage=$218k sale scheduled 9/3 current top bid = $308k
When 2nd lien holder holds their sale (we are assuming that their demand does not include any funds to bring the 1st mtg. current or to pay it off) If the winning bid is $308k from Investor A, subject to the $27k, the overbid goes to the foreclosed homeowner = $308k-$218k=$90k
(Investor A) has title to a home worth $650k with $308k + $27k (1st mtg) = $315k gross spread.
Now if (Investor A) fails to bring the 1st current before the foreclosure sale on 9/9 & the winning bid is from (Investor B), with $355k as the winning bid, (Investor A) loses their title thru foreclosure by the winner of the 1st mtg (Investor B). Now the overbid is $355k-$27k= $328k. Since( Investor A) was also the last owner of record, they are entitled to the overbid. (Investor A) makes a profit of $20,000 from their $308k investment.
The winner of the 1st mtg auction (Investor B) now has title to a house worth $650k that they paid $355k.
As long as the high bid on the first maintains an acceptable overbid for the strategy, (if I was Investor A, I would make sure I bid the price up on the 1st mtg auction).
Hypothetically, if I were a resourceful investor & I could get to the homeowner directly I could propose a few compelling ideas:
1) Offer owner to bring loans current, stop the foreclosure, buy time to flip it "as is" or fix-it up for retail pricing & split a percentage of the $405k gross equity.
2) Give owner cash now for title & rights of redemption so they don't have to wait for the overbid check which could take a long time. Now I have more exit strategies:
A) Do nothing, & wait for the overbid proceeds on the first auction.
B) Do something to increase resale value.
C) Exercise the redemption rights or (sell them to someone else) if I think the price at the 1st auction was too low when it eventually takes place.
Ellis, I'm believe any over bid surplus from the 2nd mtg, assuming it occurs first, goes to the first mortgage, then any other liens, before anything goes to the owner.
The superior lien is unaffected by a junior foreclosure. They do not get any surplus. Surplus trickles to junior lienors then eventually the homeowner. The senior lienor can still foreclose to recoup their money.
you are correct in your assessment with one exception. Both foreclosures sales have already taken place and are in the redemption period. The dates are the last day to make an upset bid not the date they go to sale. If you do make an upset bid, another 10 days is added.
I see it as you do, I think the winner of the 2nd gets and surplus because they are the new homeowner of record (providing the 2nd sale ends before the 1st sale does). However, I just came across a lawsuit in Florida where the bank tried this strategy with their second and the courts said no, they do not get the surplus... but every case is a bit different.
Here is the link to this article:
And if things were not complicated enough, in NC we do not require immediate payment. We have to wait for the trustee to get the paper work together, that is a minimum of a few days. Then you have to send the money back to them. That is a few days minimum. Then you have to wait for the trustee's deed to be completed and sent back to you, again a few days. Then you can take it to the registrar and register your deed.
So by the time the first mortgage sale ends, even if you were high bidder on the second mortgage, you will not be the owner of record for that home at the time the first mortgage sale ends.
Not sure how that is taken into consideration either.
Dan, thanks for the case reference. That is odd, since the original owner no longer had title when the 1st mortgage auction occurred, yet he still got the surplus. That is bewildering. We have some weird Appeals court rulings sometimes, and it's apparent the lower courts ruled against the homeowner getting the funds, which seems to follow the existing procedures. But, had there been a surplus at the 2nd mortgage auction, I'm still sure it would have gone to the 1st. In Florida the surplus funds go into a court account, and all parties make a claim, with the superior liens being paid first. The whole redemption bidding/upset procedure you have there definitely throws some wrinkles into it, which I don't pretend to understand.
Wayne, the surplus here in NC is handle by the clerk of court here and like FL, if you feel you have a claim, you submit to the court. I have not had experience with surplus directly because I always buy the senior position, though I was going to buy a second once on a house valued at $800,000 and I could hav epicked it up for 400,000 which was more than owed on both the First and Second. I thought the way you are thinking because, after all, it is logical for the senior to get paid. However after much research, everything, and I mean everything I came across stated that the senior lien is unaffected and therefore will not get anything. I would have been screwed because I would have spent $400k but I would need another $250k to pay off the first. I did not have another $250K available. Thank god the owner declared bankruptcy in that 10 day period. That was one time when the 10-day redemption/upset bid period helped me!
When a foreclosure is under way, it is law that any lien holders affected by the foreclosure be notified. A senior is not affected and therefore, they are not notified of any junior lien foreclosures. So they will never know there is a surplus because they never knew about the foreclosure.
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