What happens to the seller's equity in a foreclosure auction? Typical fees/costs involved?

Question

So I have a seller I'm talking with a lot of equity in her house, but she's about to be foreclosed upon -- her auction date is scheduled for mid-January, so the timing is getting tight.  We're going out to the property later this week, and I wanted to be prepared!  I haven't seen any discussion on foreclosures with this much equity.

Her mortgage (not including backpayments/penalties) is around $20k.  The auctioneer apparently told her he expected it to go for around 50-60k at auction.  ARV is 90-100k.

For round numbers, let's assume 20k in principal balance, 5k in backpayments+penalties, and it sells for $50k at auction.  What is she likely to see back in her pocket out of that auction scenario?  What sort of fees/costs are typically involved?

Chris Martin · Answer

@Nick Merryman  Regarding "For round numbers, let's assume 20k in principal balance, 5k in backpayments+penalties, and it sells for $50k at auction. What is she likely to see back in her pocket out of that auction scenario?  What sort of fees/costs are typically involved?"  Fees wise, you can see all the trustee's fees on a 'Final Report and Account of Foreclosure Sale' filing. From proceeds of sale, typically subtract: Court costs, cost for pubication of notice of sale, trustee commission (5%), assessment fee, document stamps, the secured obligation (includes all lender/servicer fees , principal, accrued interest...), trustee's recording costs (notice, S-TR filing fees), title expenses paid by trustee, back taxes, and possibly some others. This list is based on an "easy" (uneventful) Wake county (NC) foreclosure, at a minimum expect about $900 in total fees, $400-$600 or so in publication cost, 5% trustee commission. Sometimes fees can jump around. I guess it depends on attorney's time if the foreclosure is contested, additional hearings are necessary, etc... but I've never really tried to figure out that part of the fee payout. If you are going to present the numbers to the owner, which in my opinion is a good idea, I'd recommend you get the Final Report form and fill it out (preliminary, of course) with realistic numbers based on a recent foreclosure with a similar sale price (say $50K) and then show her that the surplus goes to the COURT... and then eventually to her. The clerk of superior court should have her contact information from the initial hearing, and if she did not go to that hearing, you may want her to contact the county special proceedings office/division to make sure they have it. After you do all the above, she may just sell the property to you. Full disclosure will create trust. It is not only the right thing to do, you will be able to sleep comfortably at night. Just make sure you review all the notices in the SP (Special Proceedings) file and  remember that junior lien holders not property served may have debt 'survive' (meaning they remain enforceable) after the first deed of trust foreclosure action. So for sure get an experienced attorney that knows trustee processes on board. There is more to it, but that's a start. Hope that helps.

Boyd McClean · Answer

As pointed out here you do not have all the information. Go to the court house and pull the foreclosure file, see what is in it. Don't assume anything. Check the recorder of deeds site for other liens. Check Pacer to make sure there is no pending BK. Close at a title company and also have verbage inserted  in your purchase and sale agreement that she is FULLY aware of what she is doing. You do not want to be on the 6:00 PM news "Investor Scams Senior Citizen."

Ron Drake · Answer

remember that the auction is an if. Maybe it gets bid up to $50,000, maybe it sells for $25,000. Tell her this. If there is profit to be made, cut her in a little and you will sleep better at night. Just don't feel too bad and under estimate your rehab, carrying and selling expenses.

Bill Gulley · Answer

A bit deeper, depends on your state being a Trust or Deed state, a loan made with collateral in trust means the lender is only entitled to be indemnified to the extent of their financial interests. That means a lender must give excess amount back to the borrower. It also means if they get the property back, they must sell it to obtain the cash, if there is still any overage the borrowers gets it.

In a deed state, that lender has an ownership interest, they sell at auction, equity can be lost, if the lender gets it back, they sell and the equity is still lost.

However, in all states there are courts of equity, saying courts meaning legal theory, there is a degree of fairness that prevails, a lender is not to be in business running foreclosures or taking collateral as a profit center, the fairness is that the lender receives all their money back.

This is a misconception of note buyers, thinking that if they get a property back they can just move in or turn it into a rental. If there was significant equity, it's a good way to get sued, damages can be more than the equity. Buying a note is not buying the property rights.

Foreclosures on installment contracts can be different, because the loan is made from an equity amount based on a sale price, loans funded with cash are different and are applicable to the aforementioned points. :)

Nick Merryman · Answer

@Ron Drake Thanks.  And you're right, I don't have real numbers yet -- she's going to bring paperwork when we meet.  The plan is definitely to do our homework and make an offer on the spot, and get the ball rolling to close before the auction date.

I was hoping to get a feel for what the trustee/auction fees would likely be, so I can get her a fair amount and still get a good deal for me.  It sounds like she'd probably sell it to me for the payoff amount just to make this all go away, but I don't think I could do that if she'd end up with a big payoff out of the auction.  Though I suppose I'd still be saving her from the foreclosure.

@Jay Hinrichs This one's only been going for 6-8 months.  Not sure about back taxes, but I've got to assume at least half a year's worth.

Jay Hinrichs · Answer

@Nick Merryman

actually with that low of mortgage and making assumptions that tax's are low and the foreclosure has not drug on for years.. and their are no other junior liens or judgements this person could get a really nice chunk.. I know in many west coast markets especially big fixers those that get overages probably do better letting them go to foreclosure than selling them to a rehabber..again if there are no juniors to pay.

Ron Drake · Answer

in answer to your question, the Seller would get the overbid after fees.

Ron Drake · Answer

hard to say. I am not familiar with North Carolina foreclosure process. In California if it sold for $50k after trustees fees (everything they can legally add), probably wouldn't end up with much.  Plus you probably don't have the real numbers (are there taxes due as well?).

Do your homework and make her an offer on the spot "if you can stop the auction". Open escrow and you can close before the auction. I would.

What happens to the seller's equity in a foreclosure auction? Typical fees/costs involved?

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