Help on a foreclosure

Member since 2010 · 2 posts · 0 votes

I relative of mine has been having financial difficulties since the fall of the Lehmen Brothers and AIG and has a property that hasn't been paid off. The bank foreclosed and auctioned the property away for $130,000.00. The thing is my relative bought that property for $500,000.00 and the bank hired an appraiser who valued the property at $300,000.00 - $400,000.00. Now they are suing for the remainder of the balance. Is there anything he can do?

PS. He had a friend of his that was willing to buy the property and pay off all the taxes and such but the bank declined.

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Jon Holdman

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

16y

So your relative did a "subject to" deal and sold the property to someone who assumed his or her loan. Right? Or a lease option or something else? In any case, he or she retained both ownership of the property and responsibility for the loan.

The payments weren't paid, the bank foreclosed, and they are now coming after him or her for the deficiency. Banks generally only do that if they think the previous owner has assets. If the property is a primary residence and the owner is now out of a job and has no income and now assets, the bank writes off the debt. The government even has a program to void the tax bill that's due on the forgiven debt.

Based on what you wrote, that's not the case. Your relative made an investment. The value declined. Payments weren't made and rather than sell at a loss and pay $100-200K in difference, they let the property go to foreclosure. Now there's a $370K shortage. Unfortunately for your relative, that's the deal they made when they chose to let the property go to foreclosure rather than deal with it while they still owned it.

What to do now? Pay the bank $370K. No doubt plus additional costs that have been tacked on. Negotiate for a lesser amount. Declare bankruptcy like Curt says.

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Curt DavisBusiness Member
Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
16y
file bankruptcy. Why were they not able to make the monthly payment to the bank? They made a promise to pay the loan back.
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Richard Graham
Real Estate Investor · Outer Banks, NC · Member since 2009 · 121 posts · 44 votes
16y
if this was a primary or investment Google "Debt Forgiveness act"
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Jimmy Hong
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Member since 2010 · 2 posts · 0 votes
16y
The reason for not paying the monthly payment to the bank was he sold it under the table to someone that failed to pay but the property is still under his name.
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
So your relative did a "subject to" deal and sold the property to someone who assumed his or her loan. Right? Or a lease option or something else? In any case, he or she retained both ownership of the property and responsibility for the loan.

The payments weren't paid, the bank foreclosed, and they are now coming after him or her for the deficiency. Banks generally only do that if they think the previous owner has assets. If the property is a primary residence and the owner is now out of a job and has no income and now assets, the bank writes off the debt. The government even has a program to void the tax bill that's due on the forgiven debt.

Based on what you wrote, that's not the case. Your relative made an investment. The value declined. Payments weren't made and rather than sell at a loss and pay $100-200K in difference, they let the property go to foreclosure. Now there's a $370K shortage. Unfortunately for your relative, that's the deal they made when they chose to let the property go to foreclosure rather than deal with it while they still owned it.

What to do now? Pay the bank $370K. No doubt plus additional costs that have been tacked on. Negotiate for a lesser amount. Declare bankruptcy like Curt says.
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
16y
Each state has different laws regarding deficiency judgements. A number of cases have been sucessfully argued in Texas courts that the foreclosure sold at such a low price because the trustee did not conduct a proper sale or that all rules, regulations etc. were not followed by the trustee. Not only should advise of counsel be sought, but also make sure that the attorney is experienced in real estate transactions as well as foreclosure laws. Bankruptcy should be a final alternative not an intial reaction. Speaking of which many attorneys and "experts" suggest unrealistic expectations to induce clients to file for bankruptcy. We had a loan in default where the borrower sought advise from a bankruptcy attorney. The attorney told the borrower that he would be able to do a "cram down" and get the mortgage note lowered by 2/3 based on lower property value, (with the balance becoming unsecured debt). The borrower was shocked when we presented a new appraisal to the court showing property value at twice the loan amount and their request was denied. Further, the $5000 retainer they paid their attorney for bad advise made it impossible for them to make the court ordered monthly payments, and their case was dismissed with prejudice. Paying us the $5000 instead of the attorney would have bought them enough time to stabilize their business and catch up on the payments they owed us. But instead they listened to an attorney who told them a tale too good to be true.
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