Foreclosure Auctions - Substitute Trustee Eligible to Bid?

Question

Hi BP Community—

In Virginia, when a Substitute Trustee is assigned and that firm brings a property to auction, I'm wondering if that firm - or their affiliates - can bid on the property at the courthouse steps. Or, possibly an employee of that entity acting in their own interests (or, bidding as a personal investment). I realize laws are different per state with foreclosures, so I welcome feedback from people in or out of Virginia.

I can't imagine there would be conflict of interest, right? The lender just wants their money back - who cares if the buyer is Joe Schmo on the courthouse steps or the firm assigned as the Substitute Trustee.

In summary, my questions:

• Are there any laws/code that prohibits a Substitute Trustee from purchasing the property themselves before or during the auction? 
• Why wouldn't these firms want to purchase a property that has promise to be a good investment (i.e., long-term rental, flip, etc.)?
•

Thanks in advance!

Tom Gimer · Answer

The lender only wants the debt paid. The borrower wants the highest possible bid. Their goals are not aligned.

In this situation the substitute trustee is privy not only to the exact amount of the borrower's debt but also to the lender's reserve price. Further, if efforts have been made to stabilize the property, the trustee may have more information than prospective bidders about the real condition of the interior. Having that knowledge and participating in the auction sale (directly or through a related party) is not only an apparent conflict of interest, but an actual one.

Tom Gimer · Answer

Substitute trustee owes fiduciary duties (perfect fairness and impartiality, in VA) to both lender and borrower. Whether those duties have been breached in a given scenario depend upon the facts.

To me this sounds like someone betting on a game they are playing in.

Tom Gimer · Answer

Account Closed Yes, in VA there are state and local transfers (plus grantors tax on the seller side and sometimes even more taxes based upon the congestion of the area... ugh) based upon the consideration in the deed. Every county has its own local rate. Feel free to PM me for actual numbers.

Sam Wilson · Answer

Account Closed - I'm in Tennessee and am definitely not a lawyer, but I have sat through 100s of foreclosure auctions and purchased many.  I would bet that there is something in the substitute trustee contract that does not allow them or their associates to bid on properties.  I've never seen it done and it would definitely be a conflict of interest since usually they are the only ones to know the true bank opening bid (most opening bids are lower than what the bank is owed).

Hope that helps.

Account Closed · Answer

@Sam Wilson thanks for the input, that's helpful. I may ask a local real estate attorney I've started to establish a relationship with and see if he'll offer some insight. I suppose you have a point on the conflict of interest re: the opening bid. If I get some input from the attorney I know, I'll post back.

On another note, safe to presume you're familiar with the foreclosure process given the number of auctions you've participated in? I'd love to connect and even grab a coffee/beer if you're ever in VA.

Account Closed · Answer

I understand that MD has a transfer tax upon sale, I'm considering a property in nearby VA and I'm wondering if there is a tax there as well?

Sam Wilson · Answer

Account Closed - if I ever make it back to VA, I'll be sure to hit you up for that beer/coffee!  Same for you if you are ever in the Memphis area.

Tom Gimer · Answer

Account Closed You won't find those in the code... you'll find the issue discussed in decisions from cases interpreting fiduciary duties. Re apparent vs. apparent conflict in the instant situation... that's my opinion.

Happy to chat any time... I believe we're connected now. If you're referring to a substitute trustee bidding on behalf of the lender, that's an effort to reach the reserve and not a breach. In such a situation, the auctioneer has been previously authorized to do so.

Account Closed · Answer

@Tom Gimer Got it. I noticed you’re an attorney in the DMV area. Can you reference the specific section of Virginia code referencing definitions of Conflict of Interest for foreclosures?

Also, would love to chat with you about an odd foreclosure I witnessed in Fairfax recently if you ever have 10mins.

And learn about your title services!

Account Closed · Answer

@Tom Gimer, don't the lender and borrower carry mutual interests (i.e., having the debt paid)? If so, wouldn't the substitute trustee be doing both of them a service?

Foreclosure Auctions - Substitute Trustee Eligible to Bid?

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