Question on non-performing notes and foreclosure.

[Connie Stainbrook]

I have a couple of questions on the topic of non-performing notes. I have read that if I own a note that is not performing and I have foreclosed on the property. That I now have a choice to keep the property in my inventory and then I read that if you sell it in a foreclosure auction that any cash collected above unpaid balance, fees, etc. Goes back to the borrower. So that would lead me to think I would be forced by law to try to sell the property incase the owner is due some $$ for equity. Can someone clarify this point for me. Once the house has been foreclosed on can I just keep the house and not sell it? If I do decide to sell it do I have to give the borrow any extra cash made above my costs? 2nd question is if I buy a loan that has been non-performing for lets say 2 years. I buy the note at 60% of the UPB. Can I then still charge the borrower for the 2years of back interest and penalties? I noticed some notes were actually being sold for more then the UPB but the property has a ton of equity so my guess is that I can in turn charge the owner for back fees and interest even though I just bought the note.

I appreciate your feedback.

[Jeff S.]

You don't automatically own the house with a foreclosure. You will determine the total balanced owed on the note including principal, interest, penalties, and any other legally permitted expenses and fees. This becomes the maximum you are allowed to ask for when the home goes up for auction at a trustee sale, sheriff sale, or whatever they call it in your state.

To be clear, the maximum you are legally allowed to ask for becomes the minimum bid the auctioneer will accept. As Bob E. noted above, depending on your strategy, this can also be $1.

If the home makes more than this amount at auction, the successful bidder owns the house, you get only what you asked for, and any extra goes to any subordinate lienholders (like to the second, if you bought a first). If there is anything left after that, the rest goes to the borrower on whom you foreclosed.

If the house does not make the minimum you set, you will generally own the house. If you own the house and there are any liens superior to yours (like a first, if you bought a second, or even a tax lien), you must pay those or they can foreclose on you.

You are under no obligation to foreclose, but if you do and end up with the home, it's yours to do with as you wish. If you ever sell or rent it, all profit belongs to you.