How can an investor bid on their own foreclosure property?

Question

Let’s say the worst case scenario has happened, and now you’re at the auction for the property you had to foreclose on. How can an investor afford to open the bidding at the price of the UPB and costs? If you win, don’t you need to be able to pony up that cash to buy the property, and wouldn’t this be significantly increasing what you have into that property? I guess I’m not understanding why you’d pour more money into the house and shrink your P&L.

As an example, you hold a $100,000 note, and a few years later, the person defaults with an $80,000 unpaid balance (UPB). If you end up in foreclosure and you open the bidding by making a bid for $80,000, don’t you then have to cough up that $80k in cash to get the property? And now you’re $160,000 into a $100,000 note ($80,000 upb that was defaulted on plus the $80,000 cash you just bid for the property at foreclosure)? And what if you don’t have that sort of cash to be able to buy back the property on any note you foreclose on?

Can someone explain this to me like I’m five years old, because I’m clearly missing something here?

Account Closed · Answer

Foreclosures are state specific and since you don't mention the state the property is in we have to guess. But generally, a lender will bid up to the amount of the unpaid balance plus the arrears plus legal fees and costs. However they are not required to bid that high. On a $100,000 note at 5% the payment would be about $631 a month and at year 10 would be about $81,342 principal. Assuming 6 month's payments were missed with late fees and legal costs the reinstatement amount would be about $5,750. So you add $81,342 + $5,750 for a total opening bid of $86,817. That is the most the opening bid can be in *some* states.

Sometimes the lender will open bidding well below what they are owed and hope the bidders drive up the amount. In *some* states anything over the amount owed goes to the homeowner.

If someone bids above the amount owed on the property, the lender gets paid in full and the bidder gets the property. Sometimes the lender will bid to cause the price to rise. If the lender wins the bid, they win the house and do what they want with the property.

Some county auctions require cash at the auction and some county auctions allow several days to provide a cashier's check for the amount. You have to ask the attorney doing the auction what local rules are.

Mike Hartzog · Answer

@Gordon F. if you are the foreclosing lender, your bid sets the opening bid for others. You do not have to come up with cash here. If nobody outbids you, the property is simply deeded to you, i.e., you don’t have to pay yourself. If someone outbids you then the property is deeded to them and you receive the proceeds up to the total debt. All of the above assumes a 1st position note. Gets more complicated for junior liens.

Gordon F. · Answer

Thank you, Victor and Mike. Your answers were very helpful. To clarify, this would be for non-judicial states.

I happened to come across some info that was augmentative to what you guys posted; see below. I’ll copy and paste as an FYI to others who may have the same question

In Alliance Mortgage Co. v. Rothwell(1995) 10 Cal.4th 1226, the Court held as follows:

“At a nonjudicial foreclosure sale, if the lender chooses to bid, it does so in the capacity of a purchaser. [Citation.] The only distinction between the lender and any other bidder is that the lender is not required to pay cash, but is entitled to make a credit bid up to the amount of the outstanding indebtedness. [Citation.] The purpose of this entitlement is to avoid the inefficiency of requiring the lender to tender cash which would only be immediately returned to it. [Citation.] A ‘full credit bid’ is a bid ‘in an amount equal to the unpaid principal and interest of the mortgage debt, together with the costs, fees and other expenses of the foreclosure.’ [Citation.] If the full credit bid is successful, i.e., results in the acquisition of the property, the lender pays the full outstanding balance of the debt and costs of foreclosure to itself and takes title to the security property, releasing the borrower from further obligations under the defaulted note. [Citation.]” (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1238.)1

Under the “ ‘full credit bid rule,’ when a lender makes such a bid, it is precluded for purposes of collecting its debt from later claiming that the property was actually worth less than the bid. [Citations.] Thus, the lender is not entitled to insurance proceeds payable for prepurchase damage to the property, prepurchase net rent proceeds, or damages for waste, because the lender’s only interest in the property, the repayment of its debt, has been satisfied, and any further payment would result in a double recovery. [Citation.]” (Alliance Mortgage Co. v. Rothwell, supra, 10 Cal.4th at pp. 1238-1239.

How can an investor bid on their own foreclosure property?

5 Replies