FEATURE
Best Practices for Credit Bidding at Foreclosure By Edward Brown, Pacific Private Money & Randy Newman, President of Total Lender Solutions
Y
ou currently hold the first mortgage on a rental property in California. The borrower is behind in payments to you and has disregarded all communications from you. You decide to file a notice of default to start the foreclosure process. Three months lapse, the sale has been set, the date of sale approaches, and you want to be strategic in deciding how best to proceed. You start asking yourself the following question: how much do I bid at the foreclosure sale?
As the foreclosing party, you are allowed to “credit bid,” meaning that you are able to bid as high as your note [including accrued interest, late fees, costs of foreclosure, etc.] without having to come up with actual cash at the sale. In California, other bidders, including non-foreclosing junior liens, must pay 100% of their bid in cashier’s checks or the equivalent. (As a side note, this is the reason most bidders will ask their banks for
20 Originate Report | June 2019
many cashier’s checks in varying increments, as the trustee handling the sale does not give back change at the sale. For example, if a bidder asks his bank for two $100,000 checks because he believes the bid will exceed the lender’s credit bid of $100,000, and he bids $140,000 at sale, the trustee will not immediately give back the overpaid amount [in this case, $60,000]; the trustee will return the overpayment in about seven to ten days after the sale. For this reason, the bidder should obtain multiple cashier’s checks in various denominations so as not to overpay in the bidding process).
At first glance, the foreclosing party may think to fully credit bid what he is owed, especially if the property is worth considerably more than the amount owed to the lender; however, there are other factors to consider. What if the lender is way off in what he believes the property is worth? Sometimes, a property that is a bit esoteric is much harder to value than one thinks. Does the lender
want to keep the property if she is the high bidder? Does she want to sell it right away upon owning it [should she be the high bidder]? Was there a personal guarantee on the note that is being foreclosed on? What is the current condition of the property? Is there a recent appraisal on the property? Are there any IRS liens attached to the property? These and many other questions must be considered when you are the foreclosing party. Below are some general ideas/concepts to discuss with your real estate attorney (it is suggested that you hire an experienced attorney who is very familiar with the laws on foreclosure) when embarking down the foreclosure path.
IRS/Government Liens
First, we believe that the only time to open with a full credit bid is if a federal tax lien exists in a junior position (one needs to check with their attorney as to other government {or quasi government} liens, if the same rules
