The Greatest Secret of Foreclosure Is Overage
Depending on which state the homeowner lives in, his foreclosure sale will be conducted by a sheriff, a trustee, or a county clerk of the court. As prescribed by law, the person in charge of the auction will sell the property to the public with "open outcry bidding" until the property is sold or redeemed by the lender. The location is usually on the courthouse steps or similar convenient place that is readily accessible to the public.
Normally the first bid on a property is by the primary lender who bids his final judgment amount as awarded by the county court plus $100. The next bid will come from an interested party to the property such as a junior lien holder or an investor who believes there is equity in the property. These bids will continue until the last bid, which wins the property.
Let's assume the final judgment on a property is $100,000 and the bank bids $100,100 and some bystanders start bidding until the final bid is $120,000. The lender submits his final judgment documents to the county clerk and the winning bidder must bring in cash anywhere from the same day to 30 days later, depending on state and county laws. Once the funds are in the courthouse and any redemption period has passed the lender gets his $100,000 and the buyer gets a deed to his property. A redemption period is a specific period of time from 1 day to 454 days, where the foreclosed homeowner can return with money to get his property back if he pays the buyer his costs plus fees and expenses. In some states there is no redemption period.
The clerk of the court has taken in $120,000 plus some transfer fees and paid out $100,000 and has a $20,000 credit in his bank account. The homeowner is entitled to this "overage" money. The homeowner has to make a claim to the county clerk and the court usually reviews these claims and awards the homeowner his money. This is an ideal world scenario, but in the real world, the homeowner may not know he has money coming to him and these funds eventually become the county's money.
Here is what has happened - a homeowner is approached by a person one or two days before the foreclosure sale and is offered $100 for a deed to his home. If the homeowner knows he can't stop his foreclosure sale and redemption is not possible, he views the $100 as free money. The buyer pays $100 and proceeds to go to the auction and perhaps even puts in a bid or two to get the price higher. If he won by accident, he can renege on the bid and it reverts to the last bidder. Let's look at the above example where the overage was $20,000, which is a very common amount. The "new" homeowner makes claim to the court and his $100 investment becomes $20,000.
This practice was and is very common in good real estate markets and where the state hasn't passed legislation to stop this practice. It is not illegal in many states and even in the ones where it is illegal, the states allow some form of "commission" or fee to be paid to a person who brings in the seller to reclaim his overage. At one courthouse I frequent for auctions, there is a group of 4 - 6 individuals gathering the data from the clerk's sales to use for later sending out letters to sellers to claim their overage. The usual fee is 10% of the total amount and can be very lucrative because the average overage is about $21,800.
What does this mean to a homeowner in foreclosure? It means that despite what you may think your home is worth, it could be sold at auction for more than is owed to his former lender and he is entitled to whatever money is remaining - the overage. So don't sell what you think is a worthless deed because on average it could be worth over $20,000. Occasionally, the lender will get a final judgment against a homeowner by appraisal and not by sale because this is allowed in some states. The homeowner should always challenge this appraisal and have the judgment reduced if the property sells for more than the final judgment amount later. The moral to this story is that even in the worst of foreclosure situations, the loss of your home, the homeowner still has a chance to make money.
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