ISSUES IN LISTING AND MARKETING FORECLOSED PROPERTY

As the United States’ economy in general and the real estate market in particular have “slowed,” ”corrected,” ” softened,” or otherwise “cooled” from the comparatively “giddy” extremes of recent years, media reports abound about the increasing rate at which mortgage lenders are foreclosing on delinquent mortgage loans.

An increase in foreclosures results in an increasing number of real estate properties being owned by entities that do not want to own them.

Once a lender forecloses on a property, its very first thought is to protect the value of the collateral by securing the property and correcting any defects that would result in a deterioration of the property’s condition. The next thought is to sell the property.

The listing and marketing of lenders’ “REO” properties (“Real Estate Owned” as the properties are classified on the company’s balance sheets and regulatory reports) creates opportunities for real estate agents, as well as for investors and other buyers. Those opportunities, however, carry with them certain pitfalls for both agents and purchasers.

This discussion is designed to provide agents with an introduction to the pitfalls facing those persons dealing with foreclosed properties.

This entry is designed to acquaint real estate agents and others on the foreclosure and resale process in the State of Alabama. It is not intended as legal advice, nor is it intended for persons located outside of the State of Alabama. If you are interested in purchasing a foreclosed property, you are strongly urged to seek the services of a qualified and experienced real estate professional or an attorney skilled in real estate and title insurance matters.

The Foreclosure Process

The process of foreclosing a mortgage lien in the State of Alabama is a combination of statutory requirements (law) and the contractual agreement between the mortgagee and mortgagor (that is, the language of the mortgage and promissory note it secures).

The particulars of the foreclosure process are a topic for another discussion. For our purposes today, we will assume that when a property is being marketed by a lender, or a lender’s liquidation subsidiary, the lender and the lender’s attorney properly conducted the foreclosure sale.

So we begin our discussion after the foreclosure when the lender starts to market the property.

First, if you have found yourself watching a late night or early morning advertorial program touting some expert’s method for making hundreds of thousands of dollars dealing in foreclosed property, forget it. Those programs are designed to make only one person rich from foreclosed property – and it’s not you!

When lenders begin to market foreclosed property, they have likely been dealing with the property for six months or more. After the loan went into default and the lender determined that it was not likely that the owner would be able to cure the default, the lender began a series of events leading up to the foreclosure of the mortgage on the property. One of those events was to obtain either an appraisal of the property or a broker’s value opinion from a real estate agent. The lender, when it begins marketing a property, generally knows what the property is worth. There are few instances where a buyer can purchase a foreclosed property at a huge discount from its fair market value. In addition, as we will see later, the bigger the discount from the “fair market value” of the property, the greater the risk that the purchaser will be faced with legal hurdles to keeping the property.


What is the Statutory Right of Redemption?

The biggest factor in dealing with foreclosed property, either as a listing agent or a selling agent, is the statutory right of redemption.

The Statutory Right of Redemption is a creature of the legislature that is intended to mitigate the harshness of forfeiture arising form the foreclosure of a mortgage. The Statutory Right of Redemption is the right of the mortgagor (the property owner against whom the foreclosure was conducted) to:

(1) pay the indebtedness; plus
(2) the interest; plus
(3) other permitted costs and charges incurred by the mortgagee during the foreclosure period; and if necessary,
(4) to compel the reconveyance of the property to the mortgagee whose interest in it was lost at the foreclosure.

The mortgagor cannot, prior to foreclosure, waive his right to redeem the property.

When one holding a Statutory Right of Redemption exercises that right, the effect is to divest the legal title of a purchaser or his or her successors at a foreclosure sale.

Since 1969, the statutory redemption period has been one (1) year. The one-year period begins to run on the date of the foreclosure sale or, in the event of a judicial sale (foreclosures can be either non-judicial or judicial), then from the date of any judgment confirming the judicial sale.

There are a few circumstances in which the one-year period is “tolled” or extended. The one that is most applicable today is the provisions in the Servicemember’s Civil Relief Act, formerly known as the Soldier’s and Sailor’s Civil Relief Act, that provides that the period of military service is not to be included in the computation of a period for the real property. Courts have held this part of the act to be an absolute suspension, and the serviceman is not required to show that the period of service prejudiced his or her ability to redeem. In addition, under certain circumstances, the filing of bankruptcy by the former owner/mortgagor can “toll” the one year


PRACTICE NOTE: We have been asked by agents how to determine the date the redemption period expires. The rule is that the redemption period expires one year from the date of the foreclosure sale. You can determine the date of the foreclosure sale from the date of the foreclosure deed (the date the deed is signed, not the date it is recorded). HOWEVER, do NOT advertise that “Redemption rights expire on …….” and give the date one year following the foreclosure sale. INSTEAD state “Foreclosure Deed dated …..”

Who Can Redeem a Property from Foreclosure?

(1) Any debtor on the obligation secured by the mortgage;
(2) The debtor’s guarantors and sureties;
(3) Any mortgagor (that is, anybody who executed the mortgage), whether or not obligated to repay the indebtedness (example, a spouse who is not a borrower under the promissory note but who executed the mortgage to subject his or her constitutional homestead to the lien of the mortgage);
(4) Any junior mortgagee (second mortgage holder or equity line lender) or any transferee or assignee of the original junior mortgage holder;
(5) Any judgment creditor or his or her transferee;
(6) Any transferee of the interest of the debtor or the mortgagor;
(7) The spouses of all debtors, mortgagees or transferees; and
(8) In some cases, the United States Government.


From Whom Can These People Redeem?

A person or company entitled to redeem a property from foreclosure is entitled to redeem the property from the purchaser at the foreclosure sale, or the purchaser’s transferee. This means that someone purchasing a foreclosed property during the statutory redemption period might end up losing the house.


What Happens if Somebody Redeems from a Buyer?

The way the right of redemption is exercised is statutory. The person holding the right gives the current owner a Demand for Lawful Charges. It is up to the owner to prepare the statement of charges and to deliver the statement of charges to the person seeking to redeem. The person who owns the property has ten (10) days from the date of the redemptioner’s demand to provide the redemptioner with a statement of charges.


How Much Does it Cost to Redeem the Property from Foreclosure?

The redemption price is as follows:

(1) The purchase price paid at the foreclosure sale (not the price somebody paid to purchase the property from whomever bought the property at the foreclosure sale); plus
(2) Interest at 12%; plus
(3) “All other lawful charges” which are the following:
a. “Necessary Permanent improvements”;
b. Taxes Paid or Assessed;
c. All insurance premiums paid or owed by the purchaser;
d. Any lien or mortgage on the property having a higher priority than the one under which the property is being redeemed

What are “Necessary Improvements?”

Necessary improvements are those improvements that are made to preserve the property by properly keeping it in repair for its proper and reasonable use, having due regard for the kind and character of the property. Necessary permanent improvements include not only ordinary repairs necessary to restore the property after injury, decay, storm, fire, flood, and the like but also valuable and useful additions and improvements to the property suited to its reasonable necessities, character, and use.

Note that it is not the COST of the improvements that are recoverable, but the VALUE of the improvements.

This is the area of the redemption process that has resulted in the most litigation – purchasers claim items as “necessary improvements” that the person seeking to redeem the property thinks are cosmetic in nature, and do not preserve the property by keeping it in repair for its proper and reasonable use.

For this reason, I have always encouraged foreclosure property purchasers to avoid undertaking major renovation or any construction projects until the expiration of the redemption period.


Can an owner who is foreclosed on redeem the property and get it back for less than he owed on the property?

NO. Under Alabama law, if a former owner redeems the property, then all outstanding liens mortgages and encumbrances against the owner that encumbered the property are reinstated upon redemption by the former owner.

Can a buyer who purchases a foreclosed property from the bank that foreclosed lose money?

YES. Remember that very, very few properties are redeemed from foreclosure. However, if the redemption price is less than what the purchaser paid for the property, the purchase could end up losing money. Remember that the redemption price is determined by the foreclosure price, not the price for which the property resells following the foreclosure.

As a Real Estate Agent, how can I protect my buyer who purchases a foreclosed property??

There a limited number of ways to protect the buyer from the economic results of redemption.

One way is to advise the buyer not to pay in excess of the foreclosure price. The foreclosure price is stated in the foreclosure deed, which your title company can provide for you, or which may be available on line at the Judge of Probate’s web site.

In any event, advise your client of the fact that the property is a foreclosure, and that for one year following the foreclosure sale, there is a possibility, no matter how slight, that someone who had an interest in the property prior to the foreclosure might redeem the property, and that in that case, the client would be forced to give up the property and could lose some or all of the money the client invested in the property.

If a client purchases a foreclosed property, the client should not engage in extensive renovation projects or any construction projects during the redemption period.

Ask the selling lender for an indemnity protecting the buyer from loss in the event of redemption (most lenders will not give an indemnity to the purchaser, but it doesn’t hurt to ask, and some lenders, particularly local banks, are more open to this suggestion).

Depending on when the foreclosure sale was held, delay closing until after the expiration of the one year redemption period.

DO NOT ask the title company to “waive” or “insure over” the redemptive rights – no title company is in a position to insure against this risk on its owners policy.

What about a "redemption bond?"

Redemption bonds are insurance policies issued by a bonding company in favor of the title insurance company insuring the title company against loss from any claim on its lender’s policy in the event of The Redemption Bond does NOT protect the purchaser.the exercise of the right of redemption. In addition, the purchaser may be required to sign as a surety for the bonding company, which would mean that in the event the bonding company has to pay a claim, it could seek to recover its losses from the buyer.

The real purpose of a redemption bond is to allow the mortgage company to issue its mortgage secured by a property that is still subject to rights of redemption.

Redemption bonds cost approximately $13.50 per thousand dollars of the new mortgage amount. The price of redemption bonds has gone up in recent years. If you are representing a buyer of a foreclosed property and the buyer is obtaining a mortgage to purchase the property read your title commitment carefully to see if a redemption bond is required!

Is there any other way to protect the lender so that the lender will issue a mortgage?

The lender is looking for a mortgagee’s policy of title insurance that is issued to the lender without an exception from coverage for the exercise of redemptive rights. One way a title company will remove this exception from the lender’s policy is to receive a redemption bond from a reputable surety company. Another way to induce the title company to issue its lender’s policy without exception for the redemptive rights is to secure a letter of indemnity from the foreclosing lender to the title company in which the foreclosing lender agrees to indemnify the title company from loss on its mortgagee’s policy resulting from the exercise of the right of redemption.

A caveat here – not all foreclosing lenders are willing to provide a letter of indemnity and title insurance companies may not accept indemnity letters from all lenders.

A Word on Contracts to Buy Redeemed Property.

When you represent a prospective buyer of redeemed property, you will undoubtedly start out with one of RealtySouth’s standard contracts. Expect, and let your clients know to expect, that when the contract is submitted to the foreclosing lender, you most likely get back an “addendum” to the standard contract that effectively changes each and every term of the original contract. While we have found certain terms in the “addendum” are somewhat negotiable, sellers of foreclosed property want the contracts for each property to be as uniform as possible. The “addendum” generally will disclaim any warranties of condition, and contain stronger “as-is” language than our standard contract. The inspection time may be shorter, and your purchaser will be receiving a statutory warranty deed instead of a general warranty deed. If title insurance is being purchased by or for the buyer, then this distinction in deed forms is not critical.

Also expect the closing cost division to be different than the “usual” split. In some cases, the foreclosing lender insists that the buyer pay all closing costs, while in others cases, the foreclosing lender will agree to pay substantial costs for the buyer. The foreclosing lenders we work with generally required the buyer to pay all closing fees and attorney document preparation fees, but will pay the full cost of the owner’s policy of title insurance.

These changes to our standard contract form will likely necessitate you revising your good faith estimate / net sheet once the addendum is received.

Also, Realtors working with a buyer of foreclosed property should expect to lose a substantial portion of the control they are used to exercising over the particulars of the transaction. Sellers often direct the title insurance and closing agent. Sellers often dictate the time and date of closing since the lender’s asset management companies require from 24 – 48 hours of advance notice to review the settlement statement. Working with the asset management companies that handle disposition of lender owned property takes many Realtors out of their “comfort zone” and while this can be frustrating to some, it is a reality of dealing with foreclosed property.


BOTTOM LINE

Buying a foreclosed property during the redemption period is a risk vs. benefit proposition. A buyer may get a benefit in the form of a “good deal” on the property, but the good deal comes with additional risks. The better the deal - the bigger the risk.

Be aware of the pitfalls of buying foreclosed properties and advise your clients accordingly. You are not called upon to be attorneys or judges in the interpretation of the laws pertaining to redemption, nor are you called upon to be accountants and calculate redemption prices. You serve your clients if you are able to advise them of the basic risks of purchasing a foreclosed property subject to redemption, and advising them that if they have more questions about the risks involved, they should consult their personal legal advisor.

Do not be afraid to show or market foreclosed properties, but be mindful of the additional risks arising out of the foreclosure and that the transactions are not likely to proceed in the manner to which you are accustomed.