PURCHASING PROPERTY AT A FORECLOSURE SALE IN NEW YORK
BY
MICHAEL J. LOMBARDO, ESQ.
Many people, especially investors, look for the
opportunity to purchase property at a foreclosure sale but often ask whether
the property should be purchased at a foreclosure sale or from the successful
bidder following the sale. A foreclosure
sale is an auction of property as part of a foreclosure proceeding. The major advantage of purchasing property
this way is that, in most cases, the property could sell for much less than the
property is really worth.
This
article generally explores the various stages of the foreclosure proceeding in
New York so that the purchaser interested in purchasing property at a
foreclosure sale has an understanding of the process leading up to the
foreclosure sale and some of the problems that may arise in connection with a
purchase of property at a foreclosure sale. If you are interested in purchasing property before the property is
auctioned at a foreclosure sale, please see my article PURCHASING
PROPERTY IN FORECLOSURE-HOME
EQUITY THEFT PREVENTION ACT in which I provide a summary of New
York’s Home Equity Theft Prevention Act and its affect on the ability to
purchase property before there is a foreclosure sale.
WHAT IS A MORTGAGE?
Before
we can go through the foreclosure process, it is necessary to know what is
being foreclosed. At the time a buyer of
real property closes on the purchase of a home or other real property, the
buyer gives the lender, whether a financial institution like a bank or the
seller as part of the purchase price, a note (which is a promise to repay the
money borrowed), and grants the lender a mortgage (which is a lien on the real
property purchased). This also occurs if
the property is already owned and the owner is refinancing a previous
loan. The document creating the lien is
called a mortgage. The buyer or owner
(as the case may be) is called the borrower or mortgagor and the lender is
called the mortgagee.
PRE-FORECLOSURE PROCESS
Before
the foreclosure process is started, there is a default by the borrower under
the terms of the note or mortgage. The lender
usually accelerates the debt secured by the mortgage by providing the borrower
with a notice to either pay the debt secured by the mortgage in full or a
foreclosure will be started. If the debt
secured by the mortgage is not paid in full after there has been an
acceleration of the debt, the lender may elect to sue the borrower on the note
to recover money or may start a foreclosure proceeding to force a sale of the
real property to raise the money to be applied toward the debt.
Once
the decision has been made by the lender to start a foreclosure proceeding, the
lender will need to determine who has an interest in the property and, if that
interest is subordinate (or sometimes called junior) to the lien of the
mortgage being foreclosed. Anyone having
a subordinate or junior interest should be made a party to the foreclosure
proceeding. Examples of interests that
are junior to a first mortgage being foreclosed are interests such as second
mortgage (e.g. a home equity loan), interests of tenants who became tenants
after the mortgage became a lien on the property, judgment creditors who have
been granted a judgment after the mortgage became a lien on the property, as
well as others. The failure to name any
party with a junior interest to the mortgage being foreclosed means that the
successful bidder at the foreclosure sale will be purchasing the property
subject to the rights of the junior interest. For example, if there is a tenant on the property who is not made a
party to the foreclosure proceeding, the tenant’s rights, whatever they may be,
will survive the foreclosure proceeding and the purchaser of the property at
the foreclosure sale will have to honor those rights. Real estate taxes are never subordinate to
the lien of a mortgage, even if the tax did not first come due until after the
mortgage became a lien.
FORECLOSURE PROCESS-PRE SALE
Once the parties to the foreclosure proceeding are
determined, a Lis Pendens,
or Notice of Pendency, is filed with the County Clerk to put the world on
notice that a foreclosure proceeding is about to begin. Anyone who obtains an interest in the
property after the Lis Pendens is filed need not be named a party to the foreclosure proceeding but will still
have that interest cut off by the foreclosure proceeding. The parties to the foreclosure proceeding are
then served with the Summons and Complaint. Assuming there are no defenses to the proceeding raised by anyone made a
party to the foreclosure proceeding, a Referee is appointed by the Court to
compute how much is owed to the lender. Once that is determined, the lender obtains a Judgment of Foreclosure
which then allows the lender to have the property sold at auction by a
Referee. The law requires that notice of
the sale of property be published in a newspaper from between 3 to 4 weeks
before the sale, and sometimes the notice of sale has to be posted.
FORECLOSURE PROCESS-SALE
On
the scheduled date of the sale, the Referee will conduct an auction of the
property. The lender usually, but not
always, opens the bid for the property for the amount owed to the lender. If the property is worth less than what is
owed to the lender, the lender may open the bid for the value of the
property. Others are then invited to bid
until a high bidder is determined by the Referee.
The sale of the property conducted by the Referee will be
subject to Terms of Sale that are determined and usually read before the
bidding starts. The terms of sale
usually provide for the following:
- 10% down (bank
draft or cashier’s check) at the auction
- Close within 30
days, sometimes less time is provided-Time is of the essence (if late, interest
is usually charged at 9% per annum).
- The Referee will
provide a deed, but usually nothing else. The obligation to obtain a title search, survey etc. is the buyer’s
responsibility.
- The sale is
usually subject to any state of facts a survey of the property will show. What this means is that if, for example, a
survey will show a title defect (like a driveway located entirely on a
neighbor’s property), the Referee has no obligation to fix the problem.
- The purchase is
“as is”, with no right to inspect. The
reason there is no right to inspect is because the property still belongs to
the owner who took out the mortgage until the property is sold.
- The buyer is
responsible for obtaining whatever title documents, including a survey, the
buyer desires to have examined before the closing. Neither the seller nor the Referee has any
obligation to provide any title documents other than the Referee’s deed.
- The buyer is
responsible for all closing costs (tax, recording fees, title insurance etc.).
- The deposit paid
at auction will be lost if the buyer fails to close on time. If the buyer does fail to close on time, the
property is usually sold to the next highest bidder at the auction.
If
the Referee improperly conducts the foreclosure sale, the validity of the sale
could be called into question.
FORECLOSURE PROCESS-POST SALE
Once the property has been sold and
the Referee has given a deed to the buyer at the foreclosure sale, the Referee
is required to file a report of the sale with the Court. The Court, upon application, will in most
cases approve the Referee’s Report of Sale.
Although this is an important step in the foreclosure proceeding, there
are many instances where this is not done.
Even if all the steps required to be taken in the foreclosure proceeding
were properly taken, if the former owner of the property refuses to vacate the
property, the buyer is responsible for evicting the former owner.
FORECLOSURE PROCESS-SPECIAL ISSUES
Sometimes the foreclosure proceeding
can be delayed or there may be some particular interest in the property that
could affect the finality of the sale.
Some of these issues are as follows:
- The bankruptcy
filing by the owner of the property during the foreclosure process (sometimes
even on the eve of the foreclosure sale). If a bankruptcy proceeding is filed, the foreclosure proceeding must
stop until the lender receives permission from the Bankruptcy Court to proceed
with the foreclosure.
- If the United
States government has a lien against the property, the United States has what
is called a right of redemption-i.e. it has between 120 days and 1 year from
date of sale to match the purchase price and take the property.
- Appeal from the
Judgment of Foreclosure if there is a contested foreclosure proceeding.
- The foreclosure
of a second or third mortgage may trigger a due on sale clause of a senior
mortgage. This means that immediately
following the sale of the property by the Referee to the buyer, the holder of
the senior mortgage can demand payment in full on the debt secured by its
mortgage, and if there is a failure to pay, the holder of the senior mortgage
can start its own foreclosure proceeding.
SUMMARY
As noted above, the buyer of the property has no
opportunity to inspect the property before submitting a bid. In addition to the buyer having an unusually
short period of time within which to obtain title documents in order to close
the purchase, the buyer will be accepting the property subject to any state of
facts disclosed by a survey of the property. Therefore, the buyer may not discover title issues until after the
closing. Even if title issues are
discovered before the closing after the buyer’s bid has been accepted, in many
cases the defects discovered do not give the buyer the right to terminate the
agreement signed at closing or for a refund of the deposit paid at
auction. The buyer could then lose the
deposit or even worse could be responsible for the difference between the
buyer’s bid and the next highest bid. The buyer may have to deal with damaged property, title issues, and an
owner who refuses to leave, after closing.
If you are considering purchasing property at a
foreclosure auction, or even from a lender who has “bought” the property at the
foreclosure auction, you should contact an attorney well in advance of the
scheduled date for the foreclosure sale to let your attorney know of your plans
so that you can and your attorney can discuss steps that might be taken in an attempt
to protect your interests as a buyer.
CAUTION: THIS ARTICLE IS INTENDED TO PRESENT GENERAL
INFORMATION AND IS NOT INTENDED TO BE A SUBSTITUTE FOR CONSULTATION WITH LEGAL
COUNSEL.
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Last Update: March 16, 2011