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.



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.


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.



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.   



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.



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.



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.



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.




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Last Update: March 16, 2011