By: Mario Serra, Jr., Esq. & Victor Spinelli, Esq.
The hoops and obstacles caused in the residential mortgage foreclosure realm are forever changing; these have caused changes in how plaintiffs are bidding and how foreclosure properties are selling at auctions. Auctions of foreclosed properties have been resulting in more third-party successful bidders than in the preceding years. This is mainly because many of the properties are underwater, meaning that the property is worth less than what’s owed on the mortgage note. The foreclosing lenders have been bidding up to the perceived market price (specified bid) rather than a maximum bid which they are entitled to, which is typically referred to by prospective bidders as the upset bid. Savvy or frequent bidders (investors) frequently call the plaintiffs’ law firms seeking an upset price prior to bidding. The law firms taking these calls must be wary of answering these calls. Not only it is not a plaintiff’s law firm’s responsibility to aid a speculative bidder in their pursuit of a good deal, but also because it opens up the law firm to giving the wrong information or secure information to non-defendants who may rely on this information. When this information is given to a litigious investor as the upset price, it can cause more problems than it’s worth and a possibly unnecessary delay. This could be avoided by simply telling the inquiring prospective bidder that the information is not available or cannot be provided. More often than not, the larger lenders do not provide their bidding instructions until the eve of sale, so the upset price is typically not available when the inquiry is made. More significantly, due to the current foreclosure environment, the upset price is rarely immediately available prior to sale when the bidding instructions are for a specified bid, because in these cases the upset price is calculated after the sale in the referee’s report of sale.
The new evolving environment is due to properties being underwater and when the bidding plaintiffs calculate their specified bids, they are not always going to bid to the actual market value of the properties. This causes the properties to sell to third party bidders – many times regulars (investors) and sometimes a layman looking for the right deal. Many times these successful bidders not only want their sweet deal, they are also expecting pristine title and properties free of all issues instead of “AS-IS but marketable title”, which has been the legal standard for decades. Unwary successful bidders thus are raising issues that should not be considered real issues, or gumming up the works by causing delays by requesting Plaintiff’s to clear title issues that do not have to be cleared so that they can obtain a loan for the balance of the purchase price. Thus, a seasoned plaintiff’s attorney will realize it is armed with the Judgment of Foreclosure and Terms of Sale. It is important that these documents are carefully constructed so that there are no ambiguities that cause bidders to believe they are entitled to more than what these documents state. Contrary to the belief of many third party bidders and their title companies, plaintiffs need only clear up exceptions raised regarding their foreclosure. As long as the plaintiff’s foreclosure action properly named and served all necessary defendants, this should amount to providing the third party bidder’s title company with proof of proper service and notice of sale. It should be as simple as that. Yet, third party title reports will include exceptions to title which cannot, and should not, be cleared by a plaintiff’s law firm nor should a plaintiff’s law firm get fooled into allowing these exceptions to cause delay.
On occasion, the third party bidder will come up with an exception that may have some credence as a reasonable exception that can’t be cleared by plaintiff’s law firm. In those cases, plaintiffs should confirm with the title company who provided the title report (foreclosure search) for the commencement of the foreclosure action. If the foreclosure action and the foreclosure search were done correctly, the plaintiff’s title company will be able to insure for the third party bidder and the sale should proceed to closing. If not, meaning either the foreclosure title search missed something or the foreclosing attorney failed to properly transfer the information from the foreclosure search to the action, then the foreclosure and ensuing sale are defective. The foreclosure defect must be cured or the sale is invalid. In cases where there are no title concerns or defects to cure, a closing will typically be held for the third party bidder to pay the balance of the purchase price in exchange for the referee’s deed. Although the terms of sale only requires the purchaser to pay the balance of its bid to the referee, it’s the availability of the closing that creates the perception that the third party bidder is entitled to pristine title. Meanwhile, the third party title reports are typically prepared the same way – basically including exceptions that are there to avoid litigation liability for the title company. In other words, there is no obligation on plaintiffs to clear these types of exceptions and the third party reluctantly has to take title subject to exceptions or be in default of the terms of sale. What happens in many cases is the attorneys for the bidders try to get the plaintiff’s law firm to clear the exceptions or claim they can’t complete the sale until the exceptions are omitted/cleared. This can cause undue delay for a sale that should be complete within forty-five days after the hammer strikes.
At the end of the day and for a speedy completion of the sale, all of the parties to the sale (especially plaintiff’s attorney) need only to realize that the judgment and terms of sale set forth all terms including a date as to when the successful bidder must close and the only clearance obligation on plaintiff’s attorney part is to verify that the foreclosure action was done correctly. As long as the foreclosure was done correctly, the sale and closing should be completed within forty five days unless plaintiff agrees to an extension to avoid re-sale. If the extension is due to non-compliance by the third party bidder then the cost of said extension must be paid by the bidder. If the bidder fails to complete the sale pursuant to the terms of sale and any approved extensions, the bidder must be held in default and the down payment forfeited until a re-sale is held. The cost of delay and re-sale will be paid by the successful bidder from the forfeited down payment or other mutual agreement.
For more information please contact via email Mario A. Serra or by phone at 973-538-4700 ext. 196.
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