Foreclosure Flashcards
In earlier discussions about state theories, I told you that a state’s theory influenced what type of security instrument would be used.
Lien theory states tend to use mortgages, while title theory states more commonly use deed trusts.
And, more than anything else, a state’s theory, along with its choice of security instrument, is reflective of that state’s attitude about foreclosure.
All state theories employ hypothecation — the pledging of an asset as collateral to secure a loan for the purchase of that asset. And all state theories allow the borrower to enjoy nearly all the rights of ownership while they work to pay off the loan.
Where the state theories differ, then, is their approach to foreclosure in these areas:
The balance of power between the lender and the borrower in the event of default
The expense and ease of the foreclosure process
The degree of judicial involvement
And just how does the choice of security instrument influence the degree of judicial involvement?
Well, with a deed of trust, the title is either in the hands of the lender or a trustee from the beginning. No judicial help is needed to wrest it from the borrower.
But with a mortgage, the title is in the borrower’s name. So, part of the effort to protect the lender (in the event of default) is to take the legal action necessary to cut off the borrower from the title of the mortgaged property. And that requires judicial involvement.
Theory = Foreclosure Type
In preparation for your walks down the various paths of foreclosure, I want to share a few terms with which you’ll want to be familiar. Some have already come up in our conversations about mortgage provisions, but it won’t hurt to touch on those again.
First up, lis pendens.
Lis Pendens
A lis pendens is a written notice of a pending legal action. It is the prescribed manner in which an individual or entity can put third parties on official notice of their claim or interest in a property.
Content Matters
Some states have statutory requirements regarding the issuance of lis pendens notices while others do not. Either way, the clarity of content in a lis pendens can mitigate disputes as to whether or not it has technically fulfilled its purpose in giving proper notice.
How Used in Foreclosure
It is generally required as a step in a judicial path to real estate foreclosure, wherein the lender provides notice that a lawsuit has been filed regarding the title and/or ownership interest of the property.
This notice is typically filed and recorded in the county in which the property is located.
Involuntary Transfer
In an upcoming level, I’ll go over the concepts of voluntary and involuntary transfer (alienation). For now, just know that foreclosure is one method of involuntary transfer.
Once a borrower defaults on a mortgage loan, certain rights are lost. The largest of which is the right of the borrower to maintain ownership of the property. A lender can initiate foreclosure without the borrower’s consent.
I don’t know about you, but that sounds pretty involuntary to me!
Foreclosure Terminology: Lis Pendens & Involuntary Transfer
When a foreclosure sale takes place, and the funds from the sale do not cover the loan amount (balance), the resulting shortfall is known as a deficiency.
A deficiency judgment, then, is the right of a foreclosing party to pursue a personal judgment against a borrower for the amount of the deficiency.
Varies by State
The right to pursue a deficiency judgment will vary from state to state. If allowed, the circumstances under which it can be pursued will also vary from state to state.
And even in states where it is allowed, the specific language in a mortgage or trust deed might prohibit it.
Only Sometimes in Arizona
The ability to pursue a deficiency judgment in Arizona will vary depending on the circumstances.
When Not Allowed
According to Arizona Revised Statute §33-814G, a borrower who finances their property with a deed of trust is protected from a deficiency judgment, as long as the property is 2.5 acres or smaller and contains nothing larger than a one- or two-family dwelling.
(Arizona Revised Statute §330729A details the same protections for borrowers using purchase money mortgages to finance their property.)
When Allowed
In Arizona, a lender may pursue a deficiency judgment within 90 days following the foreclosure sale only in a few narrowly defined circumstances.
When the property purchased does not conform to the description above and if the borrower is not responsible for a loss in value of the property that results in the deficiency.
Other scenarios that fall outside of the anti-deficiency statute protections include:
Purchases of commercial property
Purchases of unimproved land
Purchases of property containing a dwelling that was either never substantially completed or never actually used as a dwelling
Purchases by those in the business of buying and selling property, including constructing dwellings for sale
Home improvement loans (because they’re not considered purchase loans)
Foreclosure Terminology: Deficiency Judgment
Let’s now look at two forms of redemption and one right to reinstate.
Equity of Redemption
Equity of redemption or equitable redemption refers to a borrower’s common law right to redeem a loan in default by paying the debt in full, including interest, fees, and expenses.
Timing Is Everything
The window of opportunity to exercise this right comes AFTER acceleration (remember that clause?) is initiated but BEFORE the foreclosure sale. This common law right is available to all borrowers in all states.
Right to Reinstate
Whereas a right of equitable redemption requires that the accelerated loan be paid in full, a right to reinstate grants the borrower the opportunity to bring current the delinquent loan — including interest, fees, and expenses — in one payment in order to resume paying on the loan going forward. It puts everything back to how it was in the loan’s pre-accelerated form.
Some states provide for this, up until a certain point in time, after the default occurs. But even in those states that do not grant this right, the mortgage or deed of trust used might contain language that does.
Arizona Allows It
Per Arizona Revised Statute §33-813, a borrower has the right to reinstate a defaulted loan up until 5:00 p.m. on the last day prior to the date of the sale (excluding Saturdays and holidays).
Statutory Redemption
Statutory redemption refers to the right that some states give borrowers to redeem a property within a certain timeframe AFTER a foreclosure sale has taken place.
Again, this redemption is accomplished by paying off the loan in full, including interest, fees, and expenses.
For judicial foreclosure only, Arizona provides a statutory right of redemption for six months after a foreclosure sale. That timeframe is reduced to 30 days if the borrower abandoned the property prior to foreclosure.
01:06
Foreclosure Terminology: Rights of Redemption & Reinstatement
Elsewhere in this course, I might have taught this concept as lien priority. But since many in the industry refer to it as debt priority, I thought I’d call it that this time around. So, just go with it, okay?
In the end, I want you to understand that a lien is simply a claim of debt, which helps to explain why the terms would be used interchangeably.
How It Comes About
The reason debt priority is a thing is because the same property can serve as collateral for multiple loans. That might sound strange, but in fact, it is a very common experience.
Think about how many people get home improvement loans to add an in-law apartment, pave a driveway, put in a pool, etc. It happens all the time. And when it does, it’s not a problem — as long as the borrower stays current on all loans, that is.
If the borrower should default on any one of the loans, that’s when debt priority becomes important. Because if foreclosure is initiated, the lienholders will line up to get paid.
What It Is
As its name suggests, debt priority refers to the order or priority of repayment of debt from the proceeds of a foreclosure sale. Generally, priority is determined by order of recordation of the loan (as was discussed in Chapter 1).
Senior and Junior Mortgages
In almost every instance, the first loan to be recorded against the property is the original mortgage loan. This lender is considered to be the holder of the senior mortgage (aka first mortgage) with respect to debt priority.
All subsequent mortgages recorded are considered junior mortgages whose debt priority also falls in order of their recording.
Exceptions to Debt Priority
Debts that are or can be exempt from recordation debt priority include:
Property taxes (always take first priority)
Mechanic liens (sometimes)
Subordination agreements
When “Cutsies” Make Sense
Regarding subordination, while lienholders typically want the highest debt priority they can get, there are occasions where it serves their own best interests to allow another lienholder that came after them in recordation to move ahead of their own loan, nonetheless.
One of the more common examples of this is where the lender of a first mortgage on an undeveloped piece of land will subordinate their lien to that of a construction loan because the improvement made with the construction loan raises the value of the collateralized property, thereby increasing the security of the first mortgage.
A lender willing to do this will indicate as much with the inclusion of a subordination clause in the mortgage agreement.
Debt Priority vs. Lien Priority
There are a few different types of foreclosure, each entailing specific steps along a path — actions and requirements — that the lender, the borrower, and, yes, even the real estate professional need to be aware of.
Although you will certainly want to prioritize your understanding of how foreclosure typically works in Arizona, there is value in familiarizing yourself with the foreclosure paths that are less common in Arizona but are frequently employed in other parts of the country.
Categories of Foreclosure
Some folks teach that there are two major categories of foreclosure. Others teach that there are three.
I side with the “two” camp, and would suggest to you that all of the foreclosure paths we will look at in this chapter fall under one of two larger categories:
Judicial
Nonjudicial
Judge Not unless Ye Need a Judge
The deciding factors influencing the choice between judicial and nonjudicial foreclosure paths are a combination of the state’s theory, the security instrument used, and state law.
Judicial
Judicial foreclosure is the predominant form of foreclosure in most lien-theory states.
The judicial path is generally more expensive, more complex, and more drawn out. But it has the benefit of being “blessed” by the courts and will sometimes also grant the lender the right to pursue a deficiency judgment against the borrower if the foreclosure sale does not cover the outstanding debt.
Nonjudicial
Nonjudicial foreclosure is typically the foreclosure path employed in title theory states, including Arizona.
The nonjudicial path is usually less expensive, less complex, and faster. It is suitable for situations where there are not many competing interests and the facts of the case are pretty straightforward and not likely to be contested.
Note: If a nonjudicial foreclosure is contested, you’ll see it quickly morph into a judicial path with at least one of the parties seeking court intervention.
Foreclosure: The Prequel
Before we actually examine the steps that make up the Arizona foreclosure paths, you should be aware there are state and federal efforts to encourage the borrower to seek alternatives to foreclosure before the process gets too far along. We’ll get into that in greater detail in the next chapter.
For now, as we look at the various foreclosure paths, assume that all state, federal, lender, and borrower initiatives to avoid foreclosure have been exhausted.
Movin’ on Down the Line
Speaking of exhausted, I’m tired of this judicial-vs.-nonjudicial chitchat! Time to get walking down foreclosure path number one…
Foreclosure Paths
In Arizona, the judicial foreclosure path should be considered the road less traveled. Nonetheless, you need to know how it works, and I’m the robot to teach it to you!
Deceptive Speed: It’s Slower Than It Looks
Before I get into the major steps or milestones of a judicial foreclosure, I want to set expectations regarding the timing of it. As with almost anything where lawyers and courts are concerned, the judicial foreclosure process can be painfully slow (and expensive). This is especially true when compared to a nonjudicial foreclosure that can be wrapped up in 91 days!
So, let’s take a look at what’s behind the slow creep of judicial foreclosure.
Pre- and Post-Judgment
Even after you get past all the activities and potential delays preceding the court’s judgment on the lender’s petition to foreclose, you have four weeks post-judgment before the sale can actually occur and a lender can recoup any funds.
The six-month statutory right of redemption after the sale stretches the process out further, but that affects the purchaser of the foreclosed property, not the lender. (More on this shortly.)
A desk with papers, money, clipboard, and gavel upon it.
Notice & Publication
When the borrower is first put on notice regarding the lender’s intent to foreclose, the lender does so by filing a lis pendens, which serves to inform the public of a pending legal action.
In preparation for the lis pendens, a title search is undertaken by the lender to identify all parties with a recorded interest in the property. This ensures that all interested parties — the borrower and any junior lienholders — are named as defendants in the lawsuit and are given notice by the court of the legal action (the intended foreclosure sale) against their interests.
Activating Acceleration
In conjunction with the above step, the acceleration clause in the security instrument (mortgage) is irrevocably invoked, which makes the entire loan balance immediately due. This includes any unpaid taxes the expenses incurred by the lender associated with the sale.
The borrower is given a notice of default, demanding full payment.
Writ of Execution
If the borrower fails to respond to the lawsuit, the lender can request a default judgment from the court — which would likely be granted.
If the borrower does respond to the lawsuit, a default judgment is no longer in play, but the lender can, instead, ask for a summary judgment. The court will likely go along with this if the facts of the case are not in dispute and the borrower fails to present a valid defense.
At this point, the court will issue a writ of execution, instructing the county sheriff to set a date for the foreclosure sale.
Equitable Redemption
The date of the Sheriff’s Sale represents the closing of the window of opportunity the borrower will have had to exercise their common law right to redeem the loan by paying the debt in full, including interest, fees, and expenses related to the foreclosure proceedings. Officially, they have until the end of the business day prior to the sale. (The “window” first opened when the suit was filed.)
A successful equitable redemption by the borrower will satisfy the first mortgage on the property, putting an end to the foreclosure proceedings.
Advertising the Sale
The notice of sale will be published for at least four consecutive weeks prior to the sale date. It will be posted at the local courthouse and two other public locations and will be run in a newspaper pertaining to the county where the property resides.
EXAMPLE
Edwardo received notice of his lender’s intent to file an action to foreclose on his condo. Following that, the judge granted a summary judgment in favor of the lender and issued a writ of execution. From there, a sheriff’s sale was set for the middle of the next month.
From the point he first received the lender’s notice of default to 5:00 p.m. of the last business day before the sale, Edward has an opportunity to redeem the property and put the brakes on the foreclosure efforts underway.
Good luck, Edwardo!
Judicial Foreclosure: Pre-Sale
The events surrounding the actual sale of the property represent the next phase in judicial foreclosure.
Sheriff’s Sale
Barring a successful equitable redemption attempt by the borrower, the sheriff’s sale will take place on the date advertised.
Ready, Set, Auction!
This will take the form of a public auction at the county courthouse that is open to everyone other than the defaulting borrower.
The proceeds will first cover the costs of the auction, after which senior and junior liens are paid. Senior liens typically include any taxes owed and the (foreclosing) lender’s mortgage loan.
If all liens are satisfied, excess funds, if any, are turned over to the borrower.
An empty courthouse with two desks facing the judges desk with seating for a jury.
Sheriff’s Certificate of Sale
The winning bidder will receive a certificate of sale, making the purchaser of the property a lienholder but not owner.
“If they paid for it, why aren’t they the owner?” (I can read your thoughts, Anthony.) Your answer is coming right up!
Statutory Right of Redemption
A judicial foreclosure in Arizona provides the defaulting borrower a statutory right of redemption period after the foreclosure sale. (This is NOT true for nonjudicial foreclosures in the state.)
The period extends for six months following a foreclosure sale. That time is reduced to just 30 days if the borrower abandoned the property prior to foreclosure.
EXAMPLE
Nina is the winning bidder on a property put up for sale in a judicial foreclosure sale. Yipee!
Before she can truly declare herself a homeowner, however, she must wait out the six-month statutory right of redemption period the borrower who lost the home to foreclosure has to reclaim the property.
Nina’s party tray of celebratory cupcakes could get pretty crusty by then!
What Constitutes Redemption?
For the defaulting borrower, the redemption of the property post-sale requires a lump-sum payment covering:
Purchase price (winning bid) as noted in sheriff’s certificate
Interest prorated for the time between foreclosure sale and redemption
Expenses incurred by the purchaser of the foreclosed property
Judicial Foreclosure: The Sale
Nonjudicial foreclosure, aka power of sale or sale by advertisement, requires the presence of a power of sale clause in the security instrument (most likely, a deed of trust) at the time of signing.
This clause pre-authorizes the lender (or trustee) to foreclose and sell the property without court oversight or having to file a lawsuit.
As Popular as It Is Swift
Avoidance of the dates, deadlines, and demands of the legal system allows the process to move relatively quickly — especially in comparison to a judicial foreclosure.
Not surprisingly, then, nonjudicial foreclosure is the predominant path of foreclosure for over half of the states in the nation — including Arizona!
Borrower Benefits
Some states prohibit deficiency judgments in conjunction with power of sale foreclosures. And where deficiency judgments are not prohibited, the lender would need to go to court to seek one.
A borrower retains the right to file a lawsuit and seek judicial review of the process if they so desire.
Borrower Disadvantages
A fast, efficient process = losing the property sooner than with other forms of foreclosure.
If judicial review is desired, the borrower must incur the costs of filing a lawsuit.
Some states eliminate statutory redemption in conjunction with power of sale foreclosures.
Some states allow the lender to get away with relatively little by way of notice regarding the default and subsequent sale.
On that last point, if there are junior lien holders on the mortgage or deed of trust, they may miss notification of the sale and lose their rights and interests in the property. To guard against this, the prudent junior mortgagee will file a request for notice of default when they record their lien.
Nonjudicial Foreclosure: The Intro
Let’s look at the activities in a nonjudicial foreclosure that occur prior to the sale. And from this point on, I’ll be talking about it specifically in regards to how it is carried out in Arizona.
In Trustees We Trust
Since the deed of trust is most commonly used in Arizona, I’ll be referring to trustee actions that need to be taken in the nonjudicial foreclosure process. When trustees do these things, just know that they do so on behalf of a trust’s beneficiary: the lender.
In the rare occasion where a nonjudicial foreclosure is carried out with a loan not involving a deed of trust, the actions I speak of would fall to the lender.
Take Notice of Those Notices
The process begins with the two trustee-generated forms:
Notice of Default
Notice of Sale (accompanied by a statement of breach)
First, the trustee files a notice of default and a notice of sale with the county.
That effort constitutes constructive notice.
The foreclosure sale itself is scheduled no sooner than 91 days after the filing of the notice of default and must provide time and place of the sale.
Take Five & Take 30
Within five days of recordation, the trustee must send a certified mail copy of the notice of sale and statement of breach to all parties of the deed of trust.
That action serves as actual notice.
Within 30 days of recordation, the trustee must send a certified mail copy of the notice of sale and statement of breach to all parties with a recorded interest in the property.
Additionally, the notice should also be delivered to or posted on the property in advance of the sale.
Extra! Extra! Read all about It!
Beyond the recordation efforts, the foreclosure sale must be advertised once a week for four weeks, with the last ad appearing not less than 10 days prior to the sale. These ads should appear in the county where the property is located.
Right to Reinstate
The window of opportunity for the borrower to exercise their right to reinstate the loan and put an end to the foreclosure falls between the date of recordation of the notice of default up until 5:00 p.m. of the last business day before the foreclosure sale.
Reinstating the loan would require that the borrower pay:
The entire amount needed to bring the loan current
All foreclosure-related costs incurred by the lender
Recording cancellation of sale fees
Trustee fees
Other miscellaneous fees associated with protecting the trust beneficiary’s interests
Nonjudicial Foreclosure: Pre-Sale
Once the equity of redemption period given in the notice of default has expired, the sale must be carried out per procedures as set forth in state statutes, which will vary from one state to another.
Here’s what that looks like in an Arizona nonjudicial foreclosure.
Foreclosure Sale Eve
Between 9:00 a.m. and 5:00 p.m. the last business day before the foreclosure sale, the trustee must make known the credit bid of the beneficiary of the trust.
Since you already know that the beneficiary is the lender, let me explain what a credit bid is.
4 hands each holding up a sign that reads bid in red lettering on a white background.
Credit Bid
First, I should back up a minute and explain that the foreclosure sale is handled as an auction. Prior to the opening of the auction, the lender has the chance to make what is known as a credit bid. That’s a bid that typically covers the outstanding debt on the loan. The lender gets “credit” for the amount the borrower owes, so they don’t really pay anything if the credit bid is for that exact amount.
To that point, the credit bid can be for less than than the amount owed by the borrower, or it can be that amount plus the additional costs it incurred that are associated with the foreclosure.
If the lender is the highest bidder, it becomes the new owner of the property. But whether it turns out to be the lender or another entity, the winning bidder purchases the property and take immediate title and possession. (By immediate, I mean within the seven business days allotted by statute for the trustee to execute and deliver a trustee’s deed to the purchaser.)
Sale Day
Foreclosure sales are to be held anytime from 9:00 to 5:00 (cue the Dolly Parton song) on the appointed day of sale. That day should fall during the business week (Monday - Friday) but never on a holiday (not even Festivus).
They can take place:
On the foreclosed property
At the county courthouse
At the trustee’s office (as long as it resides within the same county as the foreclosed property)
Trustee Sale
To be clear, unlike a judicial foreclosure, the county sheriff does NOT handle the sale. It is carried out by the trustee.
Trustee Deed
As there is no statutory right of redemption in nonjudicial foreclosure, at the conclusion of the trustee sale, a trustee deed will be granted to the new owner.
Nonjudicial Foreclosure: The Sale
There are only a couple of things to cover regarding the post-sale of a nonjudicial foreclosure, but they are important nonetheless. And, as you’ll see, this also is the point where things can get kinda legal-y.
Here’s what I mean…
Eviction
As with judicial foreclosure, the new owner of the property has the right to evict the previous owner via a forcible detainer action.
Deficiency Judgment
If the winning bid brings in less than the total debt, the lender might have the option to seek a deficiency judgment against the borrower. (This would be a good time to scroll back up to our discussion of foreclosure terminology if you need a refresher on when that can and cannot be done.)
To do this, however, the lender would need to initiate a separate legal action. That makes sense, right? Nonjudicial foreclosure is NOT a legal action, but a deficiency judgment is.
The clue is in the word judgment. Where there’s judgment, a judge can’t be far behind. And where there is a judge, there is a legal action… got it? Of course, you do!
The lender needs to file this legal action with the county court within 90 days of the sale.
How Different from Judicial Foreclosure
You may recall that a deficiency judgment in a judicial foreclosure will be the gap between the foreclosure sale amount and the judgment award (the outstanding loan balance in default).
That’s not the case with a nonjudicial foreclosure.
What’s Fair Is Fair Market Value
With nonjudicial foreclosure, the borrower has the right to request that a fair market value amount of the property be established. Both parties can bring evidence to support their claim as to what that figure might be.
If it turns out that the winning bid (foreclosure purchase price) was less than fair market value of the property, the borrower can reduce their deficiency judgment by the difference between the foreclosure purchase price and the fair market value of the property.
If that’s a bit fuzzy, maybe the scenario on the next page will clear things up.
Nonjudicial Foreclosure: Post-Sale
Here’s a quick demonstration of how fair market value can impact deficiency judgment in nonjudicial foreclosure scenarios.
Katrina’s Loss
Katrina lost her job, her house, and her boyfriend. Sad about the first two; the last one, not so much.
Anyway, when Katrina’s home went through a nonjudicial foreclosure sale, her lender filed for a deficiency judgment against her in the amount of $30,000.
The lender based that figure on the fact that the foreclosure sale brought in $130,000 dollars as compared to Katrina’s defaulted loan balance of $160,000.
The Lender’s Math
Lenders like money and math. Here are the numbers that Katrina’s lender used:
$160,000 - $130,000 = $30,000
Final answer: $30,000 is the deficiency judgment amount requested by the lender
Upon hearing about this, a kind-hearted robot whispered to Katrina from a shadowy alley that she ought to request a determination of the fair market value of the property. Since Katrina’s mom had only warned her about talking to strange people and had said nothing at all about robots, Katrina took Ace’s the robot’s advice.
Here Comes the Judge
After reviewing Katrina’s evidence and that of her lender, the court determined that the fair market value of the property was only $140,000.
Based on this new information, the deficiency judgment against Katrina was arrived at as follows:
Step 1: Determine the difference between fair market value and foreclosure sale price
$140,000 - $130,000 = $10,000
Step 2: Offset the amount of the initial deficiency judgment by the difference between the fair market value and the foreclosure sale price
$30,000 - $10,000 = $20,000
Final answer: $20,000 is the court-awarded deficiency judgment
Moral of the Story
There are two takeaways here:
There are times when the borrower can lower a deficiency judgment award by demanding that fair market value of the property be determined.
Shadowy robots put the machina in the deus ex machina!
Scenario: Katrina & the Shadowy Robot
Another popular “F” word in Arizona real estate is forfeiture. It is a term that, when used in conjunction with land contracts, can be thought of as a form of foreclosure. Therefore, it falls within the scope of our conversation regarding Arizona foreclosure paths.
Before we go any further, I want to first make sure you know what a land contract is.
Land Contract: What It Is and When It’s Used
A land contract, aka agreement for sale or contract for deed, is a single loan document (promissory note and mortgage, rolled up into one). It is a form of seller financing in which the seller retains legal title until the loan is satisfied. (The buyer owns equitable title — the right of possession and use.)
Like most loans, a land contract consists of a down payment and an installment plan in which the balance (with interest) is paid according to an agreed-upon schedule. It is usually recorded with the county recorder.
It’s typically used where raw land is being conveyed. It can also be used if standard mortgage financing is too expensive or the borrower can’t meet institutional lender underwriting qualifications.
The Forfeiture Process
While forfeiture with land contracts can be handled via the judicial foreclosure process, most Arizona land contracts contain a forfeiture clause that allows the seller (vendor) to remedy the default in a more expedited and efficient manner.
The clause gives the seller the right to forfeit the contract, retain any payments made to date, and evict the buyer. Even so, contracts containing such a clause, still need to execute forfeiture according to state statute (§33-742).
Land Contract Reinstatement Schedule
In the event of default, the buyer (vendee) is provided time and opportunity to cure the default and reinstate the loan. How much time they have to do this is based on the percent of the purchase price — excluding interest — that has already been paid at the time of default.
The chart below provides the reinstatement schedule to be used:
A chart showing the land contract reinstatement schedule.
Image description
One (or More) for the Record(ing)
Let’s talk about what happens if the buyer does NOT successfully reinstate the land contract during their window of opportunity.
At the expiration of the reinstatement period, the seller records a notice of election to forfeit. A copy of the notice must be delivered in person or by mail to the buyer and any other interested party with 20 day’s notice of forfeiture.
If the buyer responds with payment of the default amount plus penalties, the seller records a notice to reinstate, which cancels the previous notice of election to forfeit.
However, if the buyer does not cure the default within that 20-day time frame, the seller records an affidavit of completion of forfeiture, which serves to terminate the buyer’s rights to the property.
And, per the forfeiture clause in the contract, the seller retains all payments received to date and can pursue a forcible detainer action if needed.
Land Contract Forfeiture
Remember when I told you there was some disagreement regarding whether there are two or three primary categories of foreclosure?
A form of foreclosure known as strict foreclosure is the troublemaker in that regard.
Some folks think that it represents a distinct, third category of foreclosure (with judicial and nonjudicial being the other two).
I, and many others, believe strict foreclosure is a type of judicial foreclosure, albeit a much less complicated one.
I base my opinion on the fact that the court is clearly involved in the process, with a lawsuit being filed by the lender. I don’t know about you, but that all sounds pretty judicial to me!
No Sale
One of the biggest differences between judicial foreclosure and strict foreclosure is that strict foreclosure does NOT involve a foreclosure sale.
Instead, the lender files suit, asking the court to set a timeframe in which the borrower has to satisfy the debt through the exercise of their equitable right of redemption. (Know that, to get to this point, the lender has already activated the acceleration clause due to borrower default.)
If the borrower fails to make payment and satisfy the loan in the prescribed time, the title is conveyed to the lender.
While this might sound harsh (or should I say strict?), realize that a strict foreclosure typically comes into play when the debt far exceeds the property value, making a foreclosure sale an unnecessary expense.
Why do I say this?
Because if the property were to go to sale, the lender would likely place a credit bid for the loan balance, which exceeds the property value. This, in turn, would result in their winning the auction and ending up with the title… Which is exactly where they’d end up in a strict foreclosure without the cost and hassle of a sale.
So why bother, right?
Deficiency Judgment and Statutory Redemption
The use of strict foreclosure does NOT preclude the use of deficiency judgment by the lender.
On the other hand, statutory redemption and equitable right of redemption are typically NOT available to the borrower once the timeframe allotted by the court to redeem the property has expired.
Rarely Used
As of this writing, only a few northeastern states — Connecticut, Vermont, and New York — allow some form of strict foreclosure.
Good to know if you run into any snowbird clients from that area!
Strict Foreclosure (Judicial Lite?)
