The purpose of this article is to provide potential purchasers and investors of properties in foreclosure an overview of the process and suggestions on how to proceed with negotiating your purchase.
*This article is not intended to be a comprehensive overview of the laws and rules on foreclosure and only applies to foreclosures in Minnesota.
There are two types of foreclosure in Minnesota– Foreclosure by advertisement and foreclosure by action. In a foreclosure by advertisement the bank waives any deficiency it might seek from the borrower. Banks reserve foreclosure by action for situations where they are confident they can recover any deficiency after the sale of the property from the borrower. A strong majority of single family residence foreclosures in Minnesota are conducted as foreclosures by advertisement: Most banks recognize that the typical borrower has few additional assets so they forego any deficiency against the borrower and proceed by advertisement. Unless otherwise stated, going forward, this article refers to the foreclosure by advertisement process.
To initiate foreclosure, the bank follows certain statutory requirements and any additional requirements contained in the mortgage or other loan documents. Then it files a Notice of Pendency and Power of Attorney with the property record’s office in the county where the property is located. The Notice of Pendency means the bank is serious and is proceeding with the foreclosure. Usually very shortly thereafter, the bank publishes and serves on the property owner a Notice of Foreclosure Sale. The Notice is published in a legal newspaper for six full weeks (these are the notices you see filling the back pages of most local news papers.) In addition to other requirements, the date of the sheriff’s sale and the amount owed to the bank will be included in the Notice.
Next is the sheriff’s sale. Many people think the time to “purchase” property in foreclosure is at the sheriff’s sale. This is a myth. If you are serious about purchasing a property, I would encourage you to monitor the sheriff’s sale, but probably not buy at the sale. All that is purchased at the sheriff’s sale is a sheriff’s certificate which is the right to own property after the redemption period has expired.
The redemption period is a period of time that the owner of the property is statutorily given to attempt to secure funds to purchase the sheriff’s certificate and redeem his ownership interest in the property. The standard redemption period in Minnesota is six months. It is twelve months for certain types of property (mainly agricultural) and can be shortened to five weeks under other scenarios. If you, as an investor, buy at the sheriff’s sale, you are forced to prepay for property you will have no real right to until after the redemption period expires. Granted, you won’t lose your money, but it will be tied up for a significant period of time.
The owner of the property has a right to redeem the sheriff’s certificate at any time during the redemption period and also maintains control over the property during the redemption period. Other lien holders are also given a right to redeem if they follow certain statutory requirements. After the expiration of all redemption periods, the owner of the certificate is the owner of the property. It is not until the redemption period has expired that holder of the certificate can evict the prior owner or has any real ownership in the property.
So what to do as an investor? Instead, of buying at the sale, my recommendation is that you speak with a lawyer and formulate a plan prior to the date of the sale. I know, I know, you are reading this article so you don’t have to get a lawyer. But, think about it—you are planning on purchasing a foreclosed property. If you’ve done your homework, you should be getting a considerable rate of return on your investment. The few hundred, possibly thousand dollars you will spend with a lawyer will be well worth it in the end.
The lawyer will first obtain an owner’s an encumbrance report (O&E). An O&E will show any liens on the property. The lawyer can help interpret the effect of those liens on how to best negotiate for your purchase. For example, the O&E might show encumbrances, such as other mortgages, with priority over the mortgage that was foreclosed. After the sale, the property will remain subject to any liens with priority. You will have to pay them off in order to own the property free and clear. The O&E will also show if there are liens with lower priority than your mortgage such as assessment liens or mechanic’s liens. In that situation, you may be able to “buy” the lien and get in line to redeem the property after the owner’s redemption period has expired. This saves you from having to negotiate with the bank. You may also be in the unique position of having the bank bid less than what they are owed on the property. In that instance, a lawyer can help you negotiate purchasing the property from the current owner during his redemption period and ensure that you end up with the property free and clear of all liens.
There are lots of ways to crack the egg of purchasing foreclosed property. The way you buy is going to depend on the other liens on the property you are considering purchasing as well as what was bid at the sheriff’s sale. Careful planning with the assistance of a lawyer who can provide you an analysis of the other possible encumbrances on a property can net you a significant return on investment.