Someone told me yesterday they planned to let their bank foreclose on their property for 80% of its appraised value, and then negotiate a workout on the balance due on the promissory note. Let’s call this person “Jim.” According to Jim’s lawyer, that would stop the interest accruing on at least 80% of the debt, and represented a positive move. The lawyer said the bank was required, by law, to bid at least 80% of the appraisal. Jim was worn out with worry about trying to sell his property, trying to negotiate with his bank, and trying to keep a positive attitude for his family. He just wanted the pressure to stop!
I was shocked! There were so many pieces of misinformation and bad advice in this, it was hard to know where to begin. Jim’s troubles were not going to stop after a foreclosure.
First, the bank is not required by law to bid ANY particular amount–at least, not in Alabama. The rule, simply, is that the bid price must not be so low that it will shock the conscience. I’m here to tell you, people’s consciences are not easily shocked these days.
For you lawyers out there, read the case of Hayden v. Smith. You can read the whole opinion on my website by clicking on the case name. Here are the relevant points:
- “The general rule is that where the price realized at the
(foreclosure) sale is so inadequate as to shock the conscience, it
may itself raise a presumption of fraud, trickery, unfairness, or
culpable mismanagement, and therefore be sufficient ground for
setting the sale aside.”
- “And, although mere inadequacy of price is not sufficient to that
end, it is always a circumstance to be considered in connection
with other grounds of objection to the sale, and will be sufficient
to justify setting the sale aside, when coupled with any other
circumstances showing unfairness, misconduct, fraud or even
stupid management, resulting in the sacrifice of the property.”
Second, Jim was mixing up the loan balance and the appraisal. The bid price is based on the appraisal, not on the loan balance. The only exception is when the loan balance is LESS than the appraisal. That rarely happens any more.
Third, the appraisal will probably come in at a very low amount. That’s because of little things like a depressed real estate market, long time periods on the market before sale, post-foreclosure rights of redemption that will depress the value, and the possibility of tenants depressing value under the Protecting Tenants at Foreclosure Act.
Fourth, the bid price will start with the appraisal, and then will deduct amounts for foreclosure expenses, marketing expenses, real estate commissions, holding costs (taxes, insurance, maintenance, security, etc.) and the time value of money until a sale. The remaining number, after all those deductions, will be dramatically lower than Jim thinks it will be.
Jim’s lawyer’s advice? I’m reminded of that old Southern expression, “He’s just peeing on your leg.” In other words, you have a temporary warm feeling but it gets cold and ugly and smelly pretty quickly.
If you are facing foreclosure, and a loan modification will not help your situation, work with a real estate professional to short sale your property. The process is not quick, and there will be stresses involved. But, at the end of the day, you will have sold your property for MORE than the bank’s likely foreclosure bid and there is a very high probability the bank will forgive any remaining balance due on the note, if you make that part of your negotiations with your lender.