Foreclosures From Start to Finish

This blog attempts to summarize the foreclosure process. Nothing in this blog should be used in place of actual legal advice. Please contact an attorney if you are dealing with a foreclosure. 

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WHAT IS A FORECLOSURE?

The two main ingredients of a foreclosure are:

  1. A Note
    This is where someone borrows money with the obligation of paying it back, and if they don’t and the foreclosure doesn’t satisfy the debt owed then the lender can come after the individual for the balance.
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  2. A Mortgage
    This is a security instrument that secures the debt owed by the mortgagor to a piece of real property. ie. If you don’t pay your debt, that loan attaches to your house.

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Overall, there are three different types of foreclosures:

  1. Judicial Foreclosure
    Alabama does have judicial foreclosures where you have to go to the courthouse to foreclose on a property.
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  2. Non-Judicial Foreclosure (Power of Sale)
    Alabama is also one of 29 states that allows non-judicial foreclosures. For the economic welfare of the state, Alabama promotes the exchange of real estate quickly and if someone isn’t paying their mortgage then you can foreclose on that property and encourage a new exchange of real estate.
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  3. Strict Foreclosure
    This is where the lender asks the court for an order declaring you in default on the mortgage and permitting it to foreclose.

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HOW DOES A POWER OF SALE/NON-JUDICIAL FORECLOSURE WORK?

The Power of Sale is defined by statute and is included in the mortgage instrument. It’s a non-judicial foreclosure, so it defines the terms of how that power is used and allows the mortgagee the opportunity to regain possession of the property. Once that power is used, it can in some instances wipe out any interest that is junior or inferior to the mortgage. Factors that influence whether interest is junior or inferior are things like the date it was recorded, but there are certain taxes such as federal taxes and liens that will not be wiped out through foreclosure. There are some types of bankruptcy that can wipe out the majority of interest, but this differs from a foreclosure. 

The power of sale can be used by other mortgage companies or individuals who purchase that original mortgage. So if you get a mortgage through Wells Fargo, for example, and another company purchases that mortgage, the power of sale is still contained in that mortgage instrument and they can still use that power of sale. The power of sale can be exercised up to 20 years after the maturity date of the mortgage or, if a maturity date isn’t listed, within 20 years. This means the home can be foreclosed on during the loan term, and after the 20-year period post-maturity the loan is generally forgiven. Generally a mortgage is only released after it is satisfied, though.

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FORECLOSURES IN ALABAMA

The non-judicial foreclosure (aka a Power of Sale foreclosure) is the most common form of foreclosure in the state, especially in our office. The Power of Sales refers to a clause in the mortgage that gives the mortgagee the power to foreclose and sell the property in order to recoup the debt from the note. It’s a very useful power to have and it has to be put in the mortgage to be able to use it. Even though we have a statutory provision that allows for these things to take place, it is a requirement that the mortgage mention that power. This type of foreclosure is designed to be a much quicker process; generally a Power of Sale foreclosure will take about four weeks, and they shoot for 30 days since that’s the limit for homestead properties.

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WHAT IS THE PROCESS FOR A NON-JUDICIAL OR POWER OF SALE FORECLOSURE?

  1. Notice
    This is nothing fancy — there is no courier who delivers a letter to you saying you’re being foreclosed on. All that is required by law is that the mortgagee (the individual or entity that is given the mortgage by the property holder) give public notice, which is usually published in the local newspaper. If the local county doesn’t have a newspaper that publishes these types of announcements, then the announcement can be published in the neighboring county’s newspaper. The announcement has to run for three consecutive weeks, and then on the fourth week you can foreclose. Homesteaded properties are different, though. In 2016, Alabama updated the law so as to change the right of redemption period. The newspaper announcement allows a standard right of redemption for one year, which means the person who was foreclosed on can come back up to one year after the foreclosure, agree to pay the debt, and redeem the house. The personal notice for homesteaded property allows us to give the public notice as usual, but also mails a letter to the homeowner giving notice of the foreclosure. This letter has to be delivered 30 days prior to the foreclosure. By doing this, you lessen the right of redemption for the homeowner from one year to 6 months. This means that a new buyer would only have to worry about the right of redemption period for 6 months after purchase instead of a whole year.
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  2. Public Auction
    A foreclosure is a sale by public auction. After you give public notice, the attorney handling the foreclosure goes to the courthouse steps and declares to anyone walking by that they are foreclosing on a property. The opening bid is the mortgage amount plus incidentals, fees, and any damage to the property. Those in attendance have the chance to bid on the property if they have the cash to purchase it. All foreclosures have to take place between 11am-4pm and you are not required to say what specific time they will take place, just the date that it will happen. Anyone wishing to purchase a foreclosure needs to be present from 11:00am on that day to make sure they’ll be there when that property is announced.
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  3. Conveyance — Foreclosure Deed
    After the public auction takes place, we draft a foreclosure deed, which conveys good and marketable title to the purchaser of the property at the foreclosure sale. Once the foreclosure deed is recorded in the Probate Judge’s office, this document will serve as actual notice of the foreclosure sale to any individual or entity that performs a title search on the property in the future. 
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  4. Deficiency Balance
    Once the conveyance is made, you have to consider whether the conveyance was for all that was owed. Typically you don’t get into this too much with big lenders because they just want to get in the majority of what they’re owed and then get out. A lender usually won’t give a loan for more value than what the property is worth anyway. Sometimes you get private lenders, though, who are willing to go a little higher than that and, for example, they may have a deficiency balance where the note is for $100,000 and they foreclose on the property and it’s only worth $80,000. This means there is still an extra $20,000 they’re owed that the property sale didn’t take care of. The mortgagor can then come after the person they foreclosed on and acquire a deficiency judgement on them for that remaining amount. Once this judgement is entered, they can garnish the person’s paycheck to recoup the funds.
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  5. Ejectment of Possessor
    If you invest in a foreclosure and find there is still someone in the home saying they will not leave, you have to then eject that person. You cannot do an eviction because there is no legal relationship between the new owner and the person living on the property — an eviction serves as a legal remedy that can be utilized only in a landlord/tenant relationship. In a foreclosure, that legal relationship has not and does not exist, and you may have to challenge the possessor’s claim of ownership. All of this takes place in an ejectment proceeding in circuit court. The only silver lining of a possessor staying in the property after you’ve told them to leave is that after 10 days of ignoring your request they lose their right of redemption, which is a good thing for people who want to resell the property quickly.

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HOW IS THE ASKING PRICE DETERMINED ON A FORECLOSURE?

The asking price is pulled from a bunch of different things. There is a limit to what you can add to the initial bid, but it’s my understanding that you can calculate damages to the property, fees associated with the foreclosure process, and any brokerage listings that have been done and request that they be added to the initial bid. Because this is a non-judicial foreclosure, in order for it to be challenged the person being foreclosed on would have to say they challenge the fees listed on the initial bid. This is fairly unlikely since only about 1% of property is redeemed. So it’s a good strategy to speak with the attorney handling the foreclosure to make sure you as the mortgagee (the holder of the mortgage) are compensated for everything you put into facilitating this foreclosure, and that if someone else bids more than you that you will be covered for all of those expenses. 

You don’t have to list the bid price on the public notice, so you have some time to calculate everything that should go into it, including attorney fees, publication fees, etc. And the opening bid always comes from the lender who holds the current mortgage. They’re not interested in making a profit, they just want to save their investment and recoup damages. 

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WHAT HAPPENS WHEN SOMEONE REDEEMS A PROPERTY?

If you purchase a foreclosure and begin work on the property only to have the original owner redeem the property through the right of redemption, there are certain things that person will then have to pay you back for including:

  • interest
  • any taxes you’ve paid
  • insurance premiums
  • valid liens you may have paid off on behalf of the previous owner
  • and permanent improvements (permanent fixtures to the property that were necessary improvements)

The permanent improvements can be challenged by the original owner as not being necessary, so you are not guaranteed to get all of that money back. If you do make improvements, make sure to keep every receipt to show the value of those improvements. Permanent improvements can also be called necessary improvements in some instances, but the statute is what actually says “permanent improvements.” Though I haven’t looked into the case law regarding this, I’d say that the reason people use the term “necessary” instead of “permanent” when discussing this is because these improvements can be challenged, and if the value of the improvement is challenged then you want to be able to back it up as something that needed to be fixed, was necessary, and has a real value. It’s a good idea to hold off on cosmetic repairs that won’t increase the value of the home until after the right of redemption period is over.

Redemptions, however, are not that common. I’ve heard that the redemption percentage in Alabama is less than 1.5% of all foreclosures — I haven’t found the data to back this up, but this is what I’ve heard in seminars. This rate is likely so low because the buyer of the foreclosure has to have the entire bid available in cash on the day of public auction in order to purchase the home, and if the owner who was foreclosed on wasn’t able to make monthly payments, it’s unlikely they would have that amount of cash available to purchase the home again. They could always use a private investor or another lender who is willing to back you on a right of redemption, but typically when you go through the foreclosure process a lender will have rules about how soon after they can give you another mortgage. For example, for a conventional loan it’s typically between 3-5 years before the lender will give you another loan once you’ve been foreclosed on. 

During the foreclosure notice period, many homeowners will call the lender and attempt to negotiate with them. They may suggest a payment plan if they can’t make the full payment, or they may agree to a partial payment where they pay a little bit now and then more later so they can try to catch up. The lender can decide not to accept payment, though, and keep moving forward with the foreclosure. 

Though redemptions are not common, it is still a risk and a legal right that the previous owner has, so you should always act as if it is a possibility when purchasing a foreclosure.

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JUNIOR LIENS ARE NOT CREATED EQUAL

Mortgages are the priority lien, and a lender will not give you a mortgage unless it can be the priority lien. Sometimes you’ll hear that there’s another judgement out there and you need to subordinate it; this just means it has to be pushed down in priority so that everyone acknowledges the mortgage is going to be the priority lien. Some liens, whether they’re priority or not, are always going to be on there, such as government taxes. Those will have to be dealt with one way or another. There are other types of liens as well that may not be removed automatically, so we always recommend you speak to an attorney if you purchase a foreclosure and think there might be liens on the property. 

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WHAT ARE DEEDS IN LIEU OF FORECLOSURES?

The mortgagee can ask for a deed in lieu of foreclosure and then, if the person being foreclosed on agrees to sign the foreclosure deed, what they’re really doing is waiving the redemption period and potentially saving the mortgagee the process of having to foreclose. It is still possible, though, for a mortgagee to foreclose even after getting a deed in lieu of foreclosure; the benefit of foreclosing, even after obtaining a deed in lieu of foreclosure, is due to the fact that there may be some liens you want wiped off or some issues you want to clear up in probate, and a foreclosure may be necessary to clean those things up. Essentially, when a mortgagor (the individual or entity that originally gave a mortgage or lien on the property to someone else) signs a deed in lieu of foreclosure, they are surrendering the property the holder of lien (the mortgagee). A foreclosure deed, therefore has two benefits: 1) it eliminates the need for the mortgagee to go through the foreclosure process (UNLESS there are other outstanding liens that need to be wiped out so as to have marketable title), and 2) the mortgagor has essentially waived their power of redemption. 

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TIPS WHEN BUYING A FORECLOSURE

  • Call the attorney who is conducting the foreclosure (this should be listed on the public notice) to verify time, place, amount, delivery of funds, and whether the foreclosure is still scheduled. 
    • You may be able to get a more specific time and can ask which side of the courthouse the announcement will be made on. The most important question is whether the foreclosure is still scheduled as the owner may have worked out a private deal.
  • Plan to be there from 11am-4pm because you don’t know what time that property will actually be announced.
    • Some investors will have their attorney sit with them through the process so that they are able to challenge it when no one shows up to announce the foreclosure but the sale still happens. The downside of this is that you would then have to pay for an attorney for five hours.
  • Have certified funds available or be ready to deliver certified funds to the attorney before the end of day.
  • Consider doing a title search on the property prior to bidding on the foreclosure.
    • Foreclosures are as-is and may have pretty serious judgements attached to them, including tax liens that you could then be responsible for. A title search is typically about $150 and is well worth it.
  • Talk to an attorney about ejectments and be prepared to go through the process.
    • It’s important to know how long this process takes and what it will cost you if you do have to eject a possessor.
  • Do not plan for any major renovations during the redemption period unless you are willing to take the risk.
  • Buyers are sometimes nervous to purchase during the redemption period. Make sure you are OK to hold the property until the redemption period is over.
    • You can always ask whether personal notice was given on a specific property so that you know whether the redemption period is only six months or a full year.

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If you anticipate dealing with a foreclosure, call our office and schedule a free consultation.

By: Geoffrey K. Middleton
Attorney at Law
Huntsville, Alabama
Written in Sept 2021

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