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Understanding Lender Options Upon Real Estate Loan Default, Part 2 of 2
Posted on March 26, 2013 byLast month I began this two-part article on the options and procedures that lenders may take when a borrower defaults on their real estate loan. Understanding this process is important to real estate professionals whether they are lenders, borrowers, agents or investors attempting to buy or manage property during the default process.
When a borrower defaults on his loan, most often by failing to make the monthly payments, the lender has several options. Although not exhaustive nor mutually exclusive, these options include foreclosure, filing suit, self-help repossession or requesting that the court appoint a receiver to manage the property.
The two most popular options differ in their order: lenders can foreclose first or file a lawsuit first. Therefore, the lender gets to choose its starting point: (1) foreclose first and then sue, or (2) sue first and then foreclose. The order is important and it is significant to remember that the second step in either option is at the lender’s discretion. Last month I addressed the first and most popular option for residential loans. In this article, I will discuss the second option. Read More→
Understanding Lender Options Upon Real Estate Loan Default, Part 1 of 2
Posted on February 28, 2013 byRecently, I was asked to describe the options and procedures that lenders may take when a borrower defaults on their real estate loan. Understanding this process is vital to real estate professionals whether they are lenders, borrowers, agents or investors attempting to buy or manage property during the default process.
When a borrower defaults on his loan, most often by failing to make the monthly payments, the lender has several options. Although not exhaustive nor mutually exclusive, these options include foreclosure, filing suit, self-help repossession or requesting that the court appoint a receiver to manage the property.
The two most popular options differ in their order: lenders can foreclose first or file a lawsuit first. Therefore, the lender gets to choose its remedy: (1) foreclose first and then sue, or (2) sue first and then foreclose. The order is important and it is significant to remember that the second step in either option is at the lender’s discretion. This article only addresses the first and most popular option. Next month, the second option will be discussed.
1. Foreclose First and Then Sue
The first and most popular option by lenders is what I have entitled the foreclose-confirm-sue process. The name describes the exact steps a lender takes.
For example, Becky borrows $100,000 to buy her house. Afterwards, the market declines leaving her house valued at $60,000. Becky is unable to make her payments. So, the bank begins the foreclosure process. In order to do this, the bank sends Becky all the required notices and advertises in the newspaper for four consecutive weeks. On the first Tuesday of the month after the advertisement has run, Becky’s house is sold on the courthouse steps for $60,000 – its market value. Most real estate professionals understand this process. However, many may not understand what can happen next. In other words, what happens to the $40,000 deficiency?
If the lender desires, it can pursue the $40,000 deficiency. In order to do so, the lender must follow a two step process: confirm and sue. First, the lender must apply to the court to confirm the foreclosure sale. This confirmation hearing must be requested within 30 days of the foreclosure sale. The purpose of this judicial hearing is to determine the fair market value of the property and both the lender and borrower are allowed to present evidence. Once the court has determined the fair market value, it issues an order of confirmation. This then allows the lender to, secondly, sue Becky for the $40,000 deficiency.
Because of this double judicial procedure and the likelihood that many judgments of this nature are uncollectable, lenders rarely pursue a deficiency action against residential borrowers. Commercial borrowers are another story. In today’s market, commercial lenders are pursuing deficiency actions with vigor.
This article only addresses the most popular option: foreclose first. Next month, I will address the second option: suing first and then foreclosing. The second option is becoming increasingly popular in commercial loan defaults; the first is almost universally the choice of residential lenders.
Disclaimer: The information contained in this article is for informational purposes only and is not legal advice or a substitute for legal counsel. It does not constitute advertising or solicitation. The information in this article may or may not reflect the most current legal developments; accordingly, this article is not guaranteed to be complete, and should not be considered an indication of future results.
Jon David Huffman is a litigation attorney specializing in real estate disputes, business disputes and commercial collections. With more than a decade of experience managing small businesses before attending Emory Law School, he brings a business owner’s perspective to the practice of law.
Caution Landlords: Accepting Money After Filing an Eviction Impacts Your Rights
Posted on January 30, 2013 byLandlords often have mixed emotions when their tenants call and offer them money after a dispossessory warrant (an eviction) has been filed. On one hand, landlords are in the business of collecting rent. However, they worry how it may affect moving forward with the eviction. Accepting a payment after an eviction is filed does affect your rights.
Residential Landlords
A residential landlord has a duty to accept a payment from a tenant who is in default if and only if the tenant tenders “all rents allegedly owed plus the cost of the [eviction].”[1] However, the tenant cannot wait until the last moment to do this. They must tender the full payment within seven days of the day they were served the eviction paperwork.[2] There is no need to worry about a tenant doing this perpetually because a landlord is only obligated to accept this type of payment once per year.[3] Making this payment provides a complete defense to the eviction and, upon receipt, a landlord should dismiss the eviction.
If a residential tenant offers a partial payment, however, BEWARE! A residential landlord who accepts a partial payment from a tenant after an eviction has been filed waives his right to continue with the eviction and admits the continuance of the lease.[4] In simple terms, the eviction fails and the landlord must start the eviction process over if he wishes to evict the tenant. It does not matter when the partial payment is made – whether one hour after the eviction is filed or five minutes before the eviction trial. Thus the landlord must either reject the partial payment or, if accepted, he must restart the eviction process. Read More→
