Of the numerous types of real estate auctions, foreclosure auctions are perhaps the first to come to mind. Under a foreclosure sale, a property is sold to satisfy a delinquent mortgage debt. The intent of this article is to explain the procedures and customs currently employed in Maryland with respect to foreclosure auctions. Certain characteristics regarding the advertising and terms of sale are inherent to foreclosures and may not apply to other types of real estate auctions.
A foreclosure sale can be authorized by a decree of court, or by virtue of the power of sale contained within a mortgage or deed of trust. When authorized by a decree or order of court, a “Trustee” is normally appointed to sell the property. If a sale is conducted pursuant to the financing instrument, the seller may be the “Attorney Named In Mortgage”, “Trustee”, “Substitute Trustee” or “Mortgage Assignee”. Therefore a foreclosure auction may be advertised as a “Trustee’s or Substitute Trustee’s Sale”, “Mortgagee’s Sale”, “Assignee’s Sale”, or simply a “Foreclosure Sale”. Although legally effected in varying manners, the conduct of the different types of foreclosure sales is basically the same.
The purpose of a foreclosure is to terminate the property owner’s right of redemption in the property after its sale to satisfy a debt. Under Maryland rules of procedure, the property owner is given notice of the sale not less than ten nor more than thirty days prior to the date of sale. The foreclosed property must be advertised once a week for three successive weeks in a newspaper of general circulation published within the county wherein the property is located. Most Baltimore City foreclosure auctions are published in The Daily Record. Legal advertising may appear in the Baltimore County Jeffersonian, Howard County Times, Carroll County Times, Harford County Aegis and various other county newspapers.
The “legal advertisement” will include a description of the property, the time and place of sale, possibly the reason for the foreclosure, and most importantly, the terms and conditions of the sale.
The property description can be solely an address and deed reference or an elaborate metes and bounds description. The description may be cursory or a highly detailed depiction of the improvements and potential uses of the offered realty. In the Baltimore Metropolitan Area, most foreclosure auctions are conducted on the premises. Conversely, in the Washington suburbs and rural areas of the state, foreclosure sales are primarily conducted at the front steps of the county Circuit Courthouse. A foreclosure sale can be conducted in some jurisdictions without a professional auctioneer. Baltimore City and surrounding counties require a licensed auctioneer to cry the sale.
The legal ad will reveal particulars regarding the quality of the title a purchaser will obtain at the sale. For instance, if the property is sold under a first mortgage, the purchaser will buy the property “free and clear” of all liens. However, a foreclosed property may be sold subject to prior mortgages, tax liens, judgements and the like. The prospective purchaser should inquire prior to the sale as to what obligations, if any, they may be required to satisfy as the new property owner. Any liabilities the purchaser will assume should be contained within the legal advertisement. In most cases, the purchaser will be obligated only for expenses and risk of loss arising from the date of sale forward. Additional terms of sale may be announced on the day of sale or may be posted at the sale site.
The advertised terms of sale will specify an earnest money deposit, payable in cash, by certified check or cashier’s check, that will be required at the time of the auction. The deposit is credited towards the purchase price. Failure of the purchaser to comply with any of the terms of sale may cause forfeiture of the deposit and a resale of the property at the purchaser’s risk and expense. The balance of the purchase price is due after the sale has been ratified by the Circuit Court. The ratification period will take from 30 to 45 days, allowing ample time for a purchaser to obtain financing if desired. Interest on the unpaid purchase money, the bid price less the deposit, is charged to the purchaser from the date of sale to the date of settlement.
Foreclosed properties are usually sold in “AS IS” condition. Expense adjustments, including taxes, ground rent, sanitary and/or metropolitan district charges, and insurance are made as of the date of sale, rather than the typical date of settlement. The foreclosed property purchaser will pay all costs incidental to settlement, which include documentary stamps, transfer taxes and deed preparation. The purchaser will sign a contract of sale itemizing their obligations, incorporating the previously advertised terms and conditions.
If the foreclosure auction is conducted on the premises, a viewing of the property may be held immediately prior to the sale. Any surplus proceeds above the amount of the mortgage indebtedness derived from the sale will be returned to the prior property owner. For that reason, it is to the owner’s benefit to have the premises open for inspection. Nevertheless, occasionally the interior is not available for inspection and is sold sight unseen. Sales held at the courthouse door rarely provide an opportunity for inspection.
Maryland, unlike other states, has no right of redemption by the prior property owner on the foreclosed property. Once the auction is completed and the sale is ratified, equitable title is transferred to the purchaser and legal title will pass at settlement. Ratification typically takes 30 days after the selling party reports the sale to the Court. Although rarely done, the owner or another party in interest may file an objection during the ratification period.
Lenders do not like to foreclose mortgages and in many cases will bend over backwards to avoid repurchasing, or “buying-in”, a property at the foreclosure sale. Although the lender does have the option to bid during the auction, most would rather take a loss on the particular transaction, if necessary, rather than advance additional money in carrying costs should they become the high bidder. Sales held on the property premises generally produce third party purchasers. Often properties are purchased at below market rates.
A highly motivated lender will allow the auctioneer to do extensive promotional advertising in regional newspapers, by direct mail or by posting a sign. On larger foreclosure sales, an information package may be available to prospective bidders. To enhance the level of participation, the lender may offer below market financing. Auctioneers are precluded by law in sharing commissions derived from foreclosure sales. Occasionally though, a mortgage lender may directly provide a fee for broker cooperation.
The auctioneer begins the foreclosure sale by reading the legal advertisement and announcing any further terms or conditions. Time for questions by prospective bidders will be allowed prior to the bidding. At the conclusion of the announcement and question period, the auctioneer will solicit bids for the property. Bids are generally made either orally or by raising a hand. Bidding increments are made in amounts acceptable to the auctioneer, who may set a minimum bidding increment as the sale progresses. The high bidder at the conclusion of the sale is the ultimate buyer. The purchaser will present the required deposit, sign the contract of sale, and assume responsibility for the property.
The obvious advantage to a prospective purchaser of foreclosure real estate is that many times a property can be obtained at a discounted price. An opportunity to acquire a property for rehabilitation and resale, an investment or as a primary residence is created. Otherwise unobtainable properties can sometimes be had due to a mortgage default.
The prospective buyer should be aware of the obligations that they will inherit after the sale and should note that foreclosure sales are often canceled due to loan reinstatement. Last minute bankruptcy filings, which provide an automatic stay (postponement or cancellation) of the foreclosure proceeding, are not uncommon. Therefore, it is prudent for interested parties to verify that the auction will be held at the advertised place and time.
By the time a property is sold under a foreclosure proceeding, numerous opportunities have been given to its owner to avert the sale. A high visibility promotion, opportunity for inspection and active participation insure results to benefit the lender, borrower and purchaser. Foreclosure sales provide just one of many real estate auction opportunities. Additional information can be obtained from the Auctioneers Association of Maryland, National Auctioneers Association, Certified Auctioneers Education Institute, or from your professional auctioneer.