I do not understand this...

General Real Estate Investing
1

Just when I think I’ve got a foothold on certain aspects of real estate investing, I read something that just doesn’t make sense to me. I got this from the weekly Bob Bruss Q & A column of my local paper. Hopefully someone can help me decipher this. Here it is:

Q: Our neighbor sold her property and carried back a $20,000 mortgage on the $120,000 sale. When the neighbor moved out of state, we assumed that mortgage and installment note. We thought if the borrower defaults, we could foreclose and the property would become ours. But a friend told us a public auction is required and we would have to outbid any other bidders to retain the property. Is this correct? The payments are now four months in arrears.

A: Don’t worry. As the foreclosing lender, you can submit a “credit bid” for the amount that is owed to you including attorney or trustee’s fees and other expenses of foreclosure. With the monthly payments already in arrears, it’s time you consult a real estate attorney to proceed with foreclosure. A public auction is required. If someone shows up at the auction and bids $1 more than the amount owed to you, including costs, then you receive that cash and walk away happy. If no bidders show up, you get title to the property subject to any first mortgage, hopefully for a profit.

Now, let’s go back to the original question – When they say “our neighbor sold her property and carried back $20,000 on the $120,000 sale. When the neighbor moved out of state we assumed that mortgage and the installment note.”

  1. – Which neighbor? From whom? Did they assume that mortgage from the original owner? Or did they assume it from the people who bought it from the original owner – the ones who moved out of state? Is this a poorly worded question, or am I missing something?

  2. – When the questioner says, “we thought if the borrower defaults, we could foreclose and the property would become ours…”

– Aren’t they the borrower? Didn’t they just say they assumed it? If not, why wait for the process of foreclosure for the property “to become ours” ? If that’s their goal, why didn’t they just buy it to begin with?

  1. In the answer portion, Bob says “As the foreclosing lender, you can submit a ‘credit bid’ for the amount that is owed to you, including attorney fees and other expenses of foreclosure.”

– Huh? How are they the ‘foreclosing lender’ ?? What’s a ‘credit bid’ ??

Maybe I haven’t had enough coffee yet for this one, but it just doesn’t make any sense to me. Help?

2

Hey, I haven’t done these, but can take a stab at some of it for you. I’m sure those more into this can get you better detailed answers.

As I read this they had a neighbor who sold her house to someone(person A). Person A financed the house $100,000 with a bank and $20,000 with the neighbor taking a second. Then the neighbor moved away and aparantly didn’t want to worry about collecting the payments, so they allowed the investor to assume the note. The investor then became the lender with second position on the house.

I won’t attempt to answer the second part of the question, since I have no experience with these deals and don’t know the details of how it would go down.

Hope this helps,

DB

3

Thank you, d_sbrown. Yep, your reply cleared a lot of things up. Obviously, with 87 views and only one reply, not many others understood that excerpt either.

Thanks again.

4

either that or the time.

5

I saw the same article and didn’t understand it either. I think the word assumed is problematic as it implies someone took over the 2nd mortgage as the borrower. I suspect, as suggested earlier, that they bought the 2nd mortgage note from the neighbor. I also suspect their motivation was to pray for a default so they could foreclose and get the negihboring property for less than fmv. Of course, there is a substantial first mortgage ahead of them so simply foreclosing the 2nd isn’t going to get them title. As for the credit bid I’m not familiar with the term. I suspect it’s a wash bid as the lender already has their loan balance in the deal.