What Do I Need to Know to Bid at Colorado Foreclosure Auctions?
A. Tracking Sales
The public trustees along the front range of Colorado generally have websites that allow investors and others to track the status of properties that are in some stage of the foreclosure process. For non-agricultural property, public trustee’s sales cannot be set any sooner than 110 days after the recording of the Notice of Election and Demand.(E1) For agricultural property, the foreclosure sale cannot be any earlier than 215 days after the recording of the Notice of Election and Demand.(E2) Before the public trustee can take a property to a foreclosure auction, the foreclosing lender must submit a written bid no later than noon, two business days prior to the public trustee sale.(E3) Though not required to do so by law, the public trustees in all of the counties that this author monitors along the front range of Colorado seem to make available a “pre-sale” list on their websites. For counties that have Wednesday public trustee sales, the “pre-sale” list is generally available Monday afternoon.
All other things being equal, foreclosure investors should begin tracking properties earlier, rather than later in the foreclosure process. Early tracking of foreclosures allows the investors more time to conduct property condition due diligence, evaluate title and lien priority and investigate the existence and viability of potential junior lien positions which might create redemption rights. Having more time generally decreases the likelihood of error. However, a high percentage of properties for which foreclosures are commenced are not suitable to be purchased by foreclosure investors. The disadvantage of tracking properties too early is that it wastes resources. Each foreclosure investor makes his or her own strategic decisions about when to begin focusing on properties. Because of a high fall out rate for properties, many investors do not begin focusing on properties until after the pre-sale list is produced. Essentially, many foreclosure investors do not begin their serious due diligence on a property until 36 hours before the foreclosure auction.(E5)
B. Title Issues and Title Insurance
At the time of the drafting of these materials, it is unusual, but not unheard of, for a second deed of trust holder or other deed of trust holder to take a property to foreclosure auction. The vast majority of Colorado residential foreclosures, presently, are of first deeds of trust. The foreclosure of the senior deed of trust extinguishes junior liens against the property if the junior lien holders have been properly notified of the foreclosure auction.(E6) Someone who acquires title to a property via foreclosure of a junior deed of trust takes title subject to senior deeds of trust. Prior to bidding at a foreclosure auction, a foreclosure investor needs to confirm his or her expectations about the priority of the deed of trust being foreclosed.
Properties that are being foreclosed upon can have all of the same title problems that any property can have. A bidder’s title expectations can be disappointed if the foreclosure was not handled correctly. Among the ways that a foreclosure can be defective is if there are persons to whom notice of the foreclosure should have been mailed who were not on the public trustee’s mailing list.(E7) The Internal Revenue Service is entitled to special notice, under federal law, of the foreclosure.(E8)
How can a foreclosure investor protect against potential title problems? As of the drafting of these materials, it seems that most foreclosure investors rely upon low cost(E9) owners and encumbrance information provided by title companies as a public relations service to market title commitments and other revenue generating services for title companies. As a low cost product, owners and encumbrance reports do not purport to be complete, and create no recourse against a title insurance company that provides them. While this author has found owners and encumbrance reports to be remarkably accurate for a low cost product, it is not unusual for “O&E’s” to miss critical information. Among the more common omissions are the release of deeds of trusts recorded prior to the deed of trust which is being foreclosed(E10) and the omission of subordination agreements.(E11) Owners and encumbrance information generally purports to only reveal liens organized in “tract” indexed databases. That is, owners and encumbrance reports generally purport to only identify liens that have property specific legal descriptions in them. Owners and encumbrance reports do not generally purport to identify other liens that might attach to the property such as judgment liens or IRS tax liens.(E12)
If a foreclosure investor begins tracking a foreclosure sufficiently early, it allows enough time to order a foreclosure title commitment. It is not practically possible for a foreclosure investor to order a foreclosure title commitment on Monday afternoon for an auction on Wednesday. A key component of making the title commitment useful is allowing the title examiner time to verify that the persons entitled to receive notice of the foreclosure were sent notice of the foreclosure. Generally, a foreclosure title commitment must be ordered no later than the Friday before a Wednesday foreclosure auction in order to be useful.
Care should be taken to ensure that the foreclosure title commitment is issued without the standard requirements, and instead has only the foreclosure appropriate requirements. For example, in a buy/sell transaction, a title commitment would normally have requirements for the conveyance of the deed from the then owner to the buyer, and the release of the seller’s mortgages against the property. These requirements should be eliminated from a foreclosure title commitment, and instead be replaced by a requirement that the public trustee issues a confirmation deed to the insured.
C. Bidding and Tender of Funds
The different public trustees have evolved different protocols for conducting their sales. Most public trustees require potential bidders to register to bid. Some require registration on a property by property basis. Some require bidders to show that they have certified funds at the auction for more than the lender’s bid at the foreclosure auction.
Some public trustees require the high bidders to tender good funds immediately after the close of all the auctions. Some require a tender of funds after the close of the auction for property A before the public trustee commences the foreclosure for property B. For the public trustees that allow a later tender of funds, those public trustees designate a time deadline by which the good funds must be tendered. Colorado law stipulates the specific types of payments that are acceptable as good funds in a foreclosure proceeding.(E13) Since these procedures vary significantly from county to county, any lawyer advising a foreclosure investor should check the relevant county-specific bidding and tender rules. These rules are generally available on the public trustees’ websites.
D. The Passage of Title
Upon the expiration of all redemption periods allowed to all lienors who filed a notice of intent to redeem, title to the foreclosed upon property vests in the holder of the certificate of purchase (if none of the junior lien holders actually redeemed) or in the holder of the last certificate of redemption in the case where one of the junior lien holders actually redeems.(E14) If there are no junior lien holders who are entitled to redeem, or if none of the junior lien holders who are entitled to redeem properly file notices of intent to redeem, then title vests in the certificate of purchase holder upon the close of business eight business days after the foreclosure sale.(E15) When the public trustee later issues the “confirmation deed,” she is merely confirming the passage of title that has already occurred by operation of law.
(E1)COLO. REV. STAT. § 38-38-108(1)(a)
(E2)COLO. REV. STAT. § 38-38-108(1)(c)
(E3)COLO. REV. STAT. § 38-38-106
(E4)Other than the City and County of Denver, which has its public trustee sales on Thursdays, all of the counties with which this author has had experience along Colorado’s front range hold their foreclosure auctions on Wednesdays.
(E5)See James R. Haggerty, “House Flipping Makes a Comeback,” WALL STREET JOURNAL (2009), which gives a good flavor of the chaos involved in foreclosure investing.
(E6)COLO. REV. STAT. § 38-38-501
(E7)Colorado has a statute specifically addressing the resolution of “omitted parties” claims COLO. REV. STAT. § 38-38-506.
(E8)See 26 U.S.C. § 7425
(E9)Readers should consult 3 COLO. CODE REGS. § 702-3:3-5-1 (2010) which precludes title companies from providing owners and encumbrance reports at no charge.
(E10)Which would cause a foreclosure investor to perceive that the lien being foreclosed was a second deed of trust, rather than a first deed of trust.
(E11)Which could cause the foreclosure investor to perceive that he was bidding on a senior lien (because of its prior recording date) rather than a junior lien that had been subordinated pursuant to the missed subordination agreement. It might also cause an investor to pass up an opportunity, perceiving that the lien being foreclosed was more junior than its true priority.
(E12)COLO. REV. STAT. § 38-38-103(4)(a)(VII) and COLO. REV. STAT. § 24-70-109 require that all legal notices published to advertize a foreclosure contain a statement reading, “the lien being foreclosed may not be a first lien.” The lore of foreclosures is that this requirement was added to the statutes when a Colorado state legislator bought a property at foreclosure auction thinking that he was stealing a property while bidding on the sale from a first deed of trust, when the deed of trust actually being foreclosed was a second deed of trust.
(E13)See COLO. REV. STAT. § 38-37-108
(E14)COLO. REV. STAT. § 38-38-501
(E15)COLO. REV. STAT. § 38-38-501