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Foreclosure Overbids in a Seller’s Market

Remaining Overbid Funds Now Go to Borrower After Payment of All Liens

It is no secret that the residential real estate market in the Denver metro area over the past year and a half has been thriving for sellers and challenging for most buyers looking to purchase a new home due to low inventory and competitive sales strategies.  Moreover, not only is it challenging to try to locate a property to purchase on the open market; it is similarly difficult to purchase a property at foreclosure sale due to existing COVID-19 foreclosure moratoriums.  However, with foreclosure moratoriums likely to expire in the months ahead, it is inevitable that foreclosure volumes for residential properties will increase due to borrower defaults both before and during the COVID-19 pandemic, resulting in more properties available for purchase at foreclosure auction.

With the current real estate market holding strong for sellers, many struggling borrowers will be able to take advantage of the strong marketplace and sell their properties for more than they owe to their lien holders to avoid foreclosure.  Notwithstanding market strength, there will be borrowers that cannot, or choose not to sell their homes to avoid foreclosure.

For the residential properties in foreclosure that have substantial equity over and above the debts against the property, these properties will no doubt be hot commodities for investors to bid on, and hopefully purchase at foreclosure auction.  Therefore, it is certain that many distressed borrowers will have their homes sold at foreclosure sale where competitive bidding results in the property being sold at foreclosure sale for an amount that far exceeds what the borrower owes on the loans secured by the property.

When a property being foreclosed is sold at foreclosure sale for more than the borrower owes on the loan being foreclosed, the bid is called an “overbid.”  If the foreclosing lender’s lien cannot be satisfied from the proceeds from sale, the overbid first goes to satisfy any deficiency owed by the foreclosing lender up to the full amount of the obligation owed to the foreclosing lender.  Once the foreclosing lender’s lien is satisfied by the proceeds from sale, the remaining overbid amount goes to satisfy junior lienors with a recorded interest in the property as of the recording date of the notice of election and demand or lis pendens, and then according to their order of lien priority determined as of the recording date of the notice of election and demand or lis pendens.  Overbid amounts are only available to junior lienors to the extent that the junior lienor filed a timely intent to redeem the property and has not been redeemed.

As of May 28, 2021, if overbid funds remain after payment of qualifying junior liens, the remaining overbid amount shall be paid to the “borrower,” meaning a person or entity liable under an evidence of debt.  Prior to May 28, 2021, any remaining overbid funds were to be paid to the “owner” of the property being foreclosed as of the date of the recording of the notice of election and demand in the county where the property is located.  In many instances, the “owner” of the property was reflected as someone other than the borrower being foreclosed, making it difficult to locate the non-borrower owner to remit the overbid funds.  In other instances, the mere fact that the “owner” was entitled to the remaining overbid funds after payment of all liens led to unscrupulous predatory lending situations where the borrower in foreclosure ended up losing their property and not receiving any overbid funds.

With the change in the law effective May 28, 2021, distressed borrowers will now be able to take advantage of the strong real estate market even if the borrower is not able to avoid foreclosure, as now any remaining overbid amount remaining after payment of all qualifying liens will be paid to the borrower, allowing the borrower to reap the benefits of the equity in his/her foreclosed property.

This article is not intended to constitute legal advice.  Please contact me should you have questions regarding foreclosure sales or overbids.

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