Dear Real Estate Adviser,
Our lawyer tells us we can go to auction and buy back our own house if we have the cash. We're wondering why more people aren't doing this. I had thought there was some law that prevents this. We're losing two homes, our primary and a rental, and we'll be out of both by mid-December. We think we could possibly buy back the rental. What are your thoughts?
-- Beverley M.
There's no law against this practice and yes, we see it happening a little more frequently these days. After all, a former owner's cash is as good as anyone's cash.
"Cash" is the watchword here, in fact. Beleaguered folks such as you, who are losing their homes to foreclosure, are typically short on the green stuff. And some critics would comment that if you have the wherewithal to buy back a house that you'll soon be relinquishing, then why not apply those resources to prevent a foreclosure in the first place? That is a good point.
However, while I can't condone stiffing a lender on a deal you signed off on in better times, I do realize staying the course is sometimes not fiscally prudent given today's market realities. For starters, we're talking about a pair of homes here, each probably losing 30 percent or more of its value in the downturn. And depending on mortgage terms and how many mortgages you had in the two houses, there's a strong likelihood that you're deeply underwater on them.
Hence, the possibility of satisfying those notes -- even at renegotiated terms, much less original terms -- is probably pretty slender. For the sake of argument, I must also assume that any efforts you made to get these loans modified for lower payments and/or interest rates were not successful, and that a short sale is not a viable option. (If you haven't explored these options, ask your lender about them.)
Before making plans to head to auction, know some of the potential complications of trying to buy back your own foreclosed house. It's true that the winner of a conventional auction -- but not a sheriff's sale auction -- usually acquires the house free and clear, sans any need to settle the previous owner's collateral obligations. But such a sale does not extinguish the original debt, which in this instance was incurred by you.
So, if you bought back the rental house, you'd still be on the hook for the difference between what the house sold for and what you owed for it. That debt could in effect be merged back or "reattached" to the house -- and you. Lenders do have the latitude to forgive some of the debt in such situations. So a negotiated discount conceivably could lead to you buying back the same home at a much cheaper price.
There may be another option. While homeowner rights vary greatly from state to state, some states such as California, Nevada and Colorado require foreclosures to be processed through state courts in a process known as judicial foreclosure. In such judicial-foreclosure venues, you have a statutory "right of redemption" that affords you a short window of time to regain ownership of your home after it's been sold at foreclosure auction. Lenders dislike this greatly, naturally, because it muddies the ownership waters and stalls the final resolution.
In a nonjudicial foreclosure state, where foreclosures are processed with no court intervention, there are no such redemption rights, by the way. Read more about foreclosure laws in your state at the United States Foreclosure Laws website.
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