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Foreclosure Sale Process for Bankers and Bidders

Posted by attorney Luke Thomas

While there are a plethora

of possible foreclosure sale

scenarios, this article is going

to focus on the scenario most

common to our clients-—

where the senior mortgage

holder is also the only

(serious) bidder at the sale.

Being unsure of what their

required to bid, many mortgagees

will bid the outstanding

balance at the time of the sale.

This approach provides the

easiest method to bid formulation.

However, it has two key


First, if the sales price is

less than the outstanding balance,

the mortgagee has an

absolute right to have a

“deficiency" judgment entered

against the mortgagor. The

judgment amount is calculated

by subtracting your bid

amount from the total outstanding


For example, if your loan

balance, plus all related foreclosure

expenses total

$100,000 and your bid at the

foreclosure sale is $75,000,

you not only receive title to

the real estate, but also will

have a judgment against the

mortgagor in the amount of


You will be entitled to

enforce this subsequent judgmen

In addition to

losing your right to

collect a deficiency,

the second main

disadvantage to

bidding the outstanding

balance is

it may fail to take

into consideration a


in market

value of the real

estate since the time

the loan originated.

This increases the likelihood

your institution will be required

to show a present loss

when you sell the property.

Let’s take this analysis to

the opposite extreme. Again,

your outstanding balance is

$100,000. You are the only

bidder at the sale. Why not

then bid $1 and take a deficiency

judgment for the remaining


You would not only get the

real estate, but also have the

right to essentially collect all

of your money.

Before we reformulate our

strategies to all bid $1, an

examination of what the law

will require to “confirm" our

sale and withstand subsequent

scrutiny is in order.

Illinois law provides that a

foreclosure sale must be confirmed

unless “

the court finds

notice was not given, the

terms of the sale were unconscionable,

the sale was conducted

fraudulently or that

justice was otherwise not


Besides the notice requirements,

there is little to no

guidance provided as to when

the terms of sale are unconscionable

, when the sale is

conducted fraudulently, or

whether or not justice was not

otherwise not done.

Back to our example—

you’re the only bidder that

showed up and made the only

bid. There cannot be anything

inherently unconscionable,

fraudulent or unjust under

this scenario.

Our United States Supreme

Court weighed in in

the case of

BFP vs. Resolution

Trust Corporation.

At that

time, Illinois law barred evidence

relating to the “true

fair market value" after the

foreclosure sale had been

conducted; the highest bid

was conclusive as to the property’s

value at the time of the


In deciding the

BFP case,

the Supreme Court must

have anticipated our $1 bid

tactic, holding


amount of the mortgagee’s

debt satisfied as a

result of the foreclosure

sale must be the

“reasonable equivalent"

of the value of

the real estate at the

time of the sale.

Luckily, a thorough reading

of the Supreme Court’s

decision reveals “reasonably

equivalent" does not equate

to “fair market value".

The Supreme Court leaves

us considerable cushion,

recognizing valuing distressed

property is difficult and

would place an onerous burden

on the courts and creditors.

Rather, the Supreme

Court indicated it would

decline to interject if the

state’s foreclosure procedures

were followed, specifically

holding the “reasonably

equivalent value" will be

whatever price the foreclosure

sale brings.

A bit ambiguous? Yes!

Double-speak? Probably.

You’ve bared with me

through the analysis up to

this point. And while it will

require your author to put

his neck a bit on the line, you

will be rewarded for your

patience with a fairly safe and

simple way of formulating

your proper bid—but first a

bit more analysis so you understand

the basis of my


The BFP case heavily discussed

the way the federal

bankruptcy system views

“reasonably equivalent" value

when a foreclosure sale is

being analyzed in the context

of a bankruptcy proceeding.

Back to our $1 bid—if your

customer realizes he will lose

his property and still owe you

the entire balance, he may be

encouraged to file for bankruptcy.

In bankruptcy, the bankruptcy

trustee steps in the

debtor’s shoes. Considering

this, the trustee may wish to

then challenge the legitimacy

of our sale and $1 bid, requesting

the bankruptcy

court’s intervention.

There are a line of bankruptcy

cases which have held

that pre-bankruptcy sales of

property which bring

70% of

the fair market value


withstand a request for judicial


70% of the fair market

value you say? If you have a

recent (less than 6 months

old) appraisal, then using

70% of the fair market value

disclosed in appraisal may be

a realistic way to formulate

your bid.

Generally, you will want

your bid to be on low, conservative

side of what you

believe the current fair market

value of the property to

be, taking into consideration

the current condition of the

property and market conditions

in the locale.

By following these principles,

you will have formulated

a bid which will maximize

your recovery while withstanding

judicial scrutiny.

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