When a bank forecloses, they have a fiduciary duty to the debtor to sell the house for the most amount of money and theoretically the debtor could end up making money off the sale.
This question deals with the situation if I own some property and owner-finance it to a buyer. They pay off $20,000 of the principal and stop paying. I foreclose and now own the property. What fiduciary duty do I owe the debtor?
Same duty as the bank would. You sell the property, take what is owed to you (inc. costs, interest and penalties, if any) out of the proceeds and remit any balance to him.
What if I want to keep the property?
Tricky. There’s an obvious conflict of interest there between your personal desire to keep the property, and your fiduciary duty to the owner. Your interest in the property is given to you for the purpose of securing the debt owed to you, not as a back door to acquiring for yourself.
If what you want to do is keep the property, then the obvious and proper course is not to sell it in the first place. But if you’re past that point, whatever you do you need to do with the full understanding, consent and agreement of the owner. Perhaps you agree with him that you will get an independent valuation and buy it at that price, less the amount already owed to you. Just make sure you get his written agreement, after he has had independent legal advice, because if he ever challenges the propriety of what you have done, you will be very much on the hind foot.
Wouldn’t the simplest thing be to simply sell it via auction?
That’s one possibility. But you need to be sure that, if challenged, you can show that this was a genuine public auction at which you bona fide endeavoured to maximise the sale price and you didn’t, e.g. time the auction or trim the advertising with a view to your own advantage as a potential bidder. Again, because you’re a fiduciary simply being in a conflict of interest situation tells against you, even before any evidence that your actions were actually motivated by self-interest.
The bottom line is that you’re not supposed to put yourself in this situation. If you want to buy the property, do not take a mortgage over it.
I have bought one and sold two houses using a contract for deed. The contract called for principal and interest payments similar to a mortgage followed by a balloon payment after a fixed amount of time. In all three contracts it was explicitly stated that if the buyer failed to make the payments the seller would retain ownership of the property and all payments made would be considered rent. There would be no need for foreclosure, because under the terms of the contract the buyer would not actually own the property until the contract was fulfilled.
I’m not sure why the Wikipedia article is called Land Contract. The lawyer who wrote up our contract told us that land contract is a colloquialism and that contract for deed was the correct legal term.
Be very careful in using a land contract or contract for deed, as they are illegal or unenforceable in many states.
In fact, that is a required step in foreclosing in many states.
The bank never owns it, they merely have the right to sell it.
The naming of a “land contract” may be defined in state law…
As there are 50 states of the USA and 20 or so countries in the world which use English as the official language…
There are of course many different version of a contract for sale of land, and the law of the state may well not attempt to name them, but rather operate to simply ban the duration of the contract going on to long before the transfer is finalized…
The situation here in the UK is pretty much the same. Selling at auction should avoid accusations of underselling but…
There have been cases where an estate agent (realtor) has colluded with others to sell a house at well under market value. For example by putting it in an auction of commercial property, failing to advertise or some other ploy. This would be illegal of course, but might be difficult to prove.
Except if you’re a fiduciary, you bear the onus of proof that you conducted yourself appropriately.
When the bank-lender forecloses property, it does not sell it. To foreclose any lien, an action must be brought and a decree of foreclosure will be entered if the owner remains in default. The owner has a certain period of time to redeem the property after the decree, and if not redeemed it will be sold at a public sale (auction). A certificate of sale is issued to the purchaser (usually the bank) and the owner has a certain period of time again to redeem before a deed is issued. Anybody having an interest in the property, such as other lienholders, must be made parties.
The law varies by states, but most states adopt the above in some form. There is a type of mortgage called a deed of trust wherein the actual title is conveyed, but the equitable title remains in the borrower. Usually periods of redemption are shorter here, but it varies by state. In a few states, the regular mortgage does convey the title, but with similar conditions as a deed of trust.
Can you elaborate? We bought our house under contract for deed because I was in college when it became available (wife’s great grandpa died) and her grandparents who inherited it wanted us to have it. So it was less of a contract and more of a “wink wink, you pay us token payments until you graduate and can afford a mortgage and it’s yours”. But we had an actual notarized contract and paid taxes and insurance in addition to payments on the house.
Which part would be illegal in many states? The selling, or the buying? Or the living there? What about “unenforceable”? Does that mean they could have taken our house at any time (there was never any doubt about them owning the property while we lived there but nevertheless they treated it like it was our house and we never questioned that we would own it eventually – though we probably wouldn’t have trusted this deal with anyone but family)? Or that we could have stayed there indefinitely without payments if the owner wanted to renege?
Just curious, as I hadn’t heard this about contract for deed before. I knew it was rare, but never thought it was illegal or invalid.
I’m not sure about every state, but the ones that I am aware of treat a land contract as a mortgage in the event of a breach. These states hold it against public policy that you can pay $99,900 of a $100,000 home purchase, but the seller gets to keep everything when you fail to pay that last $100.
These states hold, that no matter the words in the contract, that it will be treated as a mortgage, foreclosure proceedings must commence, sold at auction, etc. No just booting the tenants to the curb.
It’s not illegal in the sense that people will be fined or go to jail, just that courts will treat it as if it was a mortgage.
This couldn’t have happened with any contract for deed I’ve been involved with or known of. They were for a fixed amount of time - 5 years with payments calculated like a 30 year loan and a balloon payment at the end. At which time we had to either get a real mortgage to pay off the contract or move out as if our lease on a rental was up. When we sold we had the contract drawn up by a lawyer to make sure it was enforceable.