During the foreclosure crisis, foreclosure sales frequently resulted in a deficiency, which means the property sold for less than the borrower owed the lender. But now that the real estate market has mostly recovered, foreclosure sales often bring in more money than the borrower owes.
Read on to learn how foreclosure auctions work and get details about what happens to the extra money when a property sells for more than the borrower's total debt.
Depending on state law and the circumstances, a foreclosure is either judicial or nonjudicial. At the end of the process, a trustee or an officer of the court, like the sheriff, will typically conduct a foreclosure sale. (In two states—Connecticut and Vermont—a judge who approves a foreclosure can give title to the home directly to the lender.) In the past, foreclosure sales almost always involved an auctioneer selling the property from the courthouse steps or another public area. Now, the auction can either be live (in-person) or online. Online foreclosure sales are becoming more and more common.
At the foreclosure sale, the high bidder might be the foreclosing lender or a third party. If the lender makes a credit bid and no one else makes a higher offer, then the lender gets the property, and it becomes REO. If a third party makes the highest bid, that person or entity must then pay for the property with a money order, cashier's check, or cash to become the new owner of the home.
During the Great Recession, the purchase price at most foreclosure sales was either the loan balance or a lesser amount. Now, though, foreclosure properties often sell for prices that are more than what the borrower owes the foreclosing lender. The amount by which the purchase price exceeds the loan balance is called "excess proceeds."
If a foreclosure sale results in excess proceeds, the lender doesn't get to keep that money. The lender is entitled to an amount that's sufficient to pay off the outstanding balance of the loan plus the costs associated with the foreclosure and sale—but no more.
Generally, the foreclosed borrower is entitled to the extra money; but, if any junior liens were on the home, like a second mortgage or HELOC, or if a creditor recorded a judgment lien against the property, those parties get the first crack at the funds. Then, any proceeds left over after paying off these liens belong to the former homeowner.
Example. Jack and Georgia go through a foreclosure. At the foreclosure sale, their home sells for $350,000. The loan balance that they owed to the foreclosing lender at the time of the auction was $325,000. So, the sale resulted in excess proceeds of $25,000. The property was also subject to a second mortgage in the amount of $15,000 and a judgment lien for $5,000 due to unpaid credit card debt. In this situation, $325,000 goes to the foreclosing lender, $15,000 goes to the second mortgage holder, $5,000 to the judgment creditor, and $5,000 to Jack and Georgia.
Typically, if a sale has excess proceeds, the trustee or other sale officer has to send a notice to the foreclosed homeowner's last known address. But the last known address is usually the foreclosed property. Because most people don't realize they're due any excess proceeds, they tend to vacate a foreclosed property without leaving a forwarding address. So, it's difficult for a trustee or other sale officer to find foreclosed homeowners after a sale.
Because a sale might generate excess proceeds, it's a good idea to track the process. You should take note of the sale date, which will be included in the foreclosure documents you receive. After the auction, contact the trustee or officer that sold the property. (This information, including the trustee or officer's name and phone number, should also be in the paperwork you received during the foreclosure, as well as in your local newspaper's legal section where the sale notice was published. If you can't figure out who conducted the sale or how to contact that person, call your loan servicer.) Ask if the auction generated excess proceeds. If so, be sure to give the trustee or officer your new address and follow up with a letter—sent by both certified mail/return receipt requested and regular mail—with your new address and contact information. Also, ask what you need to do to claim your share, if any, of the proceeds.
If you need help recovering the excess proceeds after a foreclosure sale, consider talking to a lawyer. If you can't afford to hire a lawyer, you might qualify for free assistance from a local legal aid office.