Avoiding the Pitfalls of Buying Property at Foreclosure

This article will discuss each of these questions and suggest a course of action to consider.

Prior to the entry of a foreclosure judgment, the mortgagor is the owner of the property as a mortgage does nothing more than give the mortgagee a lien upon the mortgaged premises.³ Indeed, the common law doctrine that the mortgagee held title or any incidents thereof was abolished long ago.⁴ Through the mortgage and lien, the mortgagee has the power to take action to protect its interest in the property even though it has no actual legal or equitable title thereto.⁵

After foreclosure of the property but before the sale, the mortgagor/owner is divested of most of his rights in the property, but retains the right to redeem the mortgage should he choose to do so.⁶ Things change however after the foreclosure sale.

Title After a Sale

Controversy exists over who holds title during the period following a foreclosure sale but prior to closing and delivery of the deed. This period has been referred to as the “odd hiatus period” in which puzzlements are many and answers are not so neatly offered.⁷

After the foreclosure sale, the mortgagor/owner is divested of every right in the premises except formal legal title⁸ and is barred from bringing any action relating to it,⁹ including the right of redemption.¹⁰

Title companies regularly certify legal title in the name of the court appointed referee making them the owner of the property for the purposes of the closing.¹¹ However, a referee has little personal interest in or control over the property. Courts have routinely defined a referee as a ministerial officer appointed to act in the court’s place or to perform a particular task to aid in the resolution of a dispute.¹² Since a referee’s power over foreclosure proceedings is as an officer of the court, his interest in the property is only that of the court’s.¹³

The successful bidder at a foreclosure sale is entitled to good marketable title,¹⁴ but does not obtain legal title to the property until there is delivery of the deed to him, until then he retains only equitable title.¹⁵ Indeed, in the case of a purchaser who has obtained a deed the right to possession, and therefore control, is not available because the purchaser is not the legal owner.¹⁶

In summary, after a foreclosure sale but prior to closing: the successful bidder holds equitable title to the property; the mortgagee, through the power of the court decree, has the ability to force a transfer of legal title from the mortgagor/owner to the successful bidder; and the mortgagor/owner retains formal legal title without power to redeem and/or transfer the property.

Damage to the Property

A mortgagee’s rights to recover for acts of waste to the property before the foreclosure sale is clear and has been recognized based on the mortgagee’s interest in maintaining the security of the mortgage value.¹⁷ The mortgagee is entitled to collect in an action for waste prior to the foreclosure sale because of the foreseeable reduction in value, and thus in the purchase price at the time of sale.¹⁸ However, the existence of such remedy in favor of a mortgagee excludes action by purchaser at the foreclosure sale.¹⁹

But, what are the rights of the successful bidder after the foreclosure sale? The Uniform Vendor and Purchaser Risk Act (the Act) governs the rights of a buyer and seller of real property with regard to the risk of loss between the time of contract and the conveyance, i.e., the transfer of the deed.²⁰ This statute has been routinely applied to judicial sales including foreclosure sales.²¹

Effective in New York since 1964, the Act states:

If the property becomes materially damaged before a closing, without fault of the purchaser, the Act has been interpreted to allow the purchaser the option to either rescind or enforce the contract with an abatement in the purchase price.²³

Accordingly, if the property is damaged after the foreclosure sale but prior to closing through no fault of the successful bidder, the bidder is entitled to the diminution in value of the property through an abatement of the purchase price or may elect to rescind the contract.²⁴

In the case of Onondaga Savings Bank v. Wagner²⁵ the Supreme Court upheld the purchaser’s right to elect between rescission of the contract and an abatement of the purchase price against the mortgagee when the property purchased at a foreclosure sale was partially destroyed prior to closing by vandalism of various fixtures, cabinets, appliances, etc., totaling nearly $7,000.00 in damages. The Court stated that: “the intent and purpose of the statute would not be furthered by affording the mortgagee greater protection against risk of loss than that afforded to the purchaser.”²⁶

Nevertheless, the statute also provides that the parties are free to contract around this “entitlement to relief.”²⁷ Thus, the contract for sale may provide that the risk of loss or damage is assumed by the purchaser. In this situation, the purchaser would be barred from receiving either remedy.²⁸ The terms of sale read by the referee at the time of sale constitute the “contract” between the purchaser and the Court. Since the mortgagee prepares those terms for Court approval, they may allocate the risk of loss between the parties and may transfer the risk of loss from the time of the foreclosure sale to the purchaser.²⁹

In the event an action for waste exists, courts will not allow multiple parties to collect against the same damage. Once a mortgagee collects for waste, the purchaser at foreclosure is barred from recovery for the same waste since he has already received the benefit of a decreased sale price. Likewise, once the purchaser takes the title and accepts the delivery of the deed, a mortgagee can no longer bring an action for waste as the mortgage debt is extinguished and the mortgagee no longer has any interest in the property.³⁰

Finally, once a mortgage has been foreclosed and title passed to the successful purchaser at closing, the mortgagor/owner loses his title to the property and no longer retains any interest.³¹ Accordingly, he is no longer entitled to collect for any damages to the property. Further, because his interest has been extinguished, he has no right to remove any fixtures or appliances therein.³²

Conclusion

In our example, Bidder A received equitable title to the premises at the time of the foreclosure sale and is entitled to good marketable title thereto at the closing. As a result of the damage discovered by Bidder A subsequent to the sale, he has two options: