ForeclosuresReal Estate Law

All foreclosures are not created equal

I’ve fielded many questions from real estate investors about how a foreclosure works in Ohio. The most common question goes something like this: “do I get clear title if I buy this property,” but what they’re really asking about is the risk. The only real answer to this question is, with any other area of law, “it depends.”

Everyone’s standard expectation at a foreclosure sale is that the high bidder will get the property free-and-clear. Since this is the way the vast majority of foreclosures work, it’s certainly not an unreasonable expectation. However: there is no law that requires this to happen. In order to understand this, it’s necessary to explain how a foreclosure works in Ohio.

The plaintiff brings a complaint in court for foreclosure. This could be the lender, the county auditor (for unpaid taxes), a contractor with a mechanic’s lien, or a judgment lienholder (a future article will be written on these special claims on real estate).

The plaintiff orders a title search called a “preliminary judicial report” which shows all the people who might claim an interest in the property. This includes owners, other mortgages, liens, etc. This is a critical step that identifies the people who must be included in a lawsuit to obtain title to the property. Since the plaintiff is trying to repossess the property, they are asking the court to take property from someone else. A person cannot be deprived of their property without “due process of law.” In most states, this means that they must be made a part of the lawsuit so they can defend themselves.

A preliminary judicial report might list out the interest-holders like this:

Record owner John Smith and Mary Smith by deed dated 1/1/1901 and recorded 1/1/1901 in the Cuyahoga County Records, Book 200, Page 3.
Subject to the following interests:
1. Mortgage to Goliath National Bank dated 1/1/1901 and recorded 1/1/1901 in Cuyahoga County Mortgage Records, Book 5, page 20, with a face amount of $100,000.
2. Judgment lien filed in the Cuyahoga County Court of Common Pleas captioned St. Sebastian Hospital v. John Smith, case number JL-20-123456, in the amount of $5,000 plus court costs and interest from 1/1/1920.
3. Mechanic’s lien affidavit dated 1/1/1920 and recorded 1/30/1920, executed by Mike Contractor, affiant, asserting a claim for $50,000.
4. Notice of federal tax lien dated 1/1/1921 and recorded 1/2/1921, in the amount of $100,000.

It is important to note that if the plaintiff doesn’t add everyone with an interest, it doesn’t necessarily void the foreclosure, but it does deprive the court of jurisdiction against the person who was not added to the suit. Sometimes this is done strategically. An example of where this might happen is when the plaintiff holds a second mortgage on the property, and would like to keep the first mortgage in place when they take control of the property. In this situation, the plaintiff would deliberately avoid naming the first mortgage lender in the lawsuit, which would result in the property being sold “subject to” that mortgage. This isn’t permitted in all courts, but it is technically in line with the rules.

Speaking of what is permitted in the courts: ultimately, the terms of the sale are determined in the foreclosure decree which is signed by the judge and has the force of a court order. The decree will usually list out all the people who hold an interest or lien on the property, will grant judgment for the plaintiff, order the sale of the property, and list out how the sale proceeds are to be distributed. Although this decree will be identical in the vast majority of foreclosures, it doesn’t have to be this way. The decree is usually drafted by the plaintiff and signed by the judge, which allows the plaintiff a lot of leeway as to how the foreclosure sale will happen. If the plaintiff wants to keep a lien on the property for whatever reason, this is where they can make it happen. And remember, as explained in (2) above, if the plaintiff doesn’t name that person as a defendant, the court has no right to throw out that defendant’s claim.

Once the decree is filed, the sheriff receives an Order of Sale from the clerk and advertises the sale for a few weeks. The ad is drafted by the plaintiff. It is here where many sales can be overturned if there are any surprises that weren’t disclosed, as the law requires the plaintiff to include certain disclosures in the ad. The plaintiff then gets the right to bid on the property at sheriff sale, and will receive a credit for what they are owed.

The sheriff holds the sale and sells the property. But wait — the bidder does not own the property yet!

The court must confirm the sale after giving the borrower a certain amount of time (usually 14 days) to redeem the property by paying the debt off. The law allows the borrower one last chance to keep the property and pay the debt, which is really the point of the whole foreclosure process. If the borrower doesn’t pay by the deadline, the court issues a Confirmation of Sale and orders the sheriff to issue a deed to the buyer. Title to the property passes when the court confirms the sale.

It’s important to note that the buyer has a narrow window of opportunity to get out of the sale if there are any problems with how the sale happened — it should happen before the sale is confirmed. The courts are very reluctant to undo a sale once they’ve finalized it. However, this doesn’t mean that the buyer can get out of the sale without a reason — they will typically be on the hook for interest and court costs of holding a new sale if they can’t prove that the sale is invalid for some reason.

The high bidder at the sale might have clear title after the confirmation, if any of the below doesn’t apply (and certainly this is not an exhaustive list):

  1. The high bid exceeds the amount of court costs and property taxes that must be paid. If it doesn’t, the county usually retains the right to charge the new owner for the balance of the unpaid property taxes.
  2. There are no mistakes in the initial title search. If the preliminary judicial report misses a lien, it’s not removed from the property by the sale.
  3. The buyer is related to the owner in a tax foreclosure. State law prevents an owner from using the tax foreclosure process to avoid paying their taxes. If it’s determined that the buyer has a relationship with the owner, they could be stuck with the tax bill if the sale price is lower.
  4. The foreclosure decree doesn’t specify that the liens are extinguished. This is critical, because a court has the power to preserve a lien on the property if the plaintiff wants it. Sometimes it’s a scam run by the plaintiff to keep others from bidding on the property, other times it’s inadvertent, other times it’s because the first mortgage is current. It’s critical to read the decree and understand what’s happening.

Conclusion

There are many places where a foreclosure can go south — a bad title search at the outset, a plaintiff that wants something unusual from the court, or any number of other issues that might come up. Overall, it’s not for the dabbler. If you’re interested in bidding on foreclosures, it’s critical to know how to find and read a judicial report and foreclosure decree to understand what you’re really buying. We can guide you through this process with a few short lessons. Happy bidding!

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