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Law Offices of Ronald W. Rutz
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May 23, 2001: Foreclosure Procedure

Q: I read your column last year about investing money by buying tax certificates at the county tax sales and earning 14% or 15% interest. I did so and am very happy. But I also bought a video on buying properties at foreclosure sales but can not seem to connect it to Colorado law. Could you write about this?

A: I have gotten a good number of very positive responses about that old column but please remember that the column contains red flag guidelines. Not all tax certificates are created "equal". So reread the column before the next round of county tax sales that begin next winter.

In order to increase the chances that loaned money will be repaid, lenders take "security" so if the borrower breaks his or her promise to repay under the terms of a promissory note, the lender has an asset to take back or sell and hopefully "be made whole" from the value of the asset to replace the loaned but unpaid back money.

This arrangement usually involves a mortgage, a deed of trust, or some type of escrow arrangement when real estate is the security.

Most states use a mortgage with a note. Then if a default under the terms of the promissory note occurs, the mortgage gives the lender the right to go to Court and sell or gain title to the real property. But the major problem is Court the expense and time delays going through the Court process.

Thus escrow arrangement evolved where a fiduciary holds two sets of executed documents one releasing the legal affects of the mortgage if the note is paid and another set transferring the real estate to the lender or depositing the documents with the Court if a default occurs. The escrow agent has a "contract" signed by both parties telling the escrow agent what to do depending upon notification by either the lender that a default has occurred or the borrower and lender that the promissory note has been paid.

Here in Colorado and many Western States we can use a mortgage or an escrow arrangement. But the preferred security device is a deed of trust. The legal distinctions between these forms of security are far beyond the word limitations of this column. But as a general rule a deed of trust is faster and far less expensive than trying to use a mortgage.

If default occurs, the foreclosure procedure is a two-prong approach. On one side papers are given to the public trustee who handles the sale by advertising to the public the date of the auction, giving notices to all interested parties of the proceedings (such as others with a security interest), and actually conducting the sale (traditionally on the east side at the courthouse and on the steps in front of the door). There is also a "120 hearing" where the borrower can bring facts to the attention of a Judge as to why the Public Trustee should be stopped from selling the property.

At the sale the lender normally bids what is owed plus expenses. Here someone else has the right to bid more and if the property is not "redeemed," then the highest bidder gets the property. (This is the so-called auction on the Courthouse steps.)

But the borrower has the right to get the property back after the sale by paying off the bid amount (owners of rural property have up to six months and urban property has 75 days to do so after the sale). Some investors buy the borrower's right of redemption.

If the borrower does not redeem, then any junior lien holders (recording after the deed of trust being foreclosed) have a right to cash out these ahead so they can maintain their security position. Some investors buy in here taking over the junior's right.

But all of this is tricky, so knowing the true net value of the property plus all of the legal and financial baggage that a particular property carries, are keys in succeeding or in taking a financial bath. Thus to be successful you must follow the words of Sergeant Friday of the old Dragnet series and rely upon "Just the facts, Ma'am", at least to the extent that you can dig them out.

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