One of the owners in our Association is losing his home in a Trustee’s Sale. What is that and what does this mean for our Association?

By Beth Mulcahy, Esq.

If an owner becomes delinquent on his/her mortgage or deed of trust mortgage, the deed of trust company may initiate foreclosure proceedings on the owner’s property by  noticing a Trustee’s Sale.

Secure the association’s interests: A lien places the Trustee on notice of the association’s interests, so the association will receive notice of the Trustee’s sale and notice of excess proceeds generated at the Trustee’s Sale, if any.

Generally, the Notice of Trustee’s Sale will include the following information: 1) the Trustee of the sale, sale location and a contact information for additional information; 2) description and address of the property subject to the Trustee’s Sale; 3) name of the beneficiary – e.g. mortgage company or deed of trust; 4) the recording number of the mortgage or deed of trust subject to foreclosure; 5) the principal balance owed; 6) the Trust or – e.g. the owner of the lot; and 7) the date of the Trustee’s Sale.

A Notice of Trustee’s Sale will be recorded with the county recorder’s office and posted at the property being sold. The beneficiary (mortgage or deed of trust company) will assign a Trustee to manage the affairs of the Trustee’s Sale. The Trustee may be contacted for updated information regarding the status and results of the sale.

Events that may occur regarding a Trustee’s Sale:

Postponement of a Trustee’s Sale: If the owner enters into a mutually agreeable payment arrangement to pay off the delinquencies with the bank if the owner files for bankruptcy the Trustee’s Sale may be postponed.

Cancellation: If an owner pays off the mortgage, brings the delinquent balance current or refinances the property, the Trustee’s Sale may be cancelled. If the owner refinances, the association may be able to be paid through the closing.

Revert back to the beneficiary: If no one bids for the property at the Trustee’s Sale, the property will revert back to the deed of trust company. Accordingly, the owner will lose  title/ownership of the unit/lot and the deed of trust company becomes the new owner. A Trustee’s Deed will be recorded showing transfer of ownership to the beneficiary.

Sale: The property may be sold to a third party. Excess proceeds may be generated or the bid/purchase amount may be so low that no excess proceeds are generated. If excess proceeds are generated, the association can make a claim for them if money is owed to the association. A Trustee’s deed is recorded showing transfer of ownership to the third party purchaser for both types of sale.

After the Trustee’s Sale:

New Owner: Trustee’s Sales are a unique sale of property in which the purchaser (either the beneficiary or a third party) takes title of the property free and clear of junior lien holders. The association lien is second to the First Deed of Trust/First Mortgage; thus, if the First Deed of Trust/First Mortgage is the foreclosing party, the association’s lien will be wiped out through the Trustee’s Sale. The new owner will only be liable to the association for amounts due and owing after the date of the Trustee’s Sale. However, if the foreclosing party is the Second Deed of Trust/Second Mortgage, the association’s lien will remain pending against the lot/unit.

Former Owner:  The former owner (e.g. owner that lost the property at the Trustee’s Sale) remains personally liable to the association for past due amounts (unless a bankruptcy is involved). The association may pursue the owner personally for breach of contract; however, our firm recommends that the association run a credit check so as to determine whether the owner is collectible.

Events that require close monitoring:

1.The association may obtain information that the owner(s) filed for bankruptcy, transferred ownership (sale) or intends to sell the property.

2. If the property is sold at the Trustee’s Sale and excess proceeds are generated, the association should quickly send a request for excess proceeds directly to the Trustee.State law also provides that the association shall be paid first in line after the first deed of trust/first mortgage/and tax liens are paid off. Therefore, the association has a very strong probability of being paid by the Trustee with little cost to the association.)

3. If the property is sold at the Trustee’s Sale and excess proceeds are generated, but are deposited with the County Treasurer’s Office, the association will need to file a timely Answer/Application for Release of Excess Proceeds in the case. If this occurs and an attorney was not monitoring the sale, our firm recommends that your association consult with an attorney.