How do you buy a property, after the Sheriff's sale, without purchasing it from the highest bidder? You buy the right the right to redeem from the defendant/property owner!

The property owner (or assignee) has 10 days to exercise the right to redeem. If objections to the sale are filed, then the right to redeem can be exercised until the order is entered confirming the sale. To redeem the property, the mortgage debt plus foreclosure and sale costs must be paid. Typically, the defendant does not have the cash or credit to redeem the property or they would not have been in foreclosure.

However, the right to redeem the property is a valuable right and can be sold or transferred just like any other right, title or interest in or to real property (NJSA 2A:50-3,4). Therefore, if the defendant can not redeem, he can sell his right to someone who can. The person who buys the right to redeem is called the assignee.

In New Jersey, the owners right to redeem is not written in the statutes, but is provided as a equitable protection against forfeiture of his property. Since the right to redeem is not dictated in statutes, it is subject to judicial scrutiny; especially the conditions relating to assignment and sale.

Once the right to redeem is purchased from the defendant/property owner, the redemption can not be exercised unless application is made and approved by the Chancery Judge and notice is provided to the mortgagor (defendant/property owner). The judge should make certain the defendant/owner had full knowledge and understanding of the transaction and received fair consideration.

Two cases illustrate the courts reasoning for approving the transfer of the right to redeem:

The first case, Lobsenz vs. Micuicci Holdings Inc. 127 N.J. Super 50 (App. Div. 1974), The property was sold at sheriff sale for $100 to the Plaintiff/lender. The amount sought at the sale was $55,330.02. The mortgagor/owner would remain personally liable for the $55,230.02 deficiency amount with no credit for fair market value. An independent appraisal of the property in 1973, provided a $58,000 value.

The owner/mortgagor transferred and assigned the right to redeem (and his rights and interest to the buildings heating system) for $5,000 as long as the assignee could exercise the right to redeem.

The court did not dispute the fairness of the $5,000 in consideration for the right to redeem. However, the court declined the request on the grounds that granting the request would "offend public interest". Specifically, the court said redemption would "seriously impede the judicial process in mortgage foreclosures and lend aid to disruption of orderly mortgage foreclosure sale procedures by speculators in mortgagor's rights".

The case was appealed and the Superior Court decided to approve the transfer and exercise of the right of redemption.

The Superior Court believed all parties would gain by allowing the transfer and would not harm the public interest. The mortgagor/property owner would get $5,000. If the transfer was not allowed, he would be personally liable for over $55,000 and still not have the property. The mortgagee/lender would receive the full amount of the mortgage debt plus his costs and expenses for the foreclosure and sheriff sale. The assignee/buyer would have title to the premises, mortgage free, for which he would pay the excess of $60,000.

In addition, if the transfer was not approved the mortgagee/lender would have received more than $2,500 windfall based on the difference between the deficiency judgment and the property value and would still retain the right to proceed against the defendant/property owner for over $55,000.

In contrast, Heritage Bank, NA vs. Magnefax Corp. 194 NJ Super 376 (Ch Div. 1984), the foreclosure property was aggressively bid. Only $16,000 needed to be raised and the bidding went to $27,100. Since there were no junior liens, the $11,000 overage would go to the mortgagor/ property owner.

After the sale, the highest bidder went to the mortgagor/property owner and obtained the transfer of their fee title and assignment of the right to redeem. He applied to the court to exercise the right to redeem rather than complete the sheriff sale purchase. He did not notify the mortgagors/property owners of the application. The court asked the transferee two times what consideration and what representation were given to the mortgagor/ property owners for them to agree to assign the right and give up receipt of $11,000.

The attorney for the transferee responded in a document labeled "the last documentation my client intends to submit in this matter". The document said "The assignee says that after the sale he inspected the property and investigated the zoning. He discovered facts that made him regret the amount of his bid. He contacted the mortgagors/property owners who told him that they would give him an assignment of their right to redeem and that they wanted nothing for it. In return, he bought them a large fruit basket, offered them free masonry services in the future and has since bought securities from the mortgagors who are stockbrokers. The assignee did not tell the mortgagors there was an overage of some $11,000 that belonged to them".

The court ruled the assignee could not redeem and must complete the purchase of the property he bought at the sheriff's sale according to the terms of that sale.

CONCLUSION:

What is the morale of these two cases? The first case, Lobsenz vs. Micuicci Holdings Inc., needed to be appealed before the court saw the win/win nature of the transaction. This indicates the reluctance of the court to approve such a transaction. While it may appear the assignee over paid for the real estate ($60,000 vs. $58,000 appraised value) the agreement also included the heating system and his intended use of the property may have increased its value.

In the second case, Heritage Bank, NA vs. Magnefax Corp., the assignee was not completely honest with the mortgagor/owner. While some could argue the mortgagor/owner, who was a stockbroker, should be savvy enough to understand the concept of selling a right rather than giving it away (and receiving a fruit basket and future free services). The mortgagor/owner did not know the material fact that the property was sold at auction at a surplus and he would receive $11,000. This writer would bother to find out the auction price of the property, before selling the redemption rights. However, this writer has never been in that situation. Since it is such a painful process, many people would much rather put it behind them.

FACTORS TO CONSIDER BEFORE YOU BUY THE RIGHT TO REDEEM:

The current value of the real estate is greater than all the liens.

The Sheriff's sale price is less than the market value and less than the amount sought. This could result in a deficiency judgment for the mortgagor/property owner and will provide a strong incentive for the transfer of the right to redeem with smaller consideration.

One may want to consider buying the right to redeem rather than bidding the price up at a competitive sheriff's auction. For example, a property is worth $150,000 and $110,000 is the amount of debt and costs. When another bidder bids $100,000, you could stop bidding. He is now the highest bidder and wins. If you buy the right to redeem, you will pay $110,000. You save the defendant a possible deficiency judgment of $10,000 and ensure the price you pay will not go above $110.000. You could negotiate any fair price for the right to redeem. In this example, it could be argued that $1 is a fair price, since the defendant would be subject to a $10,000 deficiency judgment if the property is not redeemed.

The transfer of the right to redeem includes other items from the defendant/property owner which would not be included at the sheriff sale. Personal property, which is not permanently attached to the building, could be included in your offer to purchase the right to redeem. Personal property could include such items as: area rug, furniture, washer, dryer, refrigerator, materials for improvements which were not installed, etc.) The case, Lobsenz vs. Micuicci Holdings Inc., specified inclusion of a heating system. This writer assumes the heating system was not installed and therefore was personal property.

The current value of the property is greater than the sum of the first mortgage, the applicable costs, and all junior liens after you negotiate to buy them at discount (i.e. short sale).

Purchasing the right to redeem can be a successful strategy when there are multiple liens - even if the liens are greater than the market value. For example, suppose the current value is $150,000 and the first mortgage and costs are $110,000. There is a second mortgage for $30,000 and a third mortgage for $20,000. Therefore, the total debt is $160,000.

If the highest bid at the sheriff sale is $111,000, then the first mortgage and costs are satisfied. The second mortgagee/lender would get $1,000 for the $30,000 lien and the third mortgagee/lender would get zero for the $20,000 lien. The property owner would also get zero.

After the sale, you purchase the right to redeem from the defendant/property for $100. Next, you purchase the second mortgage for at least $1,001 and negotiate purchase of the third mortgage for $50. This strategy allows you to redeem the property for a total cost of $111,151 ($110,000 1st mortg.+ $1,001 2nd mortg + $50 3rd mortg + $100 defendant property owner). This amount is likely to be less than the amount you would pay if you had continued the bidding during the auction. In addition, the second mortgagee, Third mortgagee and plaintiff/property owner all obtain more funds from the redemption transaction then if the initial sale was allowed to stand.

Author: Anne Rand - Foreclosure News of NJ, Inc
NewJerseyPreForeclosures.com

 

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