Discover the biggest secret of foreclosures – Overage

Possibly one of the best kept secrets in the foreclosure industry is “excess.” Surplus is the amount of money left over after a foreclosure auction when the buyer has paid more than the lender’s final judgment. This money can be as little as a few dollars or as much as millions of dollars.

Depending on the state the homeowner lives in, your foreclosure sale will be handled by a county bailiff, trustee, or clerk of court. As prescribed by law, the person in charge of the auction will sell the property to the public with “open voice bidding” until the property is sold or redeemed by the lender. The location is usually on the courthouse steps or in a similar convenient location that is easily accessible to the public.

Typically, the first offer on a property is made by the primary lender, who offers the amount of the final judgment awarded by the county court plus $100. The next offer will come from a party with an interest in the property, such as a junior lien holder or an investor who believes there is equity in the property. These bids will continue until the last bid, which the property wins.

Suppose the final judgment on a property is $100,000 and the bank offers $100,100 and some bystanders start bidding until the final offer is $120,000. The lender files his final judgment papers with the county clerk and the bidder winner must bring cash anywhere from same day to 30 days later, depending on state and county law. Once the funds are in court and any redemption period has passed, the lender gets their $100,000 and the buyer gets a deed to their property. A redemption period is a specific period of time from 1 day to 454 days, where the repossessed owner can return money to repossess the property from him if he pays the buyer his costs plus fees and expenses. In some states there is no redemption period.

The court clerk received $120,000 plus some transfer fees and paid $100,000 and has a credit of $20,000 in his bank account. The homeowner is entitled to this “surplus” money. The landlord has to file a claim with the county clerk and the court usually reviews these claims and awards the landlord his money. This is an ideal scenario in the world, but in the real world, the owner may not know that he has money for him and these funds eventually become county money.

Here’s what happened: A person approaches a homeowner a day or two before the foreclosure sale and offers $100 for the deed to their house. If the homeowner knows that he cannot stop his foreclosure sale and that it is not redeemable, he considers the $100 free money. The buyer pays $100 and proceeds to go to the auction and maybe even bid or two to raise the price. If he won by accident, he can renege on the offer and revert to the lowest bidder. Let’s look at the example above where the surplus was $20,000, which is a very common amount. The “new” homeowner files a claim in court and his $100 investment becomes $20,000.

This practice was and is very common in good housing markets and where the state has not passed legislation to stop this practice. It is not illegal in many states and even in those where it is illegal, states allow some kind of “commission” or fee to be paid to a person who brings in the seller to claim the surplus from him. In a courthouse that I frequent for auctions, there is a group of 4-6 people who collect the employee’s sales data and then send letters to the sellers to claim the surplus from him. The usual fee is 10% of the total amount and can be very lucrative because the average excess is approximately $21,800.

What does this mean for a homeowner in foreclosure? It means that despite what you may think his house is worth, it could sell at auction for more than what is owed to his previous lender and he is entitled to the remaining money: the excess. So don’t sell what you think is a worthless deed because on average it could be worth more than $20,000.

Occasionally, the lender will obtain a final judgment against an owner by appraisal and not by sale because this is allowed in some states. The owner should always contest this appraisal and have the judgment reduced if the property is later sold for more than the final judgment amount. The moral of this story is that even in the worst foreclosure situation, the loss of their home, the homeowner still has the opportunity to make money.