TRUSTEE SALE vs. JUDICIAL FORECLOSURE

RE:  TRUSTEE SALE  vs. JUDICIAL FORECLOSURE AND RELATED DEFICIENCIES

I have received several recent questions concerning the difference between a Trustee Sale and

Judicial Foreclosure Sale, as well as the difference between Purchase Money Loans and Non-Purchase

Money Loans.

A foreclosing lender under California law has two options: Trustee Sale or Judicial Foreclosure.

1.  Trustee Sale.

If the lender sells the property by Trustee Sale, then the lender cannot obtain a deficiency

judgement against the debtor regardless of whether the property is residential or “purchase

money.” This is the most common method of foreclosure in California. Civil Code §580d.

2.  Judicial Foreclosure.

A judicial foreclosure is when a lender sues in court to foreclose the loan. The court will

authorize sale of the property. The lender will be entitled to recovery of the deficiency. The

debtor will have a right of redemption discussed below.

Purchase Money Loans.

California treats purchase money loans against residential property differently.

A Purchase Money Loan is a loan where all proceeds were used to purchase the residence. If the

original loan was structured as an 80/20 loan, and both loans were used to fund the original

purchase, then both loans are considered Purchase Money.

If the loan is “purchase money” and the property is residential (i.e. 1 to 4 residential units), then

the commercial lender has no right to a deficiency against the debtor regardless of whether the

lender proceeds with trustee sale or judicial foreclosure.

Non-Purchase Money Loans.

Refinance Loans are considered Non-Purchase Money or Recourse Loans.

A lender can proceed by judicial foreclosure and recover a deficiency on refinance loans

regardless of whether the property is residential, commercial, industrial or other. If the lender

elects to foreclose by Trustee Sale, then the lender will have no right to recover any deficiency.

Seller Financed Loans.

California law treats seller financed loans differently than bank loans.

If the loan is “purchase money” using seller financing (i.e. no bank), then the seller has no right

to a deficiency against the debtor regardless of whether the property is residential, commercial,

industrial, vacant land or otherwise.

A Seller who provides financing for the buyer never has the right to a deficiency judgment and

are stuck with the property as sole security for the loan.

Seller financing can be dangerous for the Seller.

Statutory Right of Reinstatement.

A debtor can reinstate a loan and “cure” the default by payment of all delinquent payments

including late fees, interest, and costs at any time until five (5) business days prior to the sale date in

the case of a Trustee Sale.

A debtor can reinstate a loan and “cure” the default by payment of all delinquent payments

including late fees, interest, and costs at any time prior to entry of the order of foreclosure in the

case of a Judicial Foreclosure.

Statutory Right of Redemption.

The term Right of Redemption refers to the debtors right to recover the property after a judicial

foreclosure sale. A debtor has a limited right to repurchase the property after a Judicial

Foreclosure by paying all delinquent payments including late fees, interest, and costs.

There is no Right of Redemption following a Trustee Sale.

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