Involuntary Property Transfer Due to a Trustee Sale

Instructor: Shawn Grimsley
Not all foreclosures of real estate are the same. In this lesson, you'll learn about the sale of property through a trustee's sale, including the process, requirements and how it differs form a judicial foreclosure.

Deeds of Trusts & Trustee Sales

Homes are expensive and lenders just don't give home loans to buy them based on your word that you'll pay the loan back. Instead, lenders require that you put up collateral that can be sold to pay the loan in case you default. And with home loans, the collateral is the house you're buying with the loan.

It may come as a surprise to you, but a lot of homeowners don't have mortgages on their properties. This is because some states don't use mortgages. Instead, home owners in these states get a deed of trust, wherein legal title to the property you just bought is transferred to a neutral third party called a trustee. The trustee holds legal title for the beneficiary, which is the lender. If you default on your loan, the trustee may be directed by the lender to sell the property to pay off the loan. We call this type of sale a trustee sale because the trustee is the party selling the property.

Distinguished from Judicial Foreclosure

So what's the difference between a typical mortgage foreclosure and a trustee sale? The key distinction is that a lender must commence a court proceeding called a judicial foreclosure if it has a mortgage, while a deed of trust doesn't require court proceedings. In other words, a trustee sale constitutes a nonjudicial foreclosure because the courts aren't involved. The trustee doesn't need to go to court to get permission to sell the property, nor will a court supervise the sale to ensure the rights of all parties are protected. And while a sheriff is typically the official that sells the property at a judicial foreclosure, as we noted above, the trustee runs the sale in a nonjudicial foreclosure.

Requirements & Process

Certain requirements must be met before a trustee sale can proceed. The deed of trust must contain a power of sale provision, which empowers the trustee to sell the property without going to court to do so. Without the power of sale provision, the lender will have to commence a judicial foreclosure action in court.

While the power of sale provision gives the trustee the power to sell the dirt, the trustee must still comply with the procedures for a nonjudicial foreclosure outlined by state statute. Keep in mind that the requirements vary from state to state, so you'll need to review the law where the property is located to make sure all the requirements are followed. We'll use California as an example.

Let's say that Jack has fallen behind on his house payments. Before Jack's lender can have the trustee commence a sale, the lender must contact Jack to assess his financial situation and see what solutions may be available to avoid the sale. Jack also has the right have a meeting with the lender on how to avoid a foreclosure within 14 days of the lender's first contact with Jack. The foreclosure process can't start until 30 days has passed since the lender's first contact with Jack about assessing the situation. Jack can have an attorney or other professional represent him at the meeting, but he's not required to agree to any solutions the lender and his advisor comes up with.

After 30 days has elapsed without any solution to avoid foreclosure, Jack's lender can record a Notice of Default in the county where Jack's house is located. The lender must send Jack a copy of the notice by certified mail within 10 business days from the date of recording the notice. Jack will then have 90 days from the date the notice was recorded in which to cure the default (i.e., get current on his payments).

If Jack doesn't cure the default within 90 day from the Notice of Default, the lender can record a Notice of Sale. Jack must receive a copy of the Notice of Sale by certified mail and the notice must be published in a newspaper that circulates in the county where the property is located for three consecutive weeks before the sale date. The notice must also be posted on Jack's property and at a public place, which is usually the county courthouse.

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