Options After Default: Judicial vs. Non-Judicial Foreclosures in California
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In a perfect world, lenders would make loans to borrowers, borrowers would make the payments due under the loan, and upon maturity the loan would be paid off. Unfortunately, that perfect scenario doesn’t always happen, and lenders must be tactical when understanding what to do when a borrower defaults. Our attorneys are expert strategists in loss mitigation and default management and provide attendees with the best methods to navigate non-performing loans, including an in depth analysis on whether to pursue judicial or non-judicial foreclosure as part of a lender’s strategy in California.
You will learn:
- What are the available options for lenders when a borrower defaults?
- What foreclosure restrictions or hurdles are currently in place in California?
- The process, timelines, and potential challenges lenders face when foreclosing.
- The strategy behind deciding whether to pursue a judicial vs a non-judicial foreclosure in California.
Thank you everybody for joining us today for today's webinar. Today we're going to be presenting on options after default and in particular talking about judicial versus non-judicial foreclosures in California. A couple of housekeeping items first before we get started. First, the question that we get all the time is, are the slides going to be available? Yes, they will be available to you after the presentation, so look out for those. This is also being recorded as I'm sure you had to click consenting to that when you entered the zoom today. But yes, it is being recorded. It will be up on our website, up on our YouTube, and we'll share a link to that afterwards just in case there's a coworker or friend or somebody else that you want to send it to. You'll have the link for the recording. Q and a box, I know there's a couple different boxes where you can communicate with people over the zoom over this presentation.
Put your questions in that q and a box at the very end. We will go through those and answer as many questions as we can for you guys. There is a chat box, but we request you don't put questions in there because it ends up being a lot of different things to monitor. So if you put a question in the chat box one of our moderators will ask you to move it over to the q and a. If you'd like to use that chat box to introduce yourself a little bit though to other panelists or attendees of the webinar, feel free to do so, get to know each other a little bit. That's all great. But yeah, all of those questions go in the q and a box. And then finally, post-webinar, once we get everything recorded and uploaded, we'll be sending out an email follow up that has not only the slides the link to the recording, but also several other articles and other information on this topic that you can share around. So look out for that post webinar. Next up, who are we? Hopefully you've met us before on either other presentations or other posts but my name's Melissa Martorella, I'm the department head of the banking and finance team here at Geraci. I also manage the firm's non-judicial foreclosure practice for California foreclosures and basically my general expertise is 50 state loan documentation and compliance. We're representing lenders nationwide but then in particular I also assist with navigating the non-judicial foreclosure process in California. And then with me today is Darlene.
Thank you so much, Melissa. I'm excited to be on this panel with you. My name's Darlene Hernandez. I am one of the litigation attorneys in the litigation and bankruptcy department at Geraci, and we primarily handle all litigation related matters involving our clients, our private money lenders as well as handling judicial foreclosures.
Awesome. So that's us. You've got two experts here. So happy to go through this topic with you guys and answer any questions you have. So to give us a big picture overview of where we're going today, we have a little agenda. We're going to go through the different kinds of options that are available for a lender when a borrower defaults, just generally because it's not necessarily jumped to a judicial or non-judicial foreclosure. There might be other mitigation options that you have. Any foreclosure restrictions or hurdles that are currently in place in California that you might want to look out for or just be aware that exists at this time. Process timelines and potential challenges lenders might face when they're foreclosing in either method. And then the strategy behind deciding whether to pursue a judicial versus a non-judicial foreclosure in California. There's a lot more to that than people might think.
So we'll be going through some of those considerations and pros and cons in this presentation. And then finally, as we said, we'll have that q and a. So a reminder, put the questions in the q and a box, not the chat box, and we'll be good to go. So to kick it off when a borrower defaults there are several options that a lender has before thinking about foreclosure and we've got them listed out here as kind of the big picture options that a lender might have. So to quickly go through you have several agreements that you could enter into either a forbearance, a modification, or a deed in lieu of foreclosure, and then we have foreclosure options, either judicial or non-judicial, and we have other extraordinary relief things like receivers, writs, and writs of attachment. So different options depending on how egregious the default is, the nature of the relationship with the borrower, that kind of thing before you even pursue any of these options.
We'll talk about it in a little bit as well. But the big thing that I do recommend to all lenders when there is a default on the loan is talking to your borrower first and just figure out what's going on. I think I've seen quite a bit over the past few years where oftentimes a default occurs and a borrower might not be aware of why it might be their interest reserve is depleted and they didn't know it might be, I don't even know. It could be they didn't know what the action that they took transferring the property to a different entity. They might not have known that that was a default and so they're more than willing to change it back, but they just didn't know. There might be other smaller minor issues that occur that a conversation could probably clear up a lot of things before you even start diving into these options.
So I always recommend that even if for example, our documents that we would prepare don't require you to reach out to a borrower to advise, Hey, you're in default, it's always a good practice to check in because if anything, it does set a litigation trail. So if down the line there is an issue or a contest, you have that kind of backup to say, Hey, we did try to reach out and resolve this thing. So diving into the different options really quickly before we jump into foreclosure issues just going over these three initial agreements, a forbearance versus a modification versus a deed of deed in lieu. Think of a forbearance as a waiver of rights. So a lender has many, many rights under a set of documents. One of them is upon a default to pursue options for loss mitigation, including foreclosure. But a lender can waive all sorts of other rights.
They have rights to payment, they have rights to payment at a certain time. They have rights to default interest or late charges. There are all sorts of rights that a lender has under the documents, but the forbearance is saying, is the lender saying, Hey, I'm willing to waive some of my rights. I'm willing to waive a couple of payments or defer them. So waiving the time in which those payments are due, I'm willing to allow that maturity date to lapse and be extended out because you're in some sort of hardship. I'm willing to waive late charges or default interest because there's an issue and you need a little help to get through it. We saw a lot of this during Covid where people, especially if there were tenants at properties, that kind of thing, and the tenants were struggling, the lenders would work with the borrowers or the landlords to say, hey, we'll give you a couple months of either deferred payments put in on the backend of the loan or reduced payments or some other sort of a payment plan to help people get back on track while they were waiting for either business pick up or for their tenants to start paying run again.
So that's definitely an option to you. And so that's the concept behind a forbearance is there has been a default and the lender has some rights to enforce, but they're willing to waive those in the interest of working with the bar to come to a solution. And you can be very creative with a forbearance agreement. On the other hand, we also have a modification agreement. Sometimes you can do this in conjunction with a forbearance, but typically a modification doesn't require a default. It's just really more so to me, a change in the underlying loan terms. It might be that the borrower needs more money to complete the construction project that they're working on. You may want to lower increase the interest rate, extend out the maturity date. There could be other options available to you to help your borrower get through whatever the project is that you're working on or whatever the reason for the loan was.
Maybe they're trying to secure long-term financing and they're like, Hey, I've been making my payments, but I know the maturity date's coming up in two months. I need another month or two to make sure that the long-term refinance goes through. Can you extend it out and you would use a modification for that. That's an easy way of documenting something that's amicable, friendly and doesn't automatically go to foreclosure. That as we all know, and a notice of default on a property oftentimes will slow down that refinance process and then it's tough for everybody to get out of that situation. Obviously you can charge points or fees for either of those agreements as part of the consideration for you entering into that and waiving your rights. So there's a lot of option there for lenders. Finally, we have deeds in lieu of foreclosure. This is the last kind of agreement option that you might have where you know, don't necessarily want to go to foreclosure.
The whole idea of this one is it's in lieu of the foreclosure action. And so basically the borrower is saying to you, hey, it's just not worth it. I'm so far behind this project is a mess. This property's a mess. I don't want to deal with it. Here are the keys and it's several documents that go together between grant deeds and releases and things like that. But basically that borrower's walking away giving you the keys and you get access to the property right on day one. I get a lot of questions from lenders about whether at time of loan origination you could have a deed in lieu prepped and ready to go upon the event of a default. No state will allow you to do that, whether it's California or any other you need to wait for an actual default or dispute under the documents to occur before you could enter into this kind of an agreement. So anything that deed in lieu of foreclosure that's drafted at time of loan origination is not going to be enforceable if you tried to just record the grant deed upon a default. So just keep that in mind. But it is another option that lenders do have upon a borrower default to try to either figure out how to get easy access to the property or otherwise avoid a foreclosure or other default options.
So then jumping into the main event of the day is foreclosure. As we've talked about. There are several are different options. We have a judicial foreclosure which involves the court process, and then we have a non-judicial foreclosure, which is outside of that, it's just documents that are recorded against the property and notices and publication requirements. We'll get into it a little bit but basically it's an a non judicial procedure. Procedure in general for foreclosure, I like to see a monetary default in play and evidence that other loss mitigation options that we talked about haven't worked. So you've tried to talk to a borrower to get them to pay, you've tried to enter into a forbearance or mod and it's just not working out and you've got a given borrower options. And even for that monetary default, sometimes I'll have lenders say, oh, they missed their first payment and it's day 11, the grace period's up file or record the N O D.
And it's like you should probably one, give them a little more time, talk to them, figure it out. And then two, I like to see more than just one mis payment. Ideally there's a history of this behavior. I generally say about two months of mis payments, especially if you've had attempts to talk to them and figure it out, it's probably sufficient evidence that they're not going to pay and they're going to be behind on this loan. You don't could record that N O D right on day 11 but it's definitely not something that I would generally recommend. But yeah Darlene, if you want to take it from here.
Thank you, Melissa. So the next topic is whether you want to proceed through a judicial foreclosure or the non-judicial foreclosure route. So what are the differences? And we'll go into more detail in the next few slides but just in general the options are determined on whether or not, for example if you're seeking a deficiency against the borrower, and in some states where there are restrictions on seeking deficiencies that might not be available to you. And so a judicial foreclosure, at least in California is available and it is a means for the lender to seek a deficiency against the borrower. We have in parentheses a reference to not guarantor. So that is a separate type of action for relief on a default where you would have a guarantee agreement, which we'll talk about later in the presentation today. Judicial and non-judicial foreclosures, can you do both?
And yes it is possible to do both and track both at the same time. And so we'll talk about the strategy behind why you would want to pursue both judicial and non-judicial foreclosures at the same time. Let's take a look at the judicial pros and cons for a moment. Let's take a look at the primary advantages and reasons for choosing a judicial foreclosure over a non-judicial foreclosure. The primary benefit is seeking a deficiency judgment against the borrower. It's available if the loan is non-recourse and not otherwise prohibited by the anti-deficiency statutes in your state. If the security instrument does not include a power of sale, the lender can only foreclose judicially.
One of the advantages is for a judicial foreclosure is if there are any material disagreements with a borrower regarding title or priority disputes. These types of title issues have to be adjudicated through the judicial foreclosure process in order to quiet title. So if for example there is a title issue or defect that would not allow the trustee to proceed on a foreclosure sale because they're unable to issue preliminary title report or trustee sale guarantee, then the only way to proceed would be judicially. What are the disadvantages for not choosing non-judicial foreclosure? So let's take a look at timelines. For judicial foreclosures, they generally take longer than a non-judicial foreclosure. A non-judicial foreclosure generally takes about four months from beginning to completion. However, for a judicial foreclosure, it can take anywhere from two to three years because it is a lawsuit that's filed with the court.
And depending on whether or not it's contested if it's contested, the resolution or judgment for a judicial foreclosure can take much longer. Another aspect of judicial foreclosure is the statutory redemption period. What's a redemption period? That's the period of time for when the borrower is allowed to purchase the property after a foreclosure sale. So in the judicial foreclosure process the trustee is the sheriff's, it'll be a sheriff's sale, and after that sheriff's sale, the borrower has up to one year to redeem the property by purchasing the property. And so the lender will not be able to take title until the end of that redemption period. If there's a deficiency being sought.
Generally the potential of deficiency judgments can promote sort of a animosity and opposition from the borrower and the borrower in response to a judicial foreclosure may file counterclaim, for example, wrongful foreclosure, and that could also lead to further delay in obtaining the property through judicial foreclosure. Judicial foreclosure may be barred by the statute of limitations. In California, the statute is four years for bringing a judicial foreclosure action. Cost is also another aspect to decide whether or not to proceed with judicial foreclosure. Generally because it is litigation, the fees can run up, especially if the matter is contested.
Another aspect or disadvantage of a judicial foreclosure is the waiver of security interests that are not identified in the action. So all real property collateral must be included in the action or it is waived mute. Also, a deficiency judgment may not be available if prohibited under the anti-deficiency protections because the loan on a purchase money loan where the vendor is of the property I'm sorry the property is a one to four owner occupied dwelling or any other terms that might be limited by the loan documents. Non-judicial pros and cons, what are the advantages of a non-judicial foreclosure?
Time wise, it's a lot shorter. It takes approximately four months to complete. In general, if there are no requests for postponements the cost is generally lower than a judicial foreclosure because the procedures are a lot more streamlined and straightforward and they're handled by the foreclosure trustee because no deficiency judgment is available after non-judicial foreclosure. There is no required court action by the foreclosing lender. And so the likelihood of any opposition by any party, including the borrower, is greatly reduced by proceeding non judicially. Another advantage for non-judicial foreclosure is that the borrower has no redemption rights following the foreclosure. Also, statute of limitations does not bar non-judicial foreclosure. What about real property collateral not included in the foreclosure as opposed to judicial foreclosures? In non-judicial foreclosures, the lenders are able to conduct serial sales of additional collateral subject. Of course, any contrary policy the trustee might have. The principle disadvantage of a non-judicial foreclosure is that no deficiency judgment is available against the borrower. You are limited to the security and any deficiency would have to be sought through other means such as judicial foreclosure.
Awesome. Thank you, Darlene. So that was a lot of the pros and cons between judicial versus non-judicial foreclosure. Why you might want to choose one over the other. It's really circumstantial. So sometimes we'll provided you a lot of pros and cons here, but it also really depends on your facts. So sometimes people will ask, well, which one's better? And it honestly really depends on what you're going through and what your goals are. So if you ever have questions about which options you should go for Darlene and I could walk you through that to figure out for your particular situation, what's the best recourse for you and help walk you through that. But this was big picture overview in general, why judicial is good and why it can't be and why non-judicial is helpful and sometimes when it's not. So
We also have some current restrictions and hurdles going on at the current moment. And this is in particular with non-judicial foreclosures. So first there's a little bit of confusion. There are no current restrictions on conducting trustee sale for a business purpose loan in California right now. So if you have a business purpose loan, there's no reason you cannot start a non-judicial foreclosure action in California. However, there are some new laws in place that might make it a little bit longer of a process might change your strategy might slow you down a little bit, but it's not barred from proceeding in California. The first one is this new bill called AB 30 88. This was past I believe past in September of last year. It's basically extending homeowner bill of rights requirements to business purpose loans. Previously the homeowner bill of Rights and all of the rules and regulations surrounding that were only applicable to consumer purpose loans.
And so we could just, if we knew it was a business purpose loan, we don't have to deal with it. Move right to recording your N O D. Unfortunately, AB 30 88 extended some of these requirements to certain business purpose loans and basically it'll add an additional 45 to 60 days onto the foreclosure process assuming you don't make contact with the borrower. And basically what you'll have to do is reach out to the borrower a few times, give them their options, and there may not be an option because you've tried to work with them but ultimately there's a procedure you have to set or you have to walk through. There are letters that have to be sent after certain amounts of time, and then once that is dealt with, then you can proceed with the non-judicial foreclosure. So that's in your way a little bit. It only applies though if all of the following are true.
If at least one thing is not true here, then you don't need to deal with the new hobar requirements. So it's something to look out for. So it has to be a wonderful family property. So if it's a multi-family property or commercial property, don't need to worry about it. But if it's one to four, you might it has to be a first position lien. So if it's a junior loan, even on a one to four family property, don't have to worry about it. The property has to be owned by an individual, so it has to be an individual borrower. If you have an entity borrower, no worries, don't have to comply with the hobar rules. The property has to be occupied by occupied by a tenant subject to an arm's length market lease. And that tenant also has to be unable to pay rent due to a reduction in income related to covid.
So again, these are very specific things, but sometimes you might not know. And so if you don't know, you say you don't know whether there's a lease, you don't know whether there's a tenant, you don't know if that tenant's having problems paying. I would probably defer to saying it's true rather than assuming it's not true unless you have hard and fast evidence that thing is not true. And then the last thing is lender has to be basically a licensed entity, either a California finance lender real estate broker licensed by the D R e an R M L or a state or federal bank. So if you're just, say you're an unlicensed lender and you made the loan, it was arranged through a broker at time of origination, but you're self servicing your loan not licensed, you wouldn't have to comply with this. You're not one of the targeted people for AB 30 88 and the homeowner bill of rights.
So assuming all of these are true, then you would have to deal with the pre foreclosure contacts under the homeowner bill of rights. If any one of these is not true, then you get out of it. So if you have any questions about this, I always send this to people and I'm like, look through it, make sure and confirm. If you don't know, assume that means it's true and move from there. But hopefully we've been able to get around most of these issues just by going through this checklist with our clients to make sure prior to starting foreclosure. So this is something to be aware of. Otherwise there's no restriction on starting a foreclosure on a business purpose loan but this is something to just be aware of for people, especially if you have a loan to a borrower that's an individual and it's a wonderful family property, I would be on the alert for this kind of an issue potentially.
Moving over to the non-judicial foreclosure process it's pretty streamlined. Like Darlene was saying, it's all statutory, meaning it's laid out in the California code sections that say, Hey, you do this and then you do this and it must look like this. It's very, very streamlined. Even the fees are streamlined. So if you talk to somebody and they're saying they can charge all of this for a non-judicial foreclosure what you can charge is 1% of the loan amount of the outstanding loan amount and the actual expenses incurred. So recording fees, mailing fees, publication fees, that kind of thing. Otherwise, and you could charge less than that but that's capped statutorily. So that's a good thing to know about non-judicial as well, is it You should be able to know right out what those costs are, 1% plus of an expense estimate and pretty good to go from there.
So as far as the process itself, I broke it into four things. The first one we don't even necessarily need to go through. It might not be required, but it's something I always like to bring up the demand letter. Then you have your notice of default, you have your notice of sale, and then you have the actual foreclosure auction, the sale of the property. And that's like Darlene said, it's a pretty straightforward forward process once you get going, takes about four, maybe five months to complete just depending on when sales are being held and when recording dates fall and that kind of thing. But for the most part, it's a really streamlined, easy process says. So to get started here, we have the demand letter. We talked about this a little bit before. Your loan documents will say whether or not notice of any default is necessary to give your borrower, for example, our loan documents waive any notices to the borrower.
So if there is a default, you don't have to let them know. You know can just proceed with whatever revenue you want, whether it's implementing default interest, starting a foreclosure, any other action. You do not need to issue a demand letter. However, I do think this is the best practice, even if it's not required mostly because as we said before, this is going to set the record for litigation. So I would really use these to your advantage. Have a form letter that you just kind of tweak and change the borrower name and what the issue is that's going on. What's the reason for the default, give 'em a 10 day requirement to respond to that demand to either cure that default or reach out to you for some forbearance modification, whatever it is to work the thing out. But it's going to set that litigation record.
So if as Darlene was saying, sometimes you'll have borrower contesting these foreclosures saying it was a wrongful foreclosure, I didn't know, you know, didn't work with me, or you're in front of a judge who doesn't understand maybe that it is a business purpose loan and that borrower waived these rights, et cetera, you still have that track record of you showing that you were trying to work with them and it puts you in a very good light, in a very good position as a lender if you're being attacked that you were being unfair or doing something wrongful. So it's really something that I think will help you set the record straight in the event that there is any sort of dispute between you and your borrower. But again, not required, but I do recommend including this as part of your, I guess, pre foreclosure process.
Next up we have the actual notice of default. So assuming you can proceed, you've done any pre foreclosure contacts that you had to do if you had to issue the demand letter you can proceed with the notice of default. You would record one notice of default for every deed of trust. So sometimes we get confusion on this but if say you have a loan and it's secured by two different properties, but those properties are on different deeds of trust, then you'll need multiple notices of default. If those two properties are on the same deed of trust, then you only need one. So it's just also another thing to kind of be aware of with regards to proceeding the cost of proceeding because the fees will increase per deed of trust versus if everything's on one. And there are some rules about marshaling and that kind of thing that you might get into if there are multiple properties and multiple deeds of trust, but that we can get in there if that's your situation.
But yeah, basically you record that notice of default you wait then 90 days from that recording date before you can record the notice of sale. So you record that notice of default, you set a calendar reminder for 90 days out and you sit. And what your trustee is doing in the meantime is is they're sending out notices to relevant parties that need to be made aware of this of the N O D. They're just following the statutory requirements required to complete the process. But otherwise you as the lender just you're on hold and if the borrower reaches out to you to bring the loan current or repay or whatever, follow your normal procedure, but this is hanging out for 90 days. Once that time period elapses, we jump to the notice of sale. So after that 90 days, you would run a date down of title to see that nothing's happened that would prevent you from recording a notice of sale such as a bankruptcy maybe litigation, maybe not or anything else that's saying, Hey, stop, you can't move forward with your notice of sale.
Otherwise, if it's clear go ahead, record that notice of sale and that notice of sale will set the initial auction date and it must be at least 21 days from the date of the notice of sale. So about three weeks after the notice of sale records, you could actually go to the sale. That depends on the county though. Some people will get upset and they'll be like, well, what do you mean it's a month out? It's only 21 days. Some counties only hold sales on Wednesdays or the first and third Tuesdays of every month. And if that's the case and you just missed one, you're going to have to wait a little bit longer for it to happen. Same thing with postpones. So you can postpone the sale for as many times as you want for up to a year from the initial auction date but sometimes people will say, oh, we're trying to work with them, just postpone it for one day.
Well, if they only hold sales on Wednesdays, you have to postpone it for a week. So just be aware of that and it's not a trustee being difficult or not wanting to do what you want to do. Just know that different counties have different requirements for how long sales can be or not, how long they can be postponed, but for when they're actually held, which therefore would inform how long they could be postponed. There are more requirements that a trustee will deal with after the notice of sale reco records. It has to be posted in a public place. So basically they're going to go through and post information about the sale at the property and other places. They're also going to publish the sale which means it's going to go into a circulation for three weeks and it's going to just notify the public about the fact that the sale's happening.
Assuming all of that goes, well you can go to sale on that date, so nothing's happened. There's no bankruptcy recorded or filed, there's no issue going on. You're like, Nope, I'm going to go ahead with my sale. We get to the day of auction. Recommended prac practice is you have a starting bid, a maximum bid and bidding increments. So if you know the total outstanding balance of your loan, but you're like, Hey, this property is in maybe not great condition, or it's been out here a while, or anything like that, or you're willing to let it go because it's a mess and you don't want to deal with it and you're willing to let it go at a lower amount that might in inform what your starting bid is and how you, you've been in increments and whether you bid up to that maximum outstanding amount owed or end at a lower amount and you're willing to let it go at that amount.
Just a lot of different strategies. The old strategy that we would give people, and this is in particular regard to loan secured by one to four family property don't do this for those properties anymore. If it's commercial or multi-family, go ahead and do this. But if it's a wonderful family property, we'd recommend not, and we'll get to that in just a moment. But the old strategy is to not start at your loan amount. So don't start at the total outstanding balance because it so start about, we would recommend about half of that amount. So if you're totally owed about a million dollars, we would say start at $500,000 and bid in increments up to either where you're willing to let it go for or up to your total outstanding amount owed to you that the reason for that is because it creates leverage for a breach of guarantee suit, assuming you have a guarantor that you could then go after post sale and it'll give you a little bit of leverage for that.
So that's the reasoning there. And then you're also getting the property back hopefully for a lower amount. And if you're able to sell it more, it's a better strategy. So again, for commercial properties, multi-family properties, you could still continue to use this strategy. However, if it is a one to four family property, we're recommending now to open at your credit bid at that total outstanding balance owed. And that's because another law passed during covid s P 10, sorry, s P 10 79 that went into effect on January one, and it allows certain qualified purchasers to come in post auction and blind bid on the property. This is a brand new rule. We've seen a lot of issues occur because of this. So basically what this is saying is day of auction comes, you win the property for $300,000. If a qualified purchaser comes in, and there's many definitions for this, but it's either a nonprofit, a first time home buyer, a current tenant at the property, and a couple other options, they can go in and bid 300,001 penny as long as they give a notice of intent to bid and provide payment for that amount to the trustee within 45 days of the date of the foreclosure sale, they get the property.
So that's why we want to get rid of that old strategy for one to four family properties because if this happens, you know, got it at 300,000, if you were hoping to take the property and sell it for a higher amount or anything like that, you've lost that ability. And so now all you have is the ability to go after a guarantor and a breach of guarantee suit, assuming you even have a guarantor you could go after. And as Darlene will mention in a few, whether you get what you want out of a breach of guaranteed is also difficult. It's a long drawn out process, it's a lawsuit. Whether the guarantor has assets is probably really expensive, it may not be worth it. And so that's why for one to four family properties right now, we're recommending opening at your credit bid which goes against every advice we've ever given before just to avoid having somebody basically steal the property out under you under SB-1079.
And then the last thing I get this question quite a bit on surplus proceeds. So if somebody bids more than your loan amount, so say in that example, the total outstanding balance under the loan is a million dollars. That includes your principle, all your interest fees, expenses related million dollars, and so you have to stop bidding or you stop bi bidding and then people keep bidding over that because they think the property's worth more and say, ends bidding at 1.2 million. There's a $200,000 surplus here. You don't get that money <laugh>. People ask all the time and they're like, oh, I get that right because I had the loan and I started the foreclosure, and you don't, you'll be paid in full with the total outstanding amount that'll get to you. That $200,000 surplus is first going to go to any junior lenders or lien holders in order of priority on title.
So if you were in first position and there's a junior lien holder, that money will go to them and then ultimately it'll end up with the borrower because it was their property. So it's something I bring this up so that you know don't get all that extra money if it does happen. But also if you have both a first and second position loan on the property, be strategic thinking about surplus, usually what you want to do is foreclose on that second first and then take the property back that way and then deal with your first. But it's a strategy to be aware of if you do have multiple loans or secured by the same property. With that, I'll turn it back over to Darlene. I'm sure you're sick of me talking <laugh>, and she'll go over a couple of the other litigation related options.
Thank you, Melissa. Thank you for going over all of that. That was so helpful and helping us all understand the processes for the non-judicial foreclosure. And now let's take a look at another option. When there's a borrower default, who can we go after? We can go after the guarantor in what we call a breach of guarantee lawsuit. So deficiency is established at the time of sale and after that if there is a guarantee agreement between the lender and a guarantor the lender can proceed by filing a breach of contract action. Basically, it's a guarantee action for damages for whatever deficiency that was obtained after the foreclosure sale. A breach of guarantee lawsuit can be used to obtain pre foreclosure leverage. We don't have to wait in some instances for a foreclosure sale to occur in order to seek a breach of guarantee. I've had some cases where there would be intervening bankruptcies that would prevent our lender clients from proceeding with foreclosure.
However, because a guarantor is not the same person or entity as the borrower, a breach of guarantee action is another method for which the lender can proceed to recover for money owed to them under the loan. Potential challenges by the borrower when filing a breach guarantee lawsuit. These two items, sham guarantee and waivers are particularly important when deciding whether to file a breaching guarantee lawsuit. Like Melissa mentioned earlier since it is a lawsuit it will require additional time much longer than a non-judicial foreclosure. It can take maybe one to two years to resolve if contested. And one of the defenses or challenges that the borrower can make to prevent recovery under a breaching guarantee lawsuit, it is what's called a sham guarantee. So what is a sham guarantee? A sham guarantee is where a guarantee agreement is created between the lender and an entity specifically created to distinguish between the borrower and a separate entity, the guarantor, and at times, and you'll find cases where a borrower will approach a lender and ask for a loan, and the lender explains to the borrower, we're not going to give you this loan unless we have a guarantee.
Who can you identify as a guarantor? And let's say the borrower doesn't know anybody and the borrower says, well, why don't you name me? But you can't because the guarantor has to be an independent third party. And if the borrower can show that the lender suggested or recommended that the borrower create an entity, a corporate entity specifically in order to create this guarantee, the courts will reject the enforcement of that guarantee agreement because there's no truth. Third party guarantee, it's basically the borrower.
The second type of challenge the borrower can make to stop the enforceability of a guaranteed lawsuit are certain waivers of surety ship defenses. Surety ship is another word for a guarantee. And so certain defenses would include a term in the guarantee agreement that requires that the lender must proceed against the debtor first or the debtor's assets before going after the guarantor. Those waivers can be put into a guarantee agreement, but some courts might not recognize those waivers, so the lender might not be able to just go directly to the guarantor and will have to abide by only seeking recovery against the borrower first. So those, depending on the jurisdiction certain states are friendlier than others. California, Arizona are more borrower guarantor friendly. But if you include in your guarantee agreements certain jurisdictions that are more what we call corporate friendly like Delaware or New York these types of waiver defenses can be overcome.
What else can the lender look to besides breach a guarantee action? We we'll take a look at the rid of attachment option which is generally a very powerful tool in enforcing especially real property interests that the borrower ator might have. And this is a very quick and effective tool in the early stages of litigation because if the lender can identify any assets, real property assets the lender can seek immediate relief from the court even before the lawsuit is over and seek a writ of attachment to attach any real property that the debtor or the guarantor might have. So one tip that I recommend for lenders is to retain a private investigator to search out assets because you don't want to enter into a guarantor agreement with a party or a company in some cases a special purpose entity that doesn't have assets. And so you don't want to waste your time going down that path unless there are assets to attach. So very early on that would be recommended just to save time later down the road. And if you can identify and do a title search, you can find real property assets to attachment.
So let's take a look at judicial foreclosures. Again we talked a little bit about it at the beginning of the presentation, and I want to dive into the process because it always seems like a mystery to most lenders who want to proceed non judicially but for whatever reason they have to proceed judicially. If you are seeking a deficiency, be aware of your state's anti-deficiency rules and you can certainly consult with counsel for specifics on which anti-deficiency rules apply in your situation. So it is case by case. Often judicial foreclosures are used in conjunction with receivership. You may have a property where it is determined that there could be a potential for waste or destruction of the property. You might have a borrower who is refusing to make payments on their loan and let's say they threaten to destroy the property or to remove any other assets from the property that may belong to the creditor. And a receivership is another form of legal procedure. When seeking a judicial foreclosure the court will appoint a third party receiver to basically act as a trustee or an agent of the court to collect rents and to make sure the property is maintained and secure from any waste or destruction by the borrower.
Judicial foreclosure is also combined with other types of actions. We mentioned earlier title issues. For example if the lender wanted to go through the non-judicial foreclosure process, but the title reveals that there is a lien on the property that appears to have never been paid off, but it was prior to the lender's lien that lien would have priority. However, it's clouding title and it either should have been paid off or it should be settled in some way so that the lender who's foreclosing has priority. So in order to clear that defect, the lender would have to quiet title either by submitting their claims to their title company and if it's rejected by the title company, then they can seek judicial foreclosure to cure that defect. We mentioned that judicial foreclosures can also run at the same time as a trustee sale. So if a judicial foreclosure issue, for example, a title problem is cured and for example, the example earlier about an unpaid lien, if there is a recon conveyance that could be obtained the lender can dismiss the judicial foreclosure action, not wait another year for redemption period to expire and proceed immediately to a non-judicial foreclosure sale.
So what other extraordinary relief is available? We talked about receivership can be expensive. Receiver is appointed by the court. Generally receivers have a background working with the courts in bankruptcy as well as in state court. They are paid on an hourly basis, so it can be very expensive to have a receivership because the courts generally will approve all of the expenses that a receiver submits to the court. For compensation. The courts can be reticent in approving receiverships because there's a high threshold to prove to the court why is a receivership necessary. And unless the lender can demonstrate that there is an immediate harm economic harm or physical harm to the collateral the courts will meet that evidence before they approve a receivership. Besides receivership we talked about prejudgment attachment of assets. Again, this is a very powerful tool to freeze bank accounts of the borrower guarantor as well as attach any of their real property and cloud titles so that they're unable to release the lien unless you're paid in full. Awesome,
Thank you Darlene. Couple key takeaways here from this presentation. There are a lot of options when a borrower defaults and there's no one size fits all solution in one loan that you have. It might make sense to do a forbearance, another might make sense to go crazy, do a simultaneous judicial non-judicial breach of guarantee suit everything all in one. In another one, it just might be a straightforward non-judicial foreclosure. So there might be many different options. It really depends on the loan and the default that you have at hand. So definitely talk to your attorneys to figure out that strategy. And then if do you go to that non-judicial foreclosure? We talked about a lot of different things here, but a key takeaway is really know your bidding strategy in particular after SB-1079. It's dangerous if you don't know how to bid properly with that and you can really lose out on your property.
So just be aware of that. And again, feel free to reach out. We'd be happy to talk to you about bidding strategy if you have a non-judicial foreclosure auction coming up soon. With that, that's the end of our presentation. So really quickly before we get to the q and a want to plug an upcoming event. As you all know that our flagship conference captivate is coming up in August the 18th through the 20th. It's going to be at the Cosmo in Las Vegas, and it's by far the best hotel in Las Vegas. So if you haven't been or if you've been before, come hang out. It's a great time and a fantastic conference. Heads up that ticket prices are going to be increasing pretty soon, so if you want to register ASAP before those prices jump again, I'd recommend doing so. Also, I found out this morning the room block is nearly full, so if you do want to go and stay at the Cosmo at that lower rate that we can give you, register now so that you can jump in on that and take advantage of the lower room rates for the conference.
There'll be more info on Captivate in the follow up email that goes up or that goes out right after we get done here and we send out all that follow up information about this webinar. With that, here's Darlene. And again our contact information is here. So in case you know don't have a question right now and you think of one in the middle of the night and you're like, oh my goodness, I need to know this about judicial foreclosure sales <laugh>, we feel free to reach out to us. Our contact info is here. But with that said, we will answer. We only have a couple of questions in the q and a chat, but we'll do our best to go through those. First one we have here is what qualifies as an arms length market lease. So this was in the context of AB 30 88 and how to determine whether or not you needed to comply with the homeowner bill of rights, pre foreclosure, your contact contacts an arms length market lease.
To me, I would say is it normal for the market? So for example, sometimes you'll see something and it's like, oh, the aunt owns a property and they're lending it to their niece, or I'm not, I'm sorry, not lending. They're renting it to their niece. Is the niece actually paying market rent or they paying the family rate and looking at that kind of thing or even going through and making sure, is there one an actual legitimate lease agreement in place? And then two is, is there something off in the sense that, hey, what they're paying and the term of this and what's going on is just not normal for this market. So if they own, or if they're renting a two bedroom apartment in Manhattan for a thousand dollars a month, I would probably <laugh> look at that a little differently. So it's really knowing the market, knowing, hey, are these least terms accurate? It's a little difficult to determine, but you can usually figure it out by looking that that's going to be an arm's length mark lease or not.
Question about what about a maturity de, what about a maturity default? I'm a little bit confused about the context, but I'm assuming this is when we were talking about judicial foreclosures and non-judicial foreclosures. And when you can proceed you could proceed just based on a maturity default. That obviously makes sense. You don't necessarily have to wait longer to proceed with the foreclosure. I'm assuming it was when we were talking about when the trigger would be to start the foreclosure. If that's not it, feel free to put a follow up question in here or reach out to me and I'd be happy to walk you through that.
Another one about covid. Can we really foreclose? The answer is yes. I've completed several sales recently as well in the past few months. It's definitely possible there are risks and in particular SB-1079 and what that looks like as far as recourse or not necessarily recourse, but a potential third party coming in and taking that property from you. So that bidding strategy is important, but absolutely business purpose for loans are totally able to you're totally able to foreclose on those here in California. So feel free if you have questions you want to run your loan scenario by us, I'd be happy to talk to you about that. And then the last question is multiple properties on one trustee. Does that equal one foreclosure? Yes. So oftentimes if you have a loan secured by multiple properties and they are all in the same county and owned by the same party, you can put them all in one deed of trust and then when you foreclose, you'll just have one foreclosure.
If you have, say they're in different counties or they're owned by different people, then you'll need to do multiple deeds of trust and then you would have to do a notice of default for each deed of trust and it would be multiple foreclosure actions. Yeah, so I don't know if there are any other last little questions there. I was hoping there would be a few for Darlene on the judicial side but if not, we can wrap for the day. If you think of anything, feel free to reach out to us. We would be happy to talk to you guys. Thank you so much for joining.