In Avoiding the $475,000 Mistake – Entering the Credit Bid attorney John L. Hosack, Buchalter Nemer, and mortgages expert witness Joffrey Long write:
How to proceed with your trustee’s sale:
In the case we referenced above, the total balance of all amounts due on the note was $575,000 and the property value was $500,000. You would open the bidding at $100,000. Instructions would then be issued to the trustee that should there be other bids at the sale, the trustee is to increase your credit bid in increments of $2,000, until either 1) the bidding reaches an amount acceptable to you or 2) you acquire the property. With no other bidders, the property reverts to you in exchange for your “giving up” only $100,000 or your debt. The other $475,000 has not been paid. Through this one simple maneuver, you’ve preserved the ability to pursue the collection of the remaining $475,000 of your debt from insurers, guarantors, or other parties to the transaction.
If there are other bidders, your bid is increased in increments of $2,000 until you receive an acceptable price or acquire the property. If other bidder(s) stop bidding and you acquire the property at a $325,000 credit bid, you’re still better off than with a full credit bid. You’ve now been “paid” only $325,000, leaving $250,000 ($575,000 less $325,000) that you can attempt to collect from others.
Joffrey Long, President of Southwestern Mortgage, chairs the education committee, is a director and is a past president of the California Mortgage Association. He provides litigation consultation for, and is often called upon to testify as an expert in mortgage related litigation matters. See his profile here.