Private sale may be a more profitable alternative to foreclosure auction

For lenders and practitioners alike, the common assumption is that when a court enters a judgment of foreclosure of mortgage, the next step is to schedule the property for judicial sale or auction. An often overlooked alternative is seeking court approval to proceed with a private sale pursuant to Section 15-1506(f) of the Illinois Mortgage Foreclosure Law (IMFL). Per the IMFL, a mortgagee may seek to sell the subject real estate through a licensed real estate broker. This is often accomplished via a court-appointed receiver.

Advantages of a private sale

Among the advantages to proceeding with a private sale is that it often nets a higher sale price and provides a good alternative for lenders seeking to avoid taking title to distressed properties (e.g., properties with environmental concerns or hazardous materials onsite).

To ensure the mortgagee has the option of a private sale, it is prudent to include language in the underlying foreclosure complaint that seeks authorization to sell the subject real estate via a licensed real estate broker pursuant to the IMFL. The mortgagee must also seek to include specific language in the judgment of foreclosure authorizing a commercially reasonable sale other than a public auction, subject to court approval. Once the court-appointed receiver has a buyer and a proposed sale contract, the mortgagee must obtain court authorization to sell the property, pursuant to the terms of the specific sale contract. When that approval is obtained, the receiver can schedule a “dry” closing with the title company with the sale proceeds and transfer documents held in escrow.

Distribution of the proceeds

Thereafter, the mortgagee will need to tender to the court a report of sale reflecting the proposed disbursement of sale proceeds. In addition to requesting court approval of the proposed distribution of sale proceeds, the mortgagee may also seek entry of a deficiency judgment and immediate possession of the property in favor of the third-party purchaser. Once the title company receives confirmation that the court has approved the receiver’s sale, the sale proceeds will be disbursed pursuant to the settlement statement.

An important consideration is the statutory mandate that a plaintiff must proceed to judicial sale in an action to foreclose a mortgage or other lien naming the United States of America as a party. In those cases, the mortgagee will need to negotiate the voluntary discharge of any liens in favor of the United States, as a private sale will not extinguish such a lien.

Contact a Chuhak & Tecson Banking attorney for counsel regarding private sales.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Amanda E. Losquadro, Principal

This alert originally appeared in the Winter 2019 Banking Focus newsletter.