When a borrower decides to take out any type of commercial real estate loan, it is crucial they understand the fundamentals of the foreclosure process. It doesn’t matter whether borrowers choose to borrow from private capital lenders or institutional lenders; there are real risks involved. Understanding the foreclosure process help both real estate lenders and borrowers know the risk, foresee possible options available if you end up in this situation, and have the best possible experience with hard money lenders.

Each state has its own foreclosure rules and regulations.  The following explanation is intended for Colorado hard money borrowers only although certain aspects of Colorado’s foreclosure process may be applicable in other states.

• Step One:  The foreclosure demand letter – prior to initiating a foreclosure, a lender almost always sends a “demand letter” to the borrow “demanding” that defaults in the loan are cured.  These defaults may be non-payment of interest, failure to pay taxes or insurance, or placing a lien on the property without the lender’s permission.  The default letter typically gives the borrower a certain number of days to cure the default and states that if it is not cured within that time frame the loan will be put into foreclosure.

• Step Two:  Filing the foreclosure – if the lender’s demands are not met by the required date, the lender files what is called the “Notice of Election and Demand” (NED) with the Public Trustee (PT) of the county in Colorado in which the property is located.  Colorado is the only state that uses the Public Trustee system.  In Colorado, when documenting a loan the borrower signs the lender’s Deed of Trust form.  A Deed of Trust literally transfers ownership of the collateral property to a Public Trustee (an appointed county official) during the term of the loan.  So long as the loan is not in default, the Public Trustee does not need to exercise its ownership of the property. On the other hand, when a default is declared by the filing of the NED, the Public Trustee must follow certain regulations created by the state legislature. Unless the default is cured, the Public Trustee will transfer its ownership of the property to the private capital lender.

• Step Three:  Notification of the borrower and other creditors by the Public Trustee – according the rules set up by the legislature the Public Trustee must send a letter to the borrower and to any other creditors that are junior (i.e. that have an interest in the property like a second mortgage) to the lender that a foreclosure has been commenced.  This notice must also be published in a newspaper on three separate occasions to give the public notice that a foreclosure is in process.  The entire foreclosure process takes approximately four and one half months from start to finish.

These three steps are the first part of the foreclosure process.  The last part of the foreclosure process will be discussed in the next installment of Montegra’s Foreclosure series (part 2), including the rule 120 hearing, receivership, the cure period, and transfer of the title.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.