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This is a theoretical situation, one that keeps making the rounds on Facebook (and probably other social media sites) of a "feel good" type of story, but I'm wondering if it has any basis in fact. From what I understand of different topics, I don't think it could work even in the most remote situation.

The story goes like this: A farmer is having financial difficulty and the bank forecloses on the farm, the equipment, etc. So those things, and everything else of value, goes to auction. At the auction, all of the farmers friends and family stay silent, allowing the farmer to bid on their own stuff and get it back at a fraction of the original value/loan amounts.

Cute story, right? Of course, I've paraphrased it to be more concise for this question.

There's a lot that I think would prevent this from ever actually happening.

  1. People from outside the farmers close circle of family and friends would attend the auction, preventing "everyone" from being silent and causing actual bidding against the farmer. Also, from having been to auctions, I know that people love to get stuff at a discount, so they won't have any problems bidding against their friends and family. Not to mention that some (on the opposite end from the bargain hunter) will bid high just to give the estate a little more money.

  2. From what I understand, high value auctions normally require proof of funds for purchasing large items (like a house, vehicle, large equipment, etc.), because they require full payment before the end of the auction.

    a. Since the farmer is in the middle of a foreclosure, no bank/credit union is going to give them a loan to allow them the ability to even bid on their property.

    b. Foreclosure auctions generally have a minimum bid equal to the remaining loan amount, so the farmer in foreclosure wouldn't be able to bid high enough to get their property/land/house back.

    c. Even if the minimum bid isn't as high as the loan amount, the lender would still likely have a reserve amount equal to the loan amount, so even if the farmer was able to bid, they still likely couldn't get over the reserve level to actually win the auction.

    d. Even if the reserve isn't the full loan amount, there's still likely going to be a reserve amount that would prevent the farmer from paying $5 for everything. This reserve amount is likely still over 50% of the loan amount, as the lender wants to get as much out of the property as possible, but also not lose multiple tens of thousands or hundreds of thousands of dollars in the process.

  3. From reading this article, foreclosures can take years, so the farmer can have plenty of time to try to refinance the loan(s), borrow money from friends and family, harvest crops, sell any cattle/animals, and more to try to prevent the foreclosure in the first place, so if the farmer really was having problems and their friends and family really did want to help, there are far more reliable and direct methods to make this happen than risking everything at an auction. Even non-judicial foreclosures take a few months, so there's still time for more direct solutions than an auction.

  4. From the article mentioned in point #3 I know that mortgage release and short sales can relieve the farmer from the remaining debt, but if those weren't part of the foreclosure agreement, wouldn't the farmer still be in debt for the remaining portion of the loan(s) even if they were able to buy back the property/equipment/etc.? So if somehow the farmer does buy everything back for $5* each, and ends up with a total bill at the end of the auction of $500*, wouldn't that just be $500 off the loan(s) and then still maybe have to pay the costs for the auction itself? (I can understand if the lender has to pay those fees, but it also makes sense that the lender would find a way to incorporate that into the what's owed.)

So, my question is this: are my assertions correct or what other factors could prevent the story from happening?

I've tagged this question as United-States, but I'd be interested in knowing if there was a jurisdiction where this story was possible and could have the intended happy ending.

* random number, don't think about it too hard.

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  • I don't think this can be answered except by finding if it has ever actually happened (unlikely). "How far from happening" seems to be largely opinion, which would put it out of scope.
    – keshlam
    Commented Oct 30, 2023 at 21:47

1 Answer 1

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The glaring flaw with the story is that at the foreclosure auction, lenders can and generally do simply bid the outstanding balance amount, specifically to prevent any stunts like this. Then they're free to put the asset up for sale on the open market (not in a time-constrained auction) where they're more likely to get an actual market-value offer from a buyer.

At a foreclosure auction, the mortgage lender typically makes the opening bid. The mortgage lender can open the bidding at the amount owed on the loan without paying anything out-of-pocket to fulfill the bid. Lender’s opening credit bids are often winning bids.

Source: https://ghristlaw.com/the-basics-of-what-a-foreclosure-is-and-how-it-works/

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