A credit bid, also sometimes referred to as an upset bid, is essentially a dollar amount that a bank, credit union, or other type of lender has determined to be the minimum it would accept to release its claim to a foreclosed piece of property that is being used as collateral for a mortgage.
For example, if a $200,000 mortgage was given for a home, and the borrower defaulted, not making payments for a long enough period of time that the lender foreclosed on the property, the home purchased with the bank’s money would be scheduled to be auctioned at a foreclosure auction.
When the home foreclosure auction takes place, the bank is able to control the amount for which the home can be sold to an investor or other third party. The bank does this by setting a credit bid amount. In the case of the $200,000 mortgage referenced above, if there is $195,000 in principal amount left on the mortgage, the lender may decide that, rather than purchasing the piece of property, they would prefer to have it sold, even if it’s for less than the amount owed on the loan. It may be that the bank wants to recover at least $160,000 of the balance of $195,000 left on the loan. In this case, having considered lots of different factors, including the current value of comparable properties in the area and how quickly the bank might be able to sell the property, the bank would set it’s credit bit amount at $160,000, and would expect to take as much as a $35,000 loss on the property.
Owning real estate, which is normally referred to as REO or “real estate owned” property, is generally looked on negatively by lenders, who typically don’t want to be in the business of having real estate assets on their books, and who often will take a loss up to a certain amount on their initial loan.
Where Does the Credit Bid Term Come From?
The term credit bid comes from the fact that, whereas investors attending an auction enter cash bids at the auction and the winner is required to pay the amount bid using the equivalent of cash (most often in the form of a cashier’s check), the lender who has foreclosed on the property has a credit towards the property equal to the amount owed to the lender, including foreclosure costs and other possible fees added on top of the mortgage itself. The lender can choose to have its credit bid be equivalent to the amount that it is legally owed, but most often (as explained above) opts to set its credit bid lower than that amount.
Foreclosure Auction Proceedings
At a foreclosure auction, the lending institution often coordinates with the auctioneer who’ll be running the auction to determine two bid thresholds. One is the opening bid, which is normally posted publicly before the auction, and is used to tell potential bidders what the lowest possible bid will be. The other is the credit bid (sometimes this is an estimated figure).
In most foreclosure auctions, the credit bid is significantly higher than the opening bid. At an auction I attended recently the opening bid was $195,000 for a foreclosed townhome near Nashville, Tennessee. Before the auction, I spoke with one of the staff of Auction.com, who was in charge of this auction and many others throughout the country. He told me that once they’ve received a bid for the opening bid amount, they skip directly to the lender’s credit bid. In this case, the woman actually calling the auction skipped from $195,000 to $244,000, a difference of almost $50,000.
After the bank’s credit bid was reached, bids went up moved up in increment ranging from $100 to $5,000, with the property ultimately selling for $280,100.
I’ll include the listing for the auction below, so that you can see what the auction advertisement typically looks like with the opening bid and estimated credit bid (in this case not disclosed) for a listing on Auction.com.
Sometimes what is most commonly referred to as the credit bid can be alternatively called the upset bid. They are essentially the same thing. The upset bid terminology comes from the idea that once a judicial sale of a piece of real estate has been completed, there is an opportunity for the lender to “upset” the winning bid if it’s not high enough to meet their minimum recovery dollar amount.