7.4 Involuntary & Special Transfers: Foreclosure, REO, Short Sales, Probate & Adverse Possession

Involuntary Alienation: The Categories

Involuntary alienation is transfer of title without the owner's consent. Brokers encounter it constantly in distressed inventory and in estate listings.

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New Jersey Foreclosure and the Sheriff's Sale

New Jersey is a lien theory, judicial foreclosure state. Every residential mortgage foreclosure runs through the Superior Court, Chancery Division, General Equity Part.

1. Notice of Intention to Foreclose (NOI) — under the Fair Foreclosure Act, N.J.S.A. 2A:50-56, the lender must give the residential borrower at least 30 days' written notice before filing.
2. Complaint and service — the borrower has 35 days to answer. Most residential foreclosures are uncontested and proceed to default.
3. Final judgment and writ of execution — the court fixes the amount due and issues a writ to the county sheriff.
4. Sheriff's sale — advertised and conducted publicly. The mortgagor is entitled to two statutory adjournments of two weeks each.
5. Ten-day redemption period — after the sale, New Jersey gives the mortgagor 10 days to redeem by paying the full amount due. Only after that window closes does the sheriff deliver the deed.
6. Sheriff's deed and possession — the deed conveys the interest foreclosed. It is not exempt from the Realty Transfer Fee: consideration for fee purposes is the bid amount plus any prior mortgages, liens, or encumbrances to which the purchaser remains liable, declared on Form RTF-8, which the Division of Taxation states "is not an exemption from the RTF." Removing holdover occupants requires a separate proceeding.

Lien priority consequence: a foreclosure extinguishes liens junior to the foreclosing mortgage. Senior liens, most municipal tax liens, and many federal tax liens survive. This is why a buyer at a sheriff's sale must have searched title beforehand — there is no title insurance handed out at the courthouse steps.

REO: if no third party bids the debt, the lender takes title and the property becomes real estate owned. REO sellers convey by special warranty or bargain and sale deed without covenants, sell strictly as-is, use their own addenda that override the standard contract, and are exempt from the seller's property condition disclosure obligation because the institution has never occupied the home. The broker's duty to disclose known material defects is not waived by the seller's exemption.

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Short Sales

A short sale is a voluntary sale at a price insufficient to satisfy the encumbrances, requiring every lienholder's written consent. It is not a foreclosure; the seller still owns and still signs the deed.

• Every lien must sign off — first mortgage, second mortgage or HELOC, judgment creditors, municipal liens, and any HOA claim. A single unreleased junior lien defeats the closing.
• Deficiency is the central question. Approval of the sale price does not by itself release the borrower from the remaining balance. The broker must obtain the lender's written approval letter and read whether the deficiency is waived or reserved. Never characterize a short sale as a clean walk-away.
• Timelines are lender-driven. Approval routinely takes 60 to 120 days and can expire. Brokers must set expectations in writing and keep the buyer informed rather than promising dates the lender has not given.
• Stay in your lane. Tax treatment of forgiven debt and the credit consequences of a short sale are questions for a CPA and an attorney. A licensee who advises on them is practicing outside their license and creating liability.
• New Jersey overlay. Attorney review applies to a licensee-prepared short-sale contract exactly as it does to any other residential contract, and the lender's approval is a contingency layered on top of it.

A deed in lieu of foreclosure is the alternative: the borrower voluntarily conveys to the lender. It is faster and quieter, but the lender must accept the risk that junior liens survive, because no foreclosure occurred to extinguish them. Lenders therefore refuse a deed in lieu whenever the title search shows junior encumbrances.

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Estate, Probate, and Court-Supervised Sales

New Jersey probate runs through the county surrogate.

• Where there is a will, the surrogate issues letters testamentary to the executor. Where there is none, letters of administration issue to an administrator, and the intestacy statute controls who inherits.
• The personal representative conveys by executor's or administrator's deed, reciting the authority. Title companies require the letters, the death certificate, and often an affidavit of no debts.
• New Jersey inheritance tax creates a lien on the decedent's New Jersey real property. Class A beneficiaries — spouse, civil union partner, children, grandchildren, parents — are exempt, but a waiver or self-executing form is still typically needed to clear the lien for title purposes. Unresolved waivers are a leading cause of estate-sale delays.
• Contested estates, minors' interests, and certain guardianship matters require Superior Court approval of the sale.

Broker practice point: before listing an estate property, confirm in writing who holds letters, whether all heirs consent, and whether inheritance tax waivers will be needed. Marketing a property that the seller cannot yet convey wastes everyone's time and exposes the brokerage.

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Tax Sales, Eminent Domain, Escheat, and Adverse Possession

• Tax sale certificates. New Jersey municipalities sell certificates for delinquent taxes. The certificate holder earns statutory interest and may, after the redemption period, foreclose the equity of redemption and take title. A buyer of an encumbered property needs a written redemption figure, which changes daily.
• Eminent domain. The State, municipalities, and authorized utilities may condemn property for public use on payment of just compensation, measured by fair market value. Inverse condemnation is the owner's action when a government action effectively takes property without a formal proceeding. A partial taking may support damages to the remainder.
• Escheat. Where an owner dies intestate and without heirs, title escheats to the State.
• Adverse possession. New Jersey requires possession that is open, notorious, hostile (without permission), actual, continuous, and exclusive for 30 years for most real property, and 60 years for woodlands or uncultivated tracts, under N.J.S.A. 2A:14-30 and 2A:14-31. Tacking allows successive possessors in privity to combine periods. Adverse possession does not create record title by itself — the possessor must bring a quiet title action, and until they do, the defect shows up as a survey exception on a title commitment.

Exam trap: candidates routinely answer adverse possession questions with the 20-year period used in many other states. New Jersey's periods are 30 years and 60 years.