Over the last few months, we have received many calls from clients interested in purchasing a property at a mortgage foreclosure sale. The real estate crash and foreclosure crisis created an opportunity for savvy investors and parties still left with any cash by flooding the market with foreclosed properties which can often be purchased for less than their fair market value. But like the real estate boom times where everyone and his hairdresser became an investor in property, these times also lay traps for the unwary that can turn an opportunity for a quick profit into a cash-draining enterprise.
There are many issues that you should carefully consider before bidding at a foreclosure sale.
1. Title to any property that you are considering purchasing should be carefully searched and reviewed. Just because a property is being sold at a foreclosure does not mean the purchaser will receive “clean” marketable title. For example, there could be other mortgages which still encumber the property that have not been wiped out by the foreclosure. This happens when a second mortgage holder brings the foreclosure action. So that great deal you thought you were getting doesn’t look so good when you find out that another lender still holds a $300,000 mortgage. Additionally, judgment holders may not have been named and the lien of their judgment may not be wiped out.
2.Assessments and Liens. If a property lies within a development subject to a Homeowners, Property Owners, and/or Condominium Association, you could be personally liable for all outstanding assessments if you are the successful bidder at the foreclosure sale.Additionally, assessments may be owed to the municipality or county for utility or other services. These will typically not be wiped out by a foreclosure action. The governing body should also be contacted to confirm that there are no outstanding code enforcement or similar liens. These can be very expensive (usually with a running daily fine) and difficult to resolve with cash-strapped government bodies.
3. Taxes. Foreclosure actions do not wipe out real estate taxes. You need to determine the status of real estate taxes before making a bid, taking into account the fact that you will ultimately need to pay any outstanding real estate taxes.
4. Title Insurance. In a “normal” transaction, a buyer of real property obtains title insurance which protects against title defects and certain other adverse matters. As a purchaser at a foreclosure sale, you will not typically receive title insurance. This means that you may be left to fend for yourself in resolving any title issues, even ones back in the chain of title. We recently handled a transaction where a party purchased a property at a foreclosure sale, only to find out that a deed from twenty years ago was missing from the chain of title. This required the buyer to track down principals of a corporation that was dissolved years ago, and hope that those parties would sign and deliver a deed.
5.Foreclosure Action. The actual foreclosure proceedings should also be examined to make sure that all necessary parties were named and served; that the court issued a final judgment and properly set a sale date; AND THAT NO APPEALS HAVE BEEN FILED. We also recently handled a transaction where a party purchased property at a foreclosure sale, only to find out that the original owner/mortgagor had filed an appeal. That buyer is now left to wait for resolution of that appeal or forced to cut a deal with the prior owner.
6. Inspections. In a “normal” transaction, a buyer will visit the property, often several times. After the parties sign the contract, buyers conduct inspections and determine the condition and acceptability of the property. With a foreclosure property, you very rarely have access to the property prior to your purchase and may be in for some unpleasant surprises when you first walk through that front door.
While good deals can be found, any purchase at foreclosure sale needs to be carefully researched and weighed.