Purchasing a House at Foreclosure? Buyers Beware
If you have ever perused the legal notices section of the classifieds, perhaps you have come across foreclosure notices. Although not the most interesting reading, these notices may contain hidden gems for those interested in purchasing residential (or even commercial) real estate. However, before you decide to get in on the action, it’s best to do your homework.
For those who don’t already know, a foreclosure is the usual end result when a property owner doesn’t pay on a debt secured by a mortgage. The party holding the mortgage files a lawsuit asking the court to order that the property be sold, with the proceeds used to pay off the debt. The process generally ends with an auction that is held at the courthouse. Legal notices contained in the newspaper advertise these sales.
However, the simple truth is that these auctions are poorly attended – usually only by the bank. As a result, the bank typically ends up buying back the property at auction. But most banks have no interest in actually taking title to the mortgaged property. Rather than having to market and maintain the property that is taken back at auction, most banks would rather have cash and might even be willing to take less than the full amount needed to satisfy the debt. This is how the savvy buyer can find some good deals.
The first step, then, is simple – read the legal notices and see if any properties are in areas that interest you. The notices must contain the address of the property at issue as well as a contact person to call for further information. It’s also a good idea to review the court file and to call the attorneys for the plaintiff and defendant. The court file is open to the public for inspection - - just ask the clerk. The attorneys for the respective properties may also provide you with helpful information.
Now that you have found a property that you want to buy, what next? Your first concern should be whether you can obtain clear title at the auction. It’s possible that the lawyer for the plaintiff failed to properly include all parties with claims on the property. In that event, you would end up purchasing property that still had a lien or claim that you would be subject to. The general rule is “caveat emptor” – there are no warranties of title provided at the auction.
The best way to protect yourself regarding title is to obtain an independent review. Contact a title company and ask for a title commitment. These reports (exclusive of title insurance) generally cost around $125 and can be obtained from just about any title company with enough advance notice. The report will show all parties who have claims on the property. Check that report against the named defendants and make sure that all of the claims included in the report will be terminated through the foreclosure such that you will receive “clear” title. And, in any event, a bank would require such a report before lending money to purchase a foreclosed property.
The title commitment will also provide you with important information regarding taxes. If a property has gone to foreclosure, it’s probably a safe assumption that the property taxes have been sold. A foreclosure won’t wipe those taxes out. The title commitment will show what taxes have, or have not, been paid and whether they have been sold. You can also use this information to help calculate your bid.
Keep in mind that foreclosure sales are also done on “as is/where is terms. Generally speaking, it’s not possible to view the interior of the property. A simple visual street inspection, however, may give you some indication as to the property’s condition. In most instances it’s safe to assume that the inside is in the same condition as the outside. Talk to neighbors and ask what they know about the property. Call the city to check on dwelling code violations, or a lack thereof, which may provide you with some additional assurances or sufficient information to scare you off. In short, do whatever you can, short of trespassing, to gather as much information about the physical condition of the property as possible. Finally, make sure your budget includes some amount to fix whatever problems you do find if you are the successful purchaser at auction.
Having done what you can to verify the property’s condition and the status of the title, it’s time to calculate what to bid. The complaint, located in the court file, contains information on what money is owed to the mortgage holder and any other claimants. Use this information as your starting point. Call the attorney for the bank/mortgage holder (or more realistically find him or her just before the auction) and see if you can negotiate an amount that the bank will agree not to bid against. Also, consult the legal notice to find out how much of the successful bid must be paid at the auction. There’s no hard and fast rule, so don’t lose a good deal simply because you didn’t bring enough money. Also, talk to your own bank about getting pre-approval of financing if you aren’t paying cash.
Assuming you are the successful bidder, the sale needs to be confirmed by the court before you actually receive title. Usually the bank’s attorney will file the appropriate paperwork. However, you will need to make sure your right to possession is appropriately addressed - especially if the property is still occupied. These issues can be tricky, and it’s best to consult with your own attorney.
Even if you aren’t the successful bidder at foreclosure, it’s still possible to buy the house as “REO” (“real estate owned”) from the bank after the auction if it ends up buying the house. If you are at all uncertain about the process, this may be a safer route as there’s usually a real estate agent involved.
Buying a house at foreclosure is fraught with pitfalls for the inexperienced buyer. Do your homework, consult with your legal adviser, and it’s possible that you may find some great deals.