Foreclosed homes can be purchased in a non-judicial foreclosure sale (typically held on the courthouse steps) or through judicial foreclosure (by a judge’s order)
For those unfamiliar with the process, there are numerous legal pitfalls in purchasing a home in foreclosure the unprepared purchaser can avoid through due diligence.
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Liens
Before purchasing a home in foreclosure, a prudent investor must do a proper and title search to uncover any liens.
The critical questions regarding liens are: 1) what kind of lien is it? 2) And what number in the line of liens taken is it?
Foreclosure of a second or third lien will not extinguish the first lien taken, which is usually a lien taken by the mortgage company for the purchase money.
You also need to know what kind of liens are still active on the house. Examples include IRS liens, home improvement liens, and liens taken by homeowners’ associations.
Title Searches
While some investors are able to properly search title, many are not.
In these situations, you can engage certain title companies to do the leg work for you.
You can also obtain a title report or abstractor’s certificate and engage either a title or real estate attorney. He or she should be able to tell you what will (and will not) be extinguished by the foreclosure sale.
What about seller’s disclosures?
There are none in a foreclosure sale, so buyer beware…
Find Real Estate Attorneys for Foreclosures
Property Condition
You should acquire as much information as possible regarding the property prior to any purchase.
At a foreclosure sale, you are buying the house “as is,” meaning that no warranties are given, either express, implied, or statutory.
Your biggest information needs are:
- The condition of the foundation;
- Whether the property has flooded/is flood-prone;
- Any environmental contaminants.
There are other worries; however, these three will cause the biggest financial headaches of all.
It is always advisable to eyeball the home from the street to get a sense of it before purchase.
Other Issues
You need to also determine the realistic fair market value of the home. This will help you ensure that you don’t bid more than the equity in the property.
You also need to find out whether the property is occupied by any tenant.
Generally, your purchase will trump a prior lease. However, evicting a tenant on foreclosed property engenders all sorts of state and federal laws and can be time consuming and expensive.
You also need to check the bankruptcy records and make sure the homeowner did not file for bankruptcy right before the foreclosure.
If you unknowingly purchased the home when the owner filed bankruptcy prior to foreclosure, the sale to you is void.
While you are able to get your money back, it is infamously difficult to do so.
Finally, you need to understand that you will hold the property for some time.
Certain foreclosures, such as a foreclosure by a homeowner’s association or for unpaid taxes, allow the foreclosed-on owner to exercise a “right of redemption” for statutorily prescribed amounts of time.
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