If you are a buyer considering purchasing property from a lender following foreclosure, there are a few tips you should keep in mind. Please note that this article does not contemplate purchasing the property before the foreclosure is completed.
- Get a Lawyer! Considering the variety of issues and the dire consequences of an error, the best advice is to hire a real estate lawyer with experience in the foreclosure process. Of course, not everyone can or will retain the services of a professional. In that case, be sure to follow these recommendations.
- Title Insurance. Before purchasing real estate that is a result of foreclosure, obtain a commitment for a title insurance policy insuring you as the owner of the property. The title commitment shows all items affecting the real estate according to the land records, including the status of the real estate taxes, liens, mortgages and levied assessments. It will also provide confirmation that the rights of redemption have expired. The key to being protected with title insurance is to actually purchase the policy at closing. Don’t merely rely on the commitment!
- Inspection Contingency. As part of any offer to purchase, include an inspection contingency giving you the right to have a qualified inspector examine the condition of the property, including the well and septic system, if applicable. Lenders sell foreclosed property “as-is” – they cannot make warranties or representations about the condition of the property because they were never true “owners” and never resided in or used the property. Therefore, it is particularly important that a buyer complete due diligence and find out everything possible about the property before purchasing. Also, do not assume that the lender can transfer title to any personal property. Foreclosed properties can be bargain purchases, but if the foundation is crumbling, the septic system is failing, or the house is filled with mold, you may need to re-think the bargain and consider the overall investment being made.
- Liens, Liens, and More Liens. A title insurance commitment shows liens that affect the real estate and are recorded in the land records. To some extent a commitment can show additional lien information, if requested. Possible liens include liens for delinquent utility bills (electricity, water, sewer, trash), homeowners’ association assessment liens, mechanic’s liens for improvements made to the property and assessments for municipal improvements like new streets or water lines. You should contact the local municipality for more information, and if the real estate records show that the property is subject to a homeowners’ association, you should contact the association for a list of assessments (delinquent, pending and proposed).
- Survey? Surveys are expensive and can take time, but if there is any question at all regarding the boundary lines, you are better off knowing before completing the purchase. A lender selling foreclosed property cannot tell you where the property lines are; they do not have the benefit of prior ownership or possession. As a buyer, you should be diligent about determining where the boundaries are, be sure that you have legal access to the property and that all structures including the driveway are located on the property you are purchasing. You don’t want to find out that half of your garage is on your neighbor’s land after you’ve bought it. A survey will also allow for extended protections under your title insurance policy; be sure to ask the title company to include survey coverage.
- After the Closing. Confirm that the lender has changed the locks. If it has not, then immediately change the locks. You do not want to invite trouble by leaving your new property available for the disgruntled former owner to enter. In most foreclosure cases, the borrower and lender are not on amenable terms and the borrower is unlikely to hand over the keys (and all keys) to the lender. Take precautions.
Hopefully with these tips your purchase of foreclosed property can be successful.
By: Dehlia Seim
Published in Duluthian – Law Talk, April 2012.