Interested in Buying at a Foreclosure Sale?

Like everything else I suppose foreclosure sales present a path of opportunity along the precipice of disaster. Here’s a quick sketch of some of the considerations that should precede your participation in this activity.

We will not discuss sales under federal law, including IRS sales. Maybe another time. Rather, we will discuss foreclosure sales under state law, the vast majority of forced sales. There are two kinds of these: trustee’s sales and sheriff’s sales.

Where’s the Money? First, have liquidity sufficient to pay in full on the day of the sale. One of the reasons that you can get good deals is that you have to have money in hand at the time of the foreclosure sale. There is no time to apply for a loan. Before you bid a make sure that you are clear about the payment arrangements. You can call the trustee (for a nonjudicial sale) or the civil division of the county sheriff’s office (for a judicial sale) beforehand to find out about this. Hopefully, you will have time to go to the bank after the sale to get the money to pay for the deed.

Judicial Sales. Sheriff’s sales are sometimes called judicial sales because they are sales under the jurisdiction of the courts and are ordered by the courts. Because sheriff’s sales are the less common of the two types and because they are more complicated, the bidding is usually not very competitive. Bidding at one of these sales requires an understanding of redemption rights, an area in which most lawyers are a little foggy. Usually, but not always, sheriff’s sale will result in a redemption period in which the former owner and perhaps other lenders or lien holders can buy the property from the successful bidder. The length of the redemption period varies from eight months to a year in Washington, although under certain circumstances there is not redemption period. After you look into this and determine who the redemptioners are and the likelihood that the property might be redeemed, be sure to check to see whether the court has imposed an upset price, a minimum price. If you are not experienced with this, you should consult with someone who knows about these things and can give you good, reliable advise.

Trustee’s Sales. Nonagricultural loans are almost always secured by a deed of trust because the Washington Deed of Trust Act provides for a relatively cheap and quick means of foreclosure. It is cheap and quick because it does not involve the courts and for that reason is called a “nonjudical foreclosure.” Most significantly to the prospective bidder, there will be no redemption period. The successful bidder will get a trustee’s deed, conveying title free and clear of redemption rights. This makes preparation a lot easier.

There are three areas that must be investigated. As with all of life so far as I am aware, the people who do the best with this enterprise tend to be the most thorough in preparation.

Title Investigation. First, get a title report. Call the trustee about this. You should focus on that the recordings that preceded the deed of trust being foreclosed because the foreclosure only eliminates the liens and deeds of trust recorded afterwards. For example if a “second mortgage” (we still use this term even though a deed of trust is used instead of a mortgage) is foreclosed and you are the winning bidder, you take title subject to the first deed of trust and must pay it or lose the property in the foreclosure of the first deed of trust.

It may also contain notes about possible defects. You may find that there are easements, covenants or use restrictions that affect your decision whether to bid. Also be aware that you will get the title of the person who signed the deed of trust, the grantor. If the property has been sold you take the interest of the grantor’s successor. Check this out so that you are comfortable that the grantor had good title at the time he, she or it granted the deed of trust. In short know what you are getting when you get title.

Physical Investigation. This is often a problem area because the property is usually occupied and you cannot get access. There is no rule against asking the occupant if you can look around, but as you would guess this can be a bit dicey. There are helpful records, such as those at the building department. Be sure to always at least drive by.

Market Value. No one should ever bid at a forced sale without have a good sense of the market. The reason most people go to trustee’s sale is to acquire the equity in the property. To determine that to determine that you subtract from the market value the sum of all the debt on the property. This, of course, is the cornerstone, calculation and will be the key determining factor in the competitiveness of the bidding. It is the determination of market value that will determine your success with this type of investment. This determination must be made with a critical factor being unknown: the physical condition of the interior of the improvements.

Zoning and Future Development. Check the zoning to see whether the property is in a sensitive area (and if so what that means) and what building restrictions there are. Check with the building department to see whether there are any permits for developing the area. Generally this sort of investigation involves the same sort of inquiry regardless of whether the property is in foreclosure or being sold on the market.

Public Trust Doctrine; Standing

One always contentious issue in environmental lawsuits is the question of standing. In a New Jersey lawsuit to invalidate the City of Scranton’s agreement to sell public land to a private concern, an appellate court found that a suit under the public trust doctrine conferred standing on individual citizens who wanted to unwind the sale.

Tips for Buying Foreclosed Real Estate

A buyer can often get a good-sounding deal after a bank has foreclosed on a parcel of real estate. Like all good-sounding deals, however, this one comes with risks that people ought to understand before making an offer. Typically this property is sold by a subsidiary of a bank, sometimes by a federal agency such as H.U.D. Remember that your seller (the bank or federal agency) knows nothing about the property and will take every imaginable step to immunize itself from responsibility to the buyer. (With banks it is usually a wholly owned subsidiary that has title to the property.) You will be pretty much on your own after closing and cannot look to the seller if the roof collapses the next day or some other disaster befalls you with your acquisition. If you receive a seller’s disclosure statement about foreclosed property, it may be a bit misleading since the seller’s period of ownership is likely to have been just a few months and chances are that the property has been unoccupied during that time.

Another point to bear in mind is that there are many different reasons a person suffers a foreclosure. One reason is that the property is not worth the debt on it. Another reason is that it would cost too much to repair to justify paying on the debt. Sometimes the property cannot be sold for enough to pay off the debt. Some bank owned property has been given back to the bank by a deed-in-lieu- of-foreclosure.

Banks look to recoup their loan balance and carrying expenses when they sell property they received through foreclosure. When large down payments were required of buyers, a purchaser of foreclosed property could count on there being equity in the property at the time of the foreclosure so that the price asked by the bank was likely to be beneath market value. With subprime loans accounting for a good number of the foreclosures, a buyer certainly cannot rely on the expectation that the debt on the property was less than market value. With 100% financing frequently provided to customers, banks in setting the asking price of foreclosed property at the amount of their debt are often putting the price at or above market value.

All of this requires that the buyer have a very clear idea of market value and that absolutely everything on the property be thoroughly inspected. You may also need bids for repair work before you make an offer.

It is often useful to get all the information you can from the bank about the history of the property.

You need to pay attention to the title to the property. If work has been done on the property you need to be sure that there are no disputes with contractors that could result in the filing of a lien after you buy the property. You should try to get a warranty deed at closing and discuss with the title company the array of title insurance options that are available to you through endorsements and extended coverage.

You can also talk with neighbors and through the recorder’s office get the names of prior owners. With luck you will be able to track down a prior owner to discuss the property.

Septic systems

In purchasing property in a rural area guess what is perhaps the leader in litigation inducing discord. Septic systems. People moving from urban to rural areas are particularly susceptible to this cause of emotional disruption. Also first time buyers and generally folks who have not lived on a septic system. By statute now the seller of a residence is required to answer several questions about the septic system if there is one. This requirement has curbed the problem somewhat but often the seller’s interest in selling seems to outweigh his interest in making full disclosure. Buyer’s real estate agents have not proven to be sufficiently informed or motivated to see that the buyer always avoids the surprise of discovering a nonfunctioning septic system. The consequences of this situation are potentially disastrous, as it is unlawful to occupy a building that is neither on a sewer system nor on a lawful, functioning septic system.

People routinely order home inspections before buying but ordering a septic inspection is for some reason not entirely routine. It should be. A home inspection does not include septic, so the two should be ordered at the same time. By law generally speaking a purchaser is entitled to rely on the statements in a seller’s disclosure statement but prudence recommends doing more. An inspection will inform you whether the system will soon need replacing or upgrading. You can also find out whether you need a new system in order to add on to the existing structure. As a responsible home-owner with a septic system you should try to learn as much as you can about it before buying.