Don't Expect Easy Bargains at Foreclosure Sales
reprinted courtesy washingtonpost.com 3/31/07
By Benny L. Kass
Saturday, March 31, 2007; Page F11
Q: We have been reading that a lot of homeowners are in financial trouble and that their homes are going into foreclosure. We would like to buy a home at a foreclosure sale and need guidance as to how to go about this.
Some people might say you are trying to take advantage of other people's troubles. But the reality is that in many cases, the greedy ones were the lenders who made loans to consumers who either could not afford them or did not understand the terms and conditions.
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Buying a home at a foreclosure sale is fraught with risks. You can end up spending a lot of money doing your homework, only to learn that at the last minute the sale was canceled or that the borrower filed for bankruptcy protection minutes before the sale time. And even if the sale proceeds, you may not be the successful bidder. There are a lot of professional buyers who know the players and the process, and they often get these properties.
Hire a lawyer who has experience with foreclosures in the jurisdiction where the property is. There are different laws and requirements throughout the United States, so you cannot rely on books that try to explain the foreclosure process.
Your lawyer will explain the procedure to you and will order a title search on the property. Presumably, the lender who instituted the foreclosure has also obtained a title search, because lenders are required to provide notice of a foreclosure sale to all people (or entities) who have an interest in the property.
But generally, the lender won't share that title report with you. You want to know everything about the title to the property, including:
Who owns the property? In whose name is the title?
How many mortgages exist in the land records?
Are there any lawsuits against the homeowner?
Are there any mechanics liens on record?
Why is all this important? Let's say that the house has both first and second mortgages. It is important to know which lender has instituted the foreclosure.
If it was the first trust holder, then by law the second trust will be wiped out. That does not mean that the homeowner will no longer owe money to the second trust holder. If that trust holder wants to pursue the homeowner, it will have to sue. The holder cannot foreclose on the property.
When you borrow money to buy or refinance a home, you sign two legal documents: a promissory note, whereby the borrower agrees to pay the lender pursuant to the terms of that document, and a deed of trust, also known as the mortgage, which is the document that allows the lender to foreclose on the property. The deed of trust is recorded among the land records in the jurisdiction where the property is.
If the foreclosure was started by the second trust holder, it must notify the first trust lender, which then has an opportunity to protect itself. In some cases, that first trust lender can negotiate to buy the second trust -- usually at a discount because the second lender is happy to get money quickly -- and then the first trust holder can start foreclosure.
This sounds complicated, and it is -- especially for novices.
While the title search is being performed, you should arrange to inspect the property. Why is the owner letting it go to foreclosure? Is the house in such bad condition that the owner is unable to sell it? Most homeowners don't want to go through foreclosure because it will hurt their credit for years. No lender wants to make a new loan to a borrower who has been foreclosed upon.
Accordingly, many homeowners faced with foreclosure will try to sell the house -- even at a discount. Try to talk with the homeowner. See whether you can negotiate to buy the house directly. That way, everyone will avoid foreclosure. (By the way, you are unlikely to be the only would-be buyer who approaches the owner. There are plenty of people trying to buy this way.)
You will need to know the value of the property and will also have to obtain a preliminary loan approval letter from a mortgage lender. You also need to know the exact amount of money that the lender will require to stop the foreclosure process. Often, this is difficult to obtain because some lenders are reluctant to provide you with the complete payout amount, which includes the outstanding loan balance, late fees, legal fees and foreclosure costs.
If you can persuade the homeowner to sign a contract to sell you the house, it should be contingent on your ability to go to closing before the house is foreclosed upon. You should not give the homeowner any money; your earnest money deposit should be held by your lawyer in an escrow account.
You or your lawyer should immediately contact the lender (or its lawyer) to advise them of the sales contract. You should get written confirmation that the foreclosure will be postponed so that you have time to go to settlement on the property.
Once the foreclosure process has begun, you will have little time in which to do all of your homework. Most legitimate lenders will not start to foreclose until they have exhausted negotiations with the homeowner on other options.
The lender will place a notice of foreclosure in a local newspaper advertisement. You and your lawyer should read the ad carefully. When and where will the foreclosure take place? Often the process can take less than 10 minutes. If you are late, you will lose out.
Are there any conditions or restrictions mentioned in the ad? Will the successful bidder take title subject to any outstanding liens or obligations?
On foreclosure day, go to the auctioneer's office or wherever the sale will take place. (In some jurisdictions, foreclosure auctions are still held on the steps of the local courthouse.) Listen carefully to the bidding instructions. Sometimes, new terms and conditions will be presented at the time of the auction, and these terms may not be satisfactory to you.
If you are the successful bidder, you have to post with the auctioneer a good faith deposit that will be forfeited if you do not close promptly -- usually within 30 days.
Congratulations are not yet in order. Did you take into consideration that the current owners are still in the property and you will probably have to evict them? This can be an expensive and time-consuming project. You should account for that in your planning.
Buying property at a foreclosure sale is not for everyone. It can involve a lot of money, time and disappointment. Always ask yourself: If this is such a good deal, why am I the only one who realizes it?
Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site, http://www.kmklawyers.com .
reprinted courtesy washingtonpost.com 3/31/07
Original link at http://www.washingtonpost.com/wp-dyn/content/article/2007/03/30/AR2007033000977.html?nav=rss_realestate
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