Foreclosure refers to the legal right by which a lender cancels (or forecloses) a borrowers right of redemption of a mortgaged property through a court order (referred to as a foreclosure order). After this, the court sets up a date to which the borrower can redeem the property by paying off the entirety of the loan balance. Once the loan is paid fully, the lender is free to sell the property and apply the sale proceeds to the due amount first and then pay any remaining due amount to the borrower. The borrower remains liable for the due amount if the property remains unsold and if the shortfalls of the sale proceeds are not sufficient to pay of the remaining debt.
Many real estate buyers think of buying a foreclosed property as an economical and affordable way to obtain cheap housing. However, if the owner who had the mortgage becomes involved, there may be a series of legal hurdles involved when acquiring the property. Regardless, the kinds of legal problems real estate buyers are likely to come across are dependent on when the property is purchased and the manner in which it is purchased. However, the person that buys the foreclosed property may have a handful of legal protections once the lending agency, that sold the property, is out of the picture. Seeking help of a real estate attorney could be required.
Buying before Foreclosure
Because of the complicated and time consuming nature of foreclosures, it is more advantageous to make the purchase before any third party entities become involved in the foreclosure as this minimizes complications and hurdles. It essentially allows you to complete the sale of the house with the homeowner. In many cases, it is possible that the sale may be completed with cash out that is less than the value of the property itself. It is also possible that the deal is completed without the company that provided the mortgage getting involved, and the new owner can take over the existing mortgage or start a new one with the same or a different financial institution.
The new owner must equip him or herself with proper knowledge and research about the property such as liens, debts and mortgages. This will prepare the buyer for any upcoming legal issues and hurdles beforehand.
Buying at the Foreclosure Auction
Buying at an auction is not an easy task for individuals who are new to the real estate market. Buyers see purchasing property at a foreclosure auction as a cheap way to acquire property. What they don’t realize is that there will be many other buyers at the auction with the exact same idea who want to acquire the property just as badly as them. The buyer with the most cash is handed over the house, and the house itself may be in excellent condition or it could be in a very dilapidated state. This is because in these kinds of purchases, there usually isn’t time for more than one site inspection before the buyout.
Deteriorating physical conditions may not be the only problem a buyer does not become aware of beforehand. Other problems like unpaid taxes, liens and debts attached to the property may also present new owners with a nasty surprise, as many of these could have been attached to the property, affecting their ability to exercise their right of redemption that is available in certain states. This is possible during a certain period of time after the point of foreclosure, and it is governed entirely by the laws of the state.
Buyers looking to acquire property at a foreclosure auction ought to:
• Do research on the property’s condition by taking a look at the property’s external appearance, talking to neighbors and looking up the address online
• Order a full title search on the property to find out about any potential debts or liens attached to the property
• Scope out land use problems such as zoning or toxic waste issues
• Do research about how the auction process works and its rules
• Sit in on some other foreclosure auctions beforehand. This will allow you to familiarize yourself with the foreclosure process
• Decide on the maximum offers beforehand and not be tempted to go over that amount at auction
Buying a property purchased by a lender
Buying a property that has already been purchased by a lender as part of the foreclosure process is distinct from buying a property at a foreclosure auction in many ways. A property that has been reacquired by the lender in the foreclosure process is referred to as Real Estate Owned (REO). In most cases, these are cleaned up and marketed by lenders who would prefer not to keep the property and would be inclined to sell it at a relatively cheap price.
Foreclosure sales can be subject to redemption by the borrower, meaning the borrower can pay the buyer the purchase price, along with some costs and interest and eventually the borrower is forced to return the property to the lender. In such cases, most of the time, the buyer loses any utility from the purchase money and sees only marginal gains.
The IRS reserves the right to redeem the property within 120 days when back taxes are owed and aren’t paid. There are also other potential laws regarding redemption applicable in the state where the property resides. It is imperative that buyers use the services of a reliable and experienced real estate attorney as he or she will be able to help the new owner from having their newly purchased property seized.
Apart from this, the buyer should also ask the attorney the following questions:
• Can you help me create a purchase contract for a pre-foreclosure home?
• Would you do a title search on this home I’m considering buying at auction?
• Do our state laws create a risk that the foreclosure home I’m buying will be redeemed and reclaimed by its former owner?
Purchasing a foreclosed property can be tricky and risky. Make sure you get in touch with an experienced foreclosure attorney for legal advice before going ahead with the purchase.