Due diligence prior to foreclosure auction purchases

happybuyerAs more foreclosure properties are released from inventories, new opportunities exist for investors. At TitleSearch.com our investor clients are seeing increased volume of available deals and even higher margins on purchases.

However although foreclosures are priced much cheaper than retail/Realtor/MLS deals, they come with the responsibility to perform appropriate due diligence before bidding at auction or dealing with REO’s. This can include a proper title search, inspection of structure, and legal analysis of the purchase.

Not only will the due diligence reveal any remaining liens on the property, it will also show if the foreclosure is on a primary debt or subordinate instrument. If a bidder wins an auction but later discovers that the sale was for a second mortgage or other secondary lien, the property is still subject to priority recordings. In one recent case, a buyer purchased what turned out to be a homeowners association lien at auction, and was still subject to a first mortgage from Wells Fargo.

According to the Miami Herald article on risks of buying at foreclosure, “Establishing clear title and control of the home, which some cash buyers have never set foot in, can mean sorting through a thicket of foreclosure filings, fraud allegations, bankruptcies, other mortgages, association liens, creditors and combative tenants.” In one example from the story, a foreclosure buyer found that the delinquent borrower was properly foreclosed, but was using a complex set of legal maneuvers to avoid eviction. The court filings, emergency motions, and bankruptcy should have been discovered in the due diligence and would have cautioned the buyer to determine how to resolve the issue before purchase. Now the buyer has a house he can’t access because the foreclosed owner is still living in it.

The buyer is in a difficult situation.  He thinks the prior owner is finding ways to stall eviction so she can live rent-free in the investment property. “This is a sophisticated squatter. She’s playing the system,” he said. Attorneys say more horror stories come from the clerk’s foreclosure auction in Miami-Dade, a county where there is a backlog of 53,000 foreclosure cases.

In neighboring Fort Lauderdale, there are stories of unresolved open permits encumbering properties. Board-certified real estate attorney Gary M. Singer answers a question about how open permits can be a problem for a new owner: “A homeowner who gets certain work done is required to get a permit and pay a fee to the city or county. Usually, the contractor takes care of this. After the work is completed, the permit must be closed, often after an inspection by the building department. This final step often is overlooked as the contractor rushes off to the next job, leaving the open permit in place, sometimes for years.

The problem comes in when the new owner goes to pull another permit and now has to deal with getting the prior permit closed before the building department will issue the new permit. To close the old permit, typically a new contractor will have to inspect and possibly fix the old work, and the building department will have to come out and inspect. This can cause quite an expense for the new owner and it will become your headache after you move in.”

Higher profits come with foreclosure properties, but investors need to do the extra leg work of performing good due diligence, and having a team of qualified professionals to get them good title info, property research, and legal advice.