The Top 5 things That Investors Should Know About Buying Foreclosures

The Top 5 things That Every Investor Should Know About Buying Foreclosures

Buying foreclosures is a great way for real estate investors to get bargain prices on properties. However, there are certain things that every investor should be aware of before buying foreclosures.

• 1.The Property will be Sold As Is and No Disclosures. The Inspection is critical.

The inspection is always important and is particularly critical for buying foreclosed properties. The banks will typically not provide condition disclosures and even if they did they would not be worth that much since the bank does not have extensive knowledge about the condition of the property. Similarly, the bank will not make any warranties as to the condition of the property and will sell “as is.” Therefore, the inspection is critical when purchasing foreclosures. Make sure you use a good inspection company.

• 2.You will likely Not Get a Warranty Deed

The bank is usually unwilling to provide you warranty deed, which provides you with certain warranties concerning the title of the property. You will likely receive a special warranty deed or a quit claim deed, which provide you as the buyer with less protection. Therefore, title insurance is critical when buying foreclosures.

• 3.The Tenants may have the Right to Continue to Occupy the Premises

If there are tenants in the building or house, they may have certain protections depending on whether the lease is written or oral, the duration of the lease, and when the lease was executed. In short, you may be stuck with the tenants in the foreclosed properties until the end of the lease term in certain scenarios. This is something you should look into with the help of counsel, especially if you are planning rehab.

• 4.Tax Liens and other Liens on the Property – Beware.

When purchasing foreclosures, only liens subsequent in right to the bank’s mortgage are extinguished. Therefore, prior liens, particularly tax liens, may still remain on the property after the foreclosure. Make sure you look into this and factor it into your decision to purchase. 

5. Foreclosure Auctions can be more complicated than you think. There are different types of foreclosures which involve different risks. 

There may be different types of foreclosures in your state. Certain types of foreclosures may be riskier investments v. others. In Connecticut, where I practice, there are two types of foreclosures. If there is equity, the court will order a foreclosure auction and the property is sold to the highest bidder. If there is no equity or the property is underwater, there will be a strict foreclosure, where the owner and interest holders prior in right to the bank will get a chance to redeem the note, and if none do, the bank then becomes the owner.

From a legal perspective, it is easier to buy foreclosed properties that have been foreclosed through strict foreclosure. When the bank takes title by strict foreclosure, the bank owns the property and can enter into a contract with you directly at hopefully a bargain price. Buying a property already owned by the bank is easier than going through the auction process.

If there is equity, the court will order an auction where anyone can bid, including lienholders, the owner, other investors, and so forth. At the auction, the highest bidder wins the auction. However, all investors should know that is not the end of it. The proposed bid has to be approved by the court as reasonable, giving other parties (including the owner) a chance to object to the bid. Usually the court approves it, but not always. Then you may have done a lot of work for nothing. If the court does not approve the bid, another auction will take place.

Investors should know that buying different types of foreclosures (e.g. in CT, strict foreclosure v. auctions) could involve different risks which should be considered.