Bar News - May 20, 2015
Real Property Law: Key Differences in the Post-Auction Foreclosure Sale
By: Jordan Wilcox
The infomercials have been watched, the books read, and the training courses completed. The “quick flip” has become a reality, and the foreclosure sale date arrives.
As imagined, an auctioneer starts the bidding. A bidding war commences, and the winner (the buyer) is able to get her ideal price – well below the “comps,” based on a quick Internet search.
All that’s left now is the closing, the rehab, and finally, the payoff.
The problem, however, is that the closing may not go as planned, because the foreclosure auction closing is different from the typical residential closing in several important ways. Though the foreclosure auction closing can be tricky to navigate, for some property investors, it can also be a great opportunity. As the attorney involved in this transaction, it is important to be aware of and anticipate these differences.
To better understand, the parties must realize the transaction basics. At the auction, the foreclosing entity (the bank) is exercising its right to sell the property. This means the bank does not have ownership. In fact, the property most likely will never vest in the bank, but instead will transfer directly to the winning bidder. Any prospective bidders need to understand what effect this has on the closing process.
One key difference is financing. The buyer must be aware that in most cases there will be no financing contingency. Though usually a standard clause in the typical real estate transaction, the buyer will not be able to walk away if financing falls through by a certain date. Locking down the financing before the sale is in the buyer’s best interest, as is having a back-up financing plan.
Because the bank does not own the property, the buyer usually cannot access the property prior to the closing. The conventional lender requires an appraisal prior to making the loan. Without access, an appraisal cannot be completed. This can limit the buyer’s financing options and require the buyer to seek alternatives.
The buyer may want to consider a hard money lender. A hard money lender typically loans at a higher interest rate, with a shorter loan term. This can work well for a quick flip, but also can be used as a way to purchase the property, and then refinance into a more traditional loan.
If financing isn’t an option, or falls through, the buyer may want to consider assigning the bid. A bid assignment is a common occurrence in this type of transaction. The buyer can sell her right to purchase and benefits by taking an assignment fee. This is sometimes referred to as “wholesaling.”
This option requires the buyer to have a network of investors familiar with these types of transactions to whom she can possibly assign the bid. The buyer also needs to be aware of the limits, if any, of the ability to assign.
The access issue can be further complicated by the occupancy status of the property. Property sold at foreclosure auction is typically sold subject to the current occupants. Occupants can include the mortgagors, former owners, bona fide tenants, or family members of the prior listed occupants.
If the property is occupied, the buyer cannot rely on trying to work something out with the occupants. The auction agreement may even prohibit contacting the occupants. The buyer needs to keep in mind that title is still vested in the current owner until the foreclosure deed is recorded.
Occupancy can also pose an issue post-sale. The buyer needs to be aware that an eviction is needed, but can’t be carried out until after the closing.
Title and Title Insurance
Title issues and title insurance also play a large part in the foreclosure closing. As the attorney, it’s important to explain the foreclosure process basics to the buyer so she understands the title insurance company’s perspective.
Before writing a title policy, most title insurance companies will closely scrutinize the foreclosure process. The title company will look closely at the publication, notices, and the foreclosure documents. Expect that for any documents signed under power of attorney, the POA will also be closely examined. Title companies are keenly aware that they are liable if the foreclosure, and therefore the buyer’s title, are ever challenged.
The buyer must also be aware of the quality of title. The bank may only be offering “insurable” title and not “marketable” title. Though the buyer may be fine with insurable title, it is important to keep in mind prospective purchasers. A future buyer looking for their primary residence may not be satisfied with the insurable title buyer can provide. This can impact the timeline of the “quick flip” as the buyer may have to undertake title curative when selling the property.
Performing as much due diligence prior to the sale will also help alleviate any future issues. The property is usually sold subject to all easements, covenants, restrictions, etc. The publication will provide the necessary mortgage information to get started. Closely examining the mortgage legal description will reveal what exactly the buyer is purchasing.
As the bank is foreclosing the mortgage, the legal description on the most recent deed may not be the same property being sold. Title will also reveal any federal tax liens.
The IRS has a one-year redemption for these liens, and property is typically sold subject to that right. If the property is a condo, examining the plans and condo documents may provide an overview of the unit and any restrictions.
Purchasing at the foreclosure auction can be a smooth transaction when the parties involved know exactly what to expect. Experienced investors purchasing at foreclosure sales can greatly benefit from an attorney aware of these key differences.
Jordan Wilcox is an attorney with Orlans Moran in Waltham, Mass. He is a 2012 UNH law graduate and is licensed to practice law in New Hampshire and Massachusetts. He can be reached by email.