Legal Steps for Buying a Foreclosed Property
Buyers should understand what they’re getting into when buying a foreclosed house
By Andra DelMonico, J.D. | Reviewed by Canaan Suitt, J.D. | Last updated on October 8, 2024 Featuring practical insights from contributing attorney Richard S. AlembikUse these links to jump to different sections:
- What Should I Know Before Buying a Foreclosed Property?
- What Are the Risks of Buying a Foreclosed Home?
- Can a Foreclosure Buyer Sue the Original Owner for Not Disclosing Problems?
- What Legal Steps Should I Follow When Buying a Foreclosed Property?
- Find Experienced Legal Help
There was a time when being foreclosed upon was considered a “hush-hush” topic that you should never discuss. Then, changes in the national economy and real estate markets brought foreclosure properties to the forefront. With so many on the market, home buyers and investors took a second look at these properties as a potentially smart purchase. While there is an opportunity to find foreclosures at a great price, they also come with risks. Before you get carried away with dreams of homeownership, make sure you understand what you are getting into when buying a foreclosed house.
What Should I Know Before Buying a Foreclosed Property?
Buying foreclosure properties is a more complicated process than a traditional home purchase. With a traditional home purchase, you can get a preapproval letter from the mortgage lender. Then, with that letter in hand, find your dream home. You will go through the escrow process, which includes a title search and home inspection. By the time you complete the sale contract, you and the lender should know exactly what you are getting.
When you buy a foreclosure property, you may not know what you are buying, as you may not be able to perform an inspection. With the ability to perform full due diligence, a lender may not be willing to approve a mortgage loan.
Foreclosure tends to be used broadly. You need to understand the property’s type of foreclosure and in what phase. This will help you understand what to expect and the process for buying the property. Richard S. Alembik, a top-rated real estate attorney in Georgia, suggests homeowners take a proactive approach to protecting their interests. “Run a title search and consult with a good real estate lawyer or lawyer who knows this area of practice. It would be good to consult to make sure there are no issues. It can get very complicated.”
What Are the Risks of Buying a Foreclosed Home?
Several potential risks come with buying a foreclosure property.
1. Foreclosed House Condition
Most notable is the condition of the house. At best, the previous owner couldn’t afford the routine maintenance and upkeep. You will need to set money aside to bring the home back up to acceptable condition. In some situations, the home sat vacant for an extended period of time. The property deteriorated during this time and will require renovations to bring it back to its current condition. At worst, the previous owner was upset about the foreclosure, which caused extensive property damage. It could cost you tens of thousands of dollars to fix the home and make it livable. There are limited legal protections for discovering the home is destroyed.
2. Title Defects
Another common issue are title defects. The home is being foreclosed on, so there is already conflict between the homeowner and their lender. You don’t want to find out after your purchase there are additional creditors that continue to have a lien on the property. You could be stuck paying these creditors in order to remove their lien interest in the property.
3. Securing a Loan
Securing a loan to buy a foreclosure property can be difficult. Many lenders want to reduce their risk, and foreclosure properties represent a significant risk. First-time home buyers wanting to secure an FHA loan (Federal Housing Administration) may also face difficulty. There are strict property requirements that you must meet to gain approval. You may not be able to satisfy them with a foreclosure property.
4. Previous Owner Refuses to Vacate the Property
Finally, you may complete the sale and find that the previous owner refuses to leave the property. Now, you must go through eviction proceedings to remove the old owner before you can access the property. This will take additional time and money to accomplish.
The bottom line is that buying any real estate comes with risks. You need to consider whether the risks are worth the potential reward. For some, the discounted sale price makes the risk worth it. For others, it is the potential to own an affordable investment property that motivates them to take the risk.
Can a Foreclosure Buyer Sue the Original Owner for Not Disclosing Problems?
Normally, a buyer could sue the seller and previous homeowner for not disclosing potential defects in the home. This is not the case when you buy a foreclosure home. The property is sold “as-is” to the buyer during a foreclosure sale. This means that, as the buyer, you accept the property in its condition. The seller makes no warranties or promises.
It is important to remember that the foreclosure happened because the previous owner couldn’t make their mortgage payments. If they couldn’t afford to make loan payments, they also couldn’t afford the upkeep of the home. In many cases, the home may have sat vacant for an extended period of time. These circumstances result in foreclosure homes needing extensive maintenance and repairs.
There could be a situation where fraud or another criminal activity would warrant a lawsuit. However, this would be a separate pursuit of recovery. If you suspect you are in this type of situation, it is best to speak with a real estate lawyer with experience with foreclosure properties. They will be able to review the facts of your situation and determine if you have a legal claim.
What Legal Steps Should I Follow When Buying a Foreclosed Property?
The process of buying a foreclosure property will vary depending on the type of foreclosure the property is in.
Short Sale
In some situations, the home’s value drops below the outstanding balance on the mortgage. The borrower may then agree to sell the home for less than the outstanding balance. After the short sale, the lender and buyer will agree to cancel the outstanding debt. This is a method for the homeowner to avoid having a foreclosure on their credit report. As the buyer, you should know that pre-foreclosure short sales are not short regarding the timeline. These sale types can take up to a year to close.
Public Auction
Once the lender completes the foreclosure and takes ownership of the property, it will want to sell it as quickly as possible. Real estate costs money to maintain, so an auction allows the lender to recoup its losses without incurring additional costs.
A foreclosure auction can take place in person or online. Ownership will go to the highest bidder. The home is typically sold as-is without the opportunity to perform an inspection. These auctions can become competitive, with multiple private buyers and real estate investors looking to bid. You can easily get swept up in the excitement and bid more than you planned.
Alembik discusses how individuals buying foreclosed properties need to be financially ready and aware of what they are buying. “The prices are driven down by the fact that you have to pay cash. On the public courthouse steps, you have to have some sophistication. They [buyers] know what you’re going into.”
Real Estate Owned Properties
A third potential situation for a foreclosure property is REO properties. These are bank-owned properties that have not sold at auction. They can be easier to purchase because you do not have to compete with a group of bidders. They can also have a simpler buying process because you deal directly and entirely with the lender who now holds the title and lien.
Engage a Real Estate Agent or Attorney
Working with an experienced real estate agent will make buying significantly easier. They can help you find a potential property by looking for recent foreclosure listings on the Multiple Listing Service (MLS). Their local real estate market knowledge will help you determine fair market value. That way, you can negotiate a reasonable purchase price for the real estate and your budget. Your realtor can also help you navigate special procedures required in government programs, such as with U.S. Department of Housing and Urban Development (HUD) properties.
In addition to a realtor, working with a real estate attorney with experience with foreclosure properties can also be helpful. Your attorney can help you navigate complicated real estate contract terms.
Perform a Title Search
If you have the time and ability, do a title search on the property. Because it is being foreclosed upon, you already know that at least one party has an ownership claim on the real estate. You need to know if any other creditors also have a lien on the property.
Conduct a Property Inspection
You will likely not be able to perform a property inspection before buying a foreclosure property. For example, a foreclosure house sold at auction will not allow you to go through the traditional due diligence process when buying real estate. You need to be willing to accept the risk of not doing a home inspection before completing the sale.
Review the Auction or Purchase Terms
Before you decide to participate in a foreclosure sale auction, read the terms of the sale. Some auctions require potential buyers to pay certain fees and closing costs upfront during the auction. These additional costs are in addition to the sale price. Knowing the terms in advance can help you avoid legal troubles and complications post-auction. Having a real estate lawyer review the auction terms can help you understand what is expected of you.
Prepping for Possible Eviction Proceedings
Some homeowners choose to stay in their homes during the foreclosure proceedings. They may hope to stop the foreclosure, feel emotional about losing their home, or lack the financial means to move. Whatever the reason, they may still live in the home when you take legal ownership at the foreclosure sale.
At this point, you are now a landlord, and the previous owner is your tenant. In order to take possession of your new property, you will need to ask the previous owner to leave. If they refuse to do so, you will have to go through the eviction process. Evictions cost more money and can take months to complete. Meanwhile, the previous owner will continue to live in the house.
Find Experienced Legal Help
Buying a foreclosed property can present a unique opportunity to buy a property at a discounted rate. However, it can come with risks. As long as you know the risks, you can navigate the legal landscape and enjoy your new home. One way to avoid the legal pitfalls is to work with an experienced real estate attorney. Look for a lawyer who has experience with foreclosed properties.
Visit the Super Lawyers directory to begin your search for an experienced real estate foreclosure attorney.
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