Purchasing at a Foreclosure Sale

     One of the results of a bad economy is an increase in mortgage foreclosures.  While most people find out about foreclosure sales by reading the newspaper’s classified ads, others call lenders directly to inquire about potential upcoming sales.  At foreclosure, property often sells for less than fair market value due in part to potential unknown title and structural problems.

     In typical real estate transactions, the parties sign a contract that gives the buyer the right to inspect the property, and requires the seller to disclose known defects and guaranty clear title.  In a foreclosure sale, the buyer does not have the right to inspect, and the lender is not obligated to disclose defects or certify title.  In addition, there may be liens that survive the foreclosure, such as unpaid real estate taxes, sewer and water bills, IRS liens, and condominium association fees, if applicable.  Further, the mortgage might be a second or third mortgage, and thus, the buyer purchases the property subject to a first mortgage. The foreclosure of a first mortgage eliminates all subsequent liens, including junior mortgages, with the exception of municipal taxes and water bills, and IRS liens; however, a foreclosure of a second or third mortgage triggers the default provisions of the first mortgage and starts another foreclosure process.  In short, the buyer purchases the property with all of its title and structural problems.

     A prospective purchaser may do several things to lessen the risks.  The first is to call the taxing authorities.  Liens for unpaid real estate taxes, sewer and water bills are superior to all mortgages by state law, and transfer with the property.  Since municipalities take longer to foreclose for delinquent fees, chances are the owner has outstanding taxes, sewer and water bills.

     Next is to search the title at town hall.  While it is advisable to hire an attorney to search the title – due to the complexity of real estate title laws, a buyer may review the land evidence records himself.  The buyer should examine all the documents indexed in the owners name from the date of purchase to the present, to reveal prior liens that will survive the sale.  The buyer should also read the mortgage to determine the lender.  If it is a bank, then it is likely an attorney certified good title to the date of the mortgage’s recording.  If the mortgage is an equity or line of credit, then it may be a second or third mortgage, subject to a prior mortgage.  If a warranty deed immediately precedes the mortgage, then it is usually a first mortgage.

     The buyer should also stop at the building inspector’s office to check for outstanding housing or building code violations.  Depending on the age of the house, the records should show the year of construction, any additions or major repairs, and sometimes the builder.  Generally, the newer the house, and the more reputable the builder, the less likely it is to have structural problems.

     While following these steps will not guaranty good title and a structurally sound property, they will lessen the anxiety and risks of buying at a foreclosure sale.

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