FORECLOSURE BIDDING CAN CREATE FINANCIAL DISASTER IF YOU WIN
We are constantly getting asked about foreclosure purchasing. About half the calls are from persons that already bought the property at foreclosure and now find out that there is a bank foreclosing against the house they just bought. They want to know what to do.
THIS IS A COMPLICATED BUSINESSSimply put, foreclosure purchasing is not simple. It is very complex with a lot of information to be obtained about the property, the owners being foreclosed, and the parties to the foreclosure. All that information has to be not only obtained, but understood.
EXAMPLE - ASSOCATION FORECLOSURE OF LIENFor example, a case in our office (facts slightly changed for ease of explanation) involved a typical situation where a foreclosure purchaser bid at a foreclosure sale and then after winning, discovered that the foreclosure he bid at was for the association (condo, homeowners, it really does not matter which) lien for unpaid assessments. The judgment of the association was $24,000 and the tax assessment was $230,000 and Zillow said it was worth $275,000. He thought he got the deal of the century.
WAS THIS A BAD INVESTMENT?Now in our example, which type come to us too often, the usual outcome is that the bidder is now stuck with the property and he has to figure out how to deal with the lender that is foreclosing. Lenders typically will only deal with a borrower. The winning bidder is a third party and the lender will not and under privacy regulations, cannot deal with the third party about the borrower's loan. The bidder's usual resolution is just to pay it off.
INVESTIGATE! - AND UNDERSTANDBut in this particular case we were called in to find any way we could get the lender to somehow resolve the loan. The first thing we always do it look at the association declaration. In almost every case there is a provision allowing first (or other) mortgages to take priority over the lien of the association for assessments. There are declarations that have some specific exclusions to the typical mortgage seniority language. For example we have seen limitations specifying:
1. Institutional first mortgages
2. First mortgages that amortize
3. Mortgages that do not exceed 50% of the tax assessment of the property when recorded
4. Only first mortgages
LOOP-HOLE FOR THIS CLIENTFortunately for our client the mortgage involved was a first mortgage, but the declaration stated that any first mortgage must be an amortizing mortgage. As it was, the first mortgage for the foreclosure property he bid for was not an amortizing mortgage. Non-amortizing mortgages would include interest only mortgages and reverse mortgages.
DEAL OF THE CENTURYSo in this client's case, the foreclosure wiped out the much larger first mortgage, since although it was the first and only mortgage, it was not the first and only lien. Although more legal work needs to be done, this was for our client - the deal of the century!
HOW TO PROTECT YOURSELFProtecting yourself from the risks of financial loss is not as easy as just hiring a title company or attorney to review title. A review of title in the example above would not have told the bidder more than the fact that there is a mortgage and there is an association declaration. Looking into both the mortgage terms and the association declaration is not something that will typically be done - and if it were done the cost to the bidder would have been relatively expensive for the mere possibility of winning the bid.
There are plenty of other pitfalls for bidders - code enforcement liens, bankruptcy filings before the Certificate of Title is issued, Objections to Sale, missed parties that need to be re-foreclosed - are just a few.
Foreclosure bidding can be a very profitable business and even lead to the Deal of the Century. But there are costs to getting into the business. Education on how it works. Education from doing the work. Education on the background of the properties. All of this education has a cost - I like to call it tuition. Sometimes, as with many of those that call us, that tuition cost includes making expenses. Sometimes that tuition is expensive!