Purchasing Foreclosed Property
By Mark S. Steier
We increasingly find ourselves representing buyers who are purchasing:
1- Bank-owned properties ( a.k.a REO – Real Estate Owned properties),
2- Short sales – the shadow inventory of depressed properties,
3- Properties where the owner is more than 90 days delinquent, or are in the process of being foreclosed.
In recent days additional concerns have arisen as the result of news articles depicting “robosigners”, which suggests that the foreclosure process is flawed (including the possibility that the debt sworn to by a representative of the plaintiff bank is not accurate).
The purpose of this article is to briefly set forth potential hazards of such transactions and our role as attorney for the buyer of REO properties.
II. PURCHASE AGREEMENT PROVISIONS – POTENTIAL PITFALLS
The contract which buyers sign, in connection with the purchase of REO properties, is not your typical real estate contract. In fact, many of the provisions of the standard realtor’s contract are turned on their head, when dealing with REO’s.
PURCHASING “AS IS”
Most importantly, the buyer is purchasing the property “as is” with no continuing liability on the part of the seller for defects, misrepresentations, etc. As to inspection contingencies, there is typically a 10 days inspection period (as opposed to 30 days in a typical realtor contract). To the extent that buyer and seller are unable to negotiate inspection issues, the buyer can get out of the transaction with the return of their deposit. Typically, any agreed upon inspection issues result in a lowering of the purchase price rather than the seller agreeing to do any corrective work.
BUYER TAKES SUBJECT TO ANY TENANTS IN POSSESSION
The real estate contact will provide that the buyer will take subject to any tenants in possession and subject to any leases with such tenants with no representations being made regarding such leases as to term, amount, etc. It is important, therefore, to make sure that the property is actually vacant if the buyer intends to take possession of the property at closing.
PERSONAL PROPERTY – SELLER
With respect to personal property, none is usually included in the sale, but the seller is not responsible to remove any of the personal property that is left at the address.
The real estate contract typically provides that the buyer will assume ongoing assessments, rather than have the seller pay them off at closing. Thus, it is necessary for the buyer to investigate the existence of any such assessments prior to the signing of the contract and to reduce the purchase price accordingly for any assessments that will not be extinguished by seller at closing.
SPECIAL WARRANTY DEED
The type of deed the buyer receives is a special warranty deed which contains no warranty of anything prior to the time the bank acquired title to the property. This is in stark contrast to the typical warranty deed to be provided by the seller, which is a full covenant warrant deed in which the seller warrants that they have good title to the property and will defend the title if it is ever challenged. In addition, the seller is not obligated to provide what is known as marketable title to the property. Rather, if the seller can obtain insurable title to the property, the buyer must accept such title. Insurable title means only that a title insurance company is willing to insure the title to the property. This means that there may be title defects that render the title unmarketable. However, since the title company is willing to insure it, it is insurable title and the buyer must accept this. Such defects may make the property more difficult to sell when the buyer tries to sell it at some point in the future.
The contract contains no representations from the seller as to certificates of occupancy, the status of permits, septic, water supply, electrical service, etc. All of these issues must be investigated by the buyer prior to the signing of the contract. The buyer assumes all the risk with respect to these items.
If the seller is in default under the contract, buyer’s sole remedy is the return of their deposit. The buyer is not allowed to sue for specific performance of the contract, i.e., to force the seller to convey the property to the buyer by filing an action for specific performance in the Connecticut Superior Court.
The closing date is final with no remedy against the seller post closing. Everything merges into the deed, even adjustments improperly done or missed, so it is important to confirm that the tax and water adjustments are done properly.
Some contracts impose the payment of conveyance taxes on the buyer, so it is important to review such contracts to make sure that there is no such provision because typically the payment of conveyance taxes is the obligation of the seller. To the extent it is imposed on the buyer, the purchase price should be reduced to reflect this obligation.
CLOSING DATE & LOCATION
The closing date is typically a “time is of the essence” date with penalty provisions set forth in the event the buyer is unable to close by the contractually agreed upon closing date. The place of the closing is usually the seller’s attorney’s office.
III. TITLE SEARCHES
In addition to reviewing the land records, it is important to review the foreclosure file at the courthouse to make sure that the foreclosure was done properly and that all of the subsequent encumbrances have been properly brought in to the proceedings and have been foreclosed out. In addition, to the extent there are any federal tax liens against the property, contact needs to be made with the IRS in many instances in order to get the tax lien paid or otherwise extinguished.
Clients need to have reasonable expectations with respect to the purchase of foreclosed properties. There is potentially considerably more risk in such a purchase and less responsiveness on the part of the seller with respect to buyers’ concerns about inspection issues, or for preclosing access to the property for other than one inspection visit and one preclosing walk through. Storage of buyers’ personal property at the premises prior to closing is strictly prohibited.
Over the years I have handled many of these transactions for buyers and am experienced in guiding them through the process so that they can be properly prepared to purchase foreclosed properties. It is important to schedule a meeting with me, prior to signing a contract , to discuss the risks of your particular transaction. If you have any questions with respect to the foregoing, please do not hesitate to contact me.