Buyer Beware: Purchasing a Property at Foreclosure Sale
Most people who have purchased a property at a foreclosure sale, or have thought about doing so, have heard that one who embarks upon such an adventure should heed the warning, “Buyer beware,” but few truly understand the potential pitfalls of such a purchase. The purpose of this article is to highlight one of the most common mistakes associated with purchasing a property at a foreclosure sale, and how it might be avoided.
First, it is important to understand that you can only purchase at a foreclosure sale what the trustee or commissioner holding the sale has to offer. This may be clear title, or it may not be. The trustee holding a foreclosure sale makes no warranties or promises of any kind as to what you are getting. The trustee simply forecloses the interest the borrower (grantor of deed of trust) had at the time she executed the deed of trust. That borrower could have been only a partial owner. If the borrower only owned a one half interest in the property, that’s all the borrower could gave mortgaged, and therefore all the trustee is selling. If there were prior liens on the property, such as prior deeds of trust, taxes, or judgment liens, when the borrower executed the deed of trust, then those liens will remain, unless satisfied, and will survive the foreclosure of the deed of trust. Thus, the buyer at the foreclosure sale would take the property subject to these prior liens.
Here is an example. Suppose you are interested in buying a certain piece of property at a foreclosure sale. You look at the tax value and find that the property is valued by the tax office at $100,000.00 and there are no outstanding taxes owed. You go to the sale and the opening bid is $50,000.00. You upset the bid thinking you have purchased a $100,000.00 property for $50,000.00. However, unbeknownst to you, there was a prior deed of trust on the property with an outstanding balance of $70,000.00. Now, in order to have clear title, you must pay off the prior deed of trust. As a result, you have now paid $120,000.00 for a property valued at $100,000.00. Your great deal just became a big loss.
There is a solution to this problem. You can avoid this by having a licensed attorney conduct a title search for you prior to placing your bid. Find a local attorney and explain to her that you are a real estate investor who sometimes bids at foreclosure sales and you would like to retain them to conduct title searches for you prior to your bids. Explain that, because you are bidding at foreclosure sales, you will need a quick turn around time on your requests – under a week – and get their confirmation that they can handle this time frame. Also, ask the attorney if they would be willing to give you a reduced fee in exchange for repeat business, since you are an investor and expect you will need multiple searches in the future.
Hiring a licensed attorney to conduct a title search for you prior to your bid is an added expense, but it can help you avoid what may be a devastating outcome. You should consider this a cost of doing business. Remember, buyer beware.
J. Scott Flowers
Mr. Flowers is an attorney with The Law Firm of Hutchens, Senter & Britton, P.A., with offices in Charlotte, Fayetteville, and Wilmington, North Carolina. He can be reached at email@example.com. This article should not be considered legal advice.