Over the past few months, I have seen an influx of new clients with significant legal issues arising as a result of purchasing properties via online foreclosure sale. One very common misconception is that a purchaser at a foreclosure sale takes title to the property free and clear of liens and encumbrances. This could not be further from the truth, a fact that many find out too late. To avoid the pitfalls of online foreclosure sales gone wrong, here are a few tips that anyone buying via online foreclosure sale should follow:
- Know what you are bidding on. For example, are you bidding on a foreclosure of a first mortgage, second mortgage or perhaps a homeowner association lien? I have seen several cases where bidders believe they are bidding on a first mortgage foreclosure when, in fact, the mortgage being foreclosed is a second mortgage (in which case the bidder takes title to the property SUBJECT TO the first mortgage) or an association lien (in which case, the bidder takes title subject to existing mortgages and other liens on the property). It is essential to know what kind of lien foreclosure you are bidding on so that you know what encumbrances, if any, will remain superior to your title after the sale takes place.
- Order a Title Search and Foreclosure Title Commitment: This is essential. A title search typically costs under $100.00 and will tell the bidder all of the encumbrances on the property. That way, the bidder can ascertain which lien they are bidding on and will be aware of any other liens that are on the property that may remain after the sale. Armed with a title commitment, the bidder can then review the foreclosure case file to ensure that all inferior lien holders were included as parties in the foreclosure action to ensure that their interests were properly foreclosed out.
- Review the Property Tax Records: In a foreclosure sale, a bidder takes title subject to outstanding real estate taxes. As such, it is important for a bidder to ascertain if there are any overdue taxes as they will become the responsibility of the new owner after the foreclosure sale.
- Contact the Association: Often times, homeowners in foreclosure stop paying their HOA or Condo fees. If a third party bidder takes title to a property at an online foreclosure sale they usually take title subject to and thus would become responsible for payment of any overdue HOA or Condo fees to preserve their title. In many cases, these fees are significant and MUST be factored into a bidder’s determination as to a max bid.
- Determine if the Property is Occupied by a Renter. If so, it is essential to find out the terms of the tenant’s lease and what their intentions are. A fundamental rule of foreclosure is that a foreclosing lien holder can only foreclose out inferior interests. As such, if the tenant lease was entered into prior to the mortgage at issue, the tenant’s rights could be superior to that of the lien being foreclosed and the bidder’s title to the property.
By following the above tips, foreclosure sale bidders can ensure they are getting the benefit of what they believe they are bargaining for. Happy Holidays and Happy Bidding!