Be Forewarned When Purchasing Foreclosure Properties

May 19, 2008

Do Not Throw Your Buyer Under the Bus.....

Be Forwarned When Purchasing Foreclosure Properties!

I am often asked the difference between a short sale property vs. a foreclosed property. In the first instance, with short sales, the Seller not the bank owns the property. The bank must approve the sale which typically and realistically takes about 90 days for the bank to formally approve or deny.

In sharp contrast, with a foreclosed property, the Bank already owns the property and typically will accept or reject, or counter the offer to purchase within 3 business days.

With short sales, if approved, the Buyer is free to select their closing agent to examine and issue title insurance, In sharp contrast, with foreclosures, the Bank selects the closing agent and mandates who issues the title insurance. Unfortunately, this is where the problems begin and Buyers are often thrown under the bus.

Unfortunately, all title policies are not created equal! When buying property from a bank the title policy typically lists exceptions (exclusions) from coverage. They may seem insignificant to an untrained eye, but be careful from first hand experience they could prove financially disastrous.

Real Life Case #1. In November 2007, I was under the mistaken impression I would provide the title insurance for the Buyer. A preliminary search revealed that the bank did not properly serve all the correct parties in the foreclosure process. When the bank offered a title policy it overlooked this glaring problem. As a result, no deal. If the Buyer had closed with the Bank's Title Policy he would have been in for a surprise when they elected to sell.

Real Life Case #2. In February 2008, I had a foreclosure closing whereby I reviewed the proposed closing documents, closing statement and title policy. When I asked the bank to remove the exception and not exclude governmental liens from the title policy, the bank's closing agent stated it was not their policy to do so. Antennas went up and I performed an independent title search and discovered there were government fines outstanding in excess of $70,000....... all of which would not have been covered by the title policy. Obviously we didn't close but two months later negotiated a credit to address the problem and subsequently closed.

Real Life Case #3. In March 2008, when asked to review the Bank's proposed closing documents, it was clear that although the deed was notarized, it did not have two witnesses in accordance with Florida Statutes. The title company for the bank was recently set up by the bank and their corporate counsel was in Texas ........where witnesses are not required! The entire deed was defective!

Real Life Case #4. In April 2008, I represented a Buyer who was under contract to close with the bank. A few days before closing, I strongly recommended the Buyer obtain a survey and elevation certificate even though it was a cash purchase. The elevation certificate revealed improvements located below the flood plane level. Again, this raised antenna's. A phone call and letter to the local zoning department revealed that previous fines had been levied and the former owner had been mandated to remove approximately 1,000 square feet of the non-conforming improved living space. The bank was not aware, did not disclose this and the title policy they offered did not cover this. The bank has since offered $100,000 price reduction. So far, no deal. Think what would have happened without obtaining the elevation certificate.

I could go on and on with first hand accounts of potential pitfalls, but I will not seek to be redundant. Bottom line is when buying foreclosed properties from a bank this is one case where it is imperative to have a trained real estate attorney review both the closing documents and the title policy. All bank sales are "As Is" . While I do not recommend the unnecessary expense of two separate title policies, practice has taught me to perform an independent title search.

If you have any questions or concerns, feel free to contact me. I am there to protect you as well as your buyer. I want to earn your business.

Next Week: The Return of Retirement Accounts. With the attractive prices now being offered find out why more baby boomer's are tapping into their retirement accounts to buy property....NOW!

Courtesy of Law Offices of Ronald S. Webster