Shawn has a masters of public administration, JD, and a BA in political science.
Not all foreclosure sales are the same. Some states require a judicial foreclosure and some permit nonjudicial foreclosures. So what's the difference? A judicial foreclosure involves a judicial proceeding and court oversight of the foreclosure process. On the other hand, a trustee sale is a nonjudicial foreclosure of property and is based on a power of sale clause in a deed of trust or mortgage.
There's a reason that property can often be bought at foreclosure for a bargain - there's a lot of obstacles and risks involved. Let's take a look at some of the most important ones.
Cash is usually required at purchase, or very soon after it. Banks don't usually give unsecured loans to purchase property at a foreclosure sale. You'll either have to offer some form of collateral acceptable to the bank to have money at the auction, use your personal wealth, or find an alternative form of financing, such as a wealthy business partner who'll invest with you.
Another potential pitfall is falling prey to auction frenzy. In other words, the excitement and competitive nature of bidding sometimes leads a bidder to pay more for a piece of property than it may have been worth. Remember, it's about getting a bargain, not about outbidding the guy next to you. You can find yourself losing by winning.
Inspections are difficult to pursue if not impossible. You seldom have a chance to inspect the inside of a property and often can only give the exterior a cursory examination. Keep in mind that if the owners couldn't afford the mortgage payments, they may not have had the money or desire to properly maintain the property. Likewise, some owners undergoing foreclosure are bitter and may actually intentionally damage the property.
You also need to be conscious of title defects and the priority of any other liens on the property. A foreclosure will wipe out most liens junior to the mortgage being foreclosed, but not senior liens. For example, if it's the second mortgage being foreclosed, you will end up buying the property subject to the first mortgage. Likewise, certain government tax liens will survive a foreclosure sale even if they are junior in time to the lien being foreclosed. Running a title report before the auction will help avoid this pitfall.
You'll never get warranty deeds at the auction. Instead, you'll get a sheriff's deed if the sheriff is selling the property that is being judicially foreclosed, or a trustee's deed if a trustee is selling during a nonjudicial foreclosure. Basically, both a sheriff's deed and a trustee's deed will convey the property to the winner of the auction. However, neither deed will provide any warranties against defects in title. In other words, the property is sold 'as-is' with any and all title defects or encumbrances.
You should also note that just because a property is being auctioned, doesn't mean nobody is living there. Sometimes the borrower, tenants or squatters are residing in the property and you'll have to pursue legal action, such as an eviction or ejection action, to remove them.
Even if you do everything right and get a great bargain on a reasonably well-maintained property, you may still face losing the property through statutory redemption. Let's take a quick look at what this is.
Some states have enacted a statute that gives a mortgagor (i.e., the borrower) a right to redeem the property sold at foreclosure within a certain period of time. What this really means is that a mortgagor can buy the property back at the price that was paid at the foreclosure sale plus other costs permitted by the redemption statute. The period of time a mortgagor has varies from state to state, but it's a year in many states. In fact, in states that have statutory redemption, the mortgager may even be able to reside on the property during the redemption period.
It's also important that statutory redemption not be confused with equitable redemption. This type of redemption is a common law doctrine recognized by all states. It simply provides that a mortgagor has the right to redeem the property by becoming current on the loan anytime before the foreclosure commences. By the time the auction has started, equitable redemption will not be an issue for purchasers unless the lender failed to honor it.
Let's review what we've learned. Foreclosure properties can often be bought cheap, but that's because they are plagued with a great deal of obstacles and risks that justify the lower price. The winning bidder usually has to pay for the property immediately in cash. The property is sold as-is with limited, if any, ability to inspect the property before buying it. A successful bidder will only receive either a sheriff's deed or trustee's deed with no warranties of title. The foreclosure will not wipe out senior liens and certain government liens. A successful bidder may have to contend with tenants or squatters. Finally, in some states, the mortgagor will have a chance to buy the property back through statutory redemption.
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