Buying foreclosed upon properties and properties on short sale can be attractive for real estate professionals and investors for obvious reasons. However, there are some hidden dangers that would-be investors should know about before making a final decision to take on properties that are discounted in price because of someone else’s misfortune.
Foreclosure versus Short Sale
In a foreclosure, the borrower has stopped making mortgage payments. The lender sends a notice of default and repossesses the property. The lender can sell the property to satisfy the debt.
A short sale occurs when the mortgagee sells a property for less than the outstanding debt — with the lender’s approval. The lender receives the proceeds and releases the lien on the property.
“There’s no free lunch,” as the saying goes, and this certainly applies to short sales and foreclosure sales. With the lower price comes an increased risk to the buyer that offsets the attractiveness of the price to some degree.
Of course, it’s up you whether you want to take on the added risks that are associated with foreclosures or short sales. But you should know the risks before you make a decision.
Other Pending Superior or Secondary Liens
Keep in mind that if you’re buying a foreclosure sale or a short sale, someone else has relinquished title to that property in an unconventional way. There may be pending legal entanglements, including a second mortgage, that could eventually enable the prior owner (or some other third party who may have primary or secondary lien rights) to re-assume ownership of the property suddenly. This could even involve taking the property back from you without warning — legally.
Before you sign a contract or put any money down on a property in a foreclosure or short sale, consult with your attorney to conduct formal record research to determine whether other liens may affect your purchase — and how.
Sometimes third-party lien activity (and title transfer) can occur even after your purchase is completed and you obtain title to the property. In other words, you could legally purchase a property in a foreclosure sale or a short sale and obtain legal title rights, but then at a later point in time — possibly long after you have assumed ownership — you may be legally evicted.
In such a case, you may be either suddenly served with legal papers or become involved in a lawsuit that calls your rightful ownership of the property into question, and threatens your legal claim to the property. In fact, you may even lose the money you paid to purchase the property — your original investment.
So be aware it can be difficult to deal with secondary lien holders. But a more present and less obvious danger still arises when a secondary lien holder forecloses on the property, if that’s how you obtain ownership. You may not know when you buy the property that a primary lien holder has superior lien rights to the property you are purchasing — a better claim to the property than the party that is selling the property to you. As the wheels of business turn, the primary lien holder may come back later.
Caught unaware by a new foreclosure suit, you’ll have no recourse against this action unless you have a qualified attorney to protect you, your interests, and the money and time you invested in the new property. Don’t tread on thin ice by making a risky decision to buy a foreclosure or short sale without knowing how all of the forces interplay with each other. Protect yourself. Have your attorney advise you at every step.
Unresolved Occupancy Issues From Prior Owners or Tenants
Some foreclosure sales and short sales involve properties that have been vacant for quite some time, even years. These properties may have accumulated certain occupancy issues, that may stand in the way of your occupying the building for business or personal use.
For example, insects become an issue if the prior owner or tenant left perishables inside the space. Also, walls and plumbing can become damaged if heat has not been turned on for a period of time. Humidity can condense on interior walls if sufficient air ventilation and air flow has not been maintained, and over time this can grow mold and mildew, which is expensive to remediate and may require a licensed specialist to remove. This is even more costly if it goes undetected before the purchase, because then the cost will be shifted to you and you already own the property.
While the property was in foreclosure proceedings, before you obtained ownership, it may have acquired inhabitants. Those individuals may have rights, especially if the property is residential.