Buyers seeking to purchase property at foreclosure sale face the potential threat of title issues, as title to real property which has made its way through the foreclosure process may be invalid, clouded or subject to certain liens.
Certain errors or omissions in the foreclosure action may render a foreclosure judgment void and result in title of the foreclosure property reverting back to the former homeowner. Some of the most prevalent errors affecting foreclosure properties include insufficient notice, incorrect legal descriptions in the mortgage and/or foreclosure documents, and competing claims on the part of lenders as to ownership of the mortgage debt.
A foreclosure action typically extinguishes all subordinate liens. However, if the foreclosure complaint fails to name a pre-existing claim or junior lien, a buyer who subsequently takes title will do so subject to such lien. This also means that any existing superior liens will not be extinguished. For example, a foreclosure action filed by a second mortgage holder will not extinguish a first mortgage and the successful bidder will take title to the foreclosure property subject to such first mortgage.
There are also certain liens that cannot be extinguished in a foreclosure action, including IRS liens, real estate tax liens and code enforcement liens. In addition, IRS holds the right to redeem a foreclosure property within four months of the foreclosure auction for the sale price.
Foreclosure properties may present other unrecorded issues, such as unpermitted improvements, encroachments, and property damage. Prior to purchasing foreclosure properties at auction, potential bidders are not permitted access to the property for inspection. Foreclosure defendants who struggle to keep up with their mortgage payments may also struggle to keep up with the physical condition of the foreclosure property.
A Buyer seeking to purchase a foreclosure property can substantially mitigate the risks described above by seeking the advice of a real estate attorney and obtaining title insurance, prior to purchasing a property at foreclosure sale. The attorney and/or title insurer will conduct a title search to ensure clear title and should also examine the foreclosure action to confirm that no material errors exist.
If you have questions or concerns about purchasing a foreclosure property contact us.
