Q&A: Purchasing foreclosures
Buying a home is complicated. When it's a foreclosure, though, the questions really multiply -- whether you're trying to purchase an REO (real-estate owned) property from a bank or you're thinking of bidding at a foreclosure auction.
Two settlement attorneys teamed up to answer common questions, including ones several of you submitted. Lee M. Snyder and Eric Oberer are colleagues at Mid-Atlantic Settlement Services. Lee has been practicing real estate law since 1969 and Eric -- a former city prosecutor -- joined Mid-Atlantic in 2005.
Take it away, Lee and Eric:
-----------------------------------
Question: Is there any way for a buyer to tell before getting under contract on an REO whether the institution already has the legal ability to go to settlement?
Answer: The land records of the county/city where the property is located are the best source of information as to who is in title. It is also possible to go onto the website for the state Department of Assessments and Taxation to determine who is in title according to their records. However, both of these sources can be as much as 60-90 days behind in indexing and therefore may not show that title has recently changed. Many times, the selling REO bank has seen the foreclosure procedure completed, sale ratified, etc., and the deed from the trustees to it has not yet been recorded or indexed but the bank lists the property for sale anyway.
Q: What issues do you see crop up on a regular basis with REO transactions – delays, etc. – that buyers should be aware of?
A: The Circuit Court may re-examine the filed documents for bad signatures, robo-signing etc. Failure to give proper notice to subordinate lien holders requires the trustee to get waivers of notice or some other resolution of the problem. Before the closing for the new buyer can conclude, the REO bank must approve the HUD-1 being used and sometimes there is a delay in getting this approval.
Q: Please detail "hidden" settlement costs such as HOA fee pay-offs and other liens that may accrue for accounts in arrears. Explain borrower liabilities for Homepath, HUD REOs and auctions.
HOA payoff for existing liens and arrearages are sometime disputed by the REO bank and as a result, HOA attorneys may try to enforce the lien against the new owners even if there is no legal basis for doing so, resulting in a standoff or compromise, all of which takes time. A purchase at auction creates a different issue, in that the buyer is expected to pay ALL closing costs including stamps and transfer taxes, with adjustments to the date of SALE, not the date of settlement, but selling trustee warrants that title is merchantable.
Q: What does the trustee warranting that the title is "merchantable" mean?
A: The trustee agrees to convey good and marketable title or insurable title, which is not quite as good as marketable title, but it is up to the buyer's attorney/title company to cause the land records, court records, judgment records, lien records, bankruptcy records, etc., to be carefully examined, to determine if the trustee can convey good title. This becomes very important in the title area today based on the practices and procedures being followed in some instances. This means that the burden is on the buyer or his attorney to discover title problems and to have them resolved before accepting the deed from the trustee.
Q: Does that issue specifically apply to purchases at auction, or does it include REO purchases too?
A: The basic info for checking title is the same but an REO bank will give a deed with special warranties, as would any other individual or entity seller. Trustees and some court appointees do not usually give such warranties.
Q: How do you know if the auction is a wash sale for the bank to take title, or if they're actually going to give it to the highest bidder?
A: As to auction sales, anyone can check the Circuit Court records for the county in question and examine the Statement of Claim file therein which will state the balance due the lender. After adding an additional amount for costs, advertising and trustees' fees, the bank will come up with a predetermined amount, which may be the first bid made. Usually, any bid after that means that there is someone else interested, and if so, the bank may let the auction take its natural course.
Q: Why are some properties winterized and put away, and others are listed or auctioned?
A: The REO bank determines by geography, condition of the property and what value they can expect to get before putting the property on the market, i.e. listing it for sale with a Realtor.
-----------------------------------
Thanks, Eric and Lee!
Thoughts, questions, arguments? Comment away.
If you'd like to write a guest post -- either to share expertise or to share an interesting housing-related personal experience -- please drop me a line. Details here.
And if you've got questions you'd like to see a guest poster address on another subject, ask away right here.
Categories: Auctions, Distress sales, Guest post, The foreclosure mess
Sign up for the At Home newsletter 
Comments
Often banks will not execute the trustees deed before selling the property. They will record BOTH deeds (first the one from the trustee to them, then the one from them to "you," the buyer) at the exact same time at the county land records office. This has caused issues for various transactions in which I have been involved.
I have done a few dozen REO deals in the last two years, and never has the bank not paid the HOA fees that were owed on the property. It's a matter of the title company determining those fees through contacting the HOA/condo management company. Then they get listed on the HUD-1 on the seller side of the transaction. I'm sure there are times the bank has not paid them, but I have not seen it yet.
Another common delay is getting the lien certificate, although this delay is mainly just for city properties. It can take up to two weeks to get it, and you can't close without it. So definitely make sure your title company orders that immediately. It's basically just a list of the liens against the property that are on the city records.
Also, HomePath, HUD and Freddie REOs may require the buyer to pay ALL transfer taxes, not the usual 50/50 split. It's not universal in REOs, although HUD is always on the buyer. Many "regular" REOs - not Homepath/Fannie/etc, just your regular bank sales - split it 50/50, but you ALWAYS want to make sure you confirm this and read the bank addendum they'll send you before signing.
You should also make sure you have a good title company working on your side. Often bank sales will recommend using the bank's preferred title company. As well, they will often provide an incentive to do so (free owner's title, or appraisal, or something). This can be a viable option since the bank's preferred title company has already done some of the work on the property and has the paperwork in house. If you choose your own, you won't get that free incentive, and you want to make sure your title company is diligent and persistent in getting the docs they need from the bank's title people. I've had multiple deals held up because the bank's attorney is lax in getting our title company the foreclosure deed or other closing file info.
Just my experience the last couple years...
Posted by: John K. | June 20, 2011 7:22 AM
Thanks, John K.!
Posted by: Jamie Smith Hopkins | June 20, 2011 9:14 AM
Thank you for this post. We are currently enduring exactly what John K. described: the bank chose to execute both deeds at the same time. Everything, we hear, is awaiting approval of the General Equity Master (and has been there since the end of March!). It is crazy-making. We want to become responsible, tax-paying citizens of Baltimore City (and occupy what is currently an empty house!), but we never expected to have to work this hard for the privilege!
Posted by: Sara | June 24, 2011 10:25 AM
I purchased a hud house & since the city doesn't pay taxes on their own properties, I had to pay all the taxes.
My good friends purchased a tax sale property from the bank that wasn't fully finished. Not sure how they managed to pulled it off but they did. The bank had the property up on the market before the final order & such from the court was recorded so they had to keep pushing back the settlement. Just make sure all the proceedings are finished, the I's dotted & the T's crossed.
Posted by: pigtown girl | June 24, 2011 12:45 PM