On more than one occasion, we have seen well-intentioned bidders find themselves in a nightmare situation after purchasing real property at foreclosure auction.
If you are thinking about investing your hard-earned cash to purchase property at a foreclosure or any other court-ordered auction, it is extremely important to conduct due diligence prior to submitting a bid. Many people do not realize that the winning bidder at auction does not always acquire clear title to the property.
Before placing any foreclosure bid, you should first determine the party foreclosing on the property and the type of lien being foreclosed. If the foreclosing party (the plaintiff) is the lender holding the primary mortgage on the property, you can proceed to the next step in the due diligence process. If the foreclosing party is a homeowner’s association, beware. Foreclosure by a homeowner’s association does not eliminate superior liens. This means that you may purchase a property at foreclosure auction, only to find that it is encumbered by a large first mortgage that the lender will inevitably foreclose as a superior lien, which will leave you with no further interest in the property.
If the property you wish to bid on is being foreclosed by a first mortgage, you need to determine important information such as:
- What additional liens are recorded against the property, and whether they will survive the foreclosure process
- Whether any code enforcement violations are recorded against the property
- Whether any utility liens are recorded against the property, including liens for unpaid utilities or sewer connection
- Whether all property taxes have been paid and if any tax liens are recorded against the property
- Whether the property is in a homeowner or condominium association, and if so, any unpaid association dues or assessments that are owed on the property. Remember that private purchasers do not have the protection of the homeowner’s association “Safe Harbor” laws which limit unpaid association dues. This means that a private purchaser will bear responsibility for 100% of all unpaid homeowner association dues and assessments owing on the date of purchase.
In sum, it is of utmost importance to ensure that you will acquire clear title to any property that you bid on at auction. Once the sale is complete, the court will not unwind the sale, even if you massively overpaid for nothing more than a homeowners’ association lien. Therefore, we recommend any person bidding at auction to obtain a title search, municipal lien search, and estoppel letters from any association. Additionally, you may obtain title insurance on an auction property for further protection, which we highly recommend.
Should you have any questions in regards to the foregoing, please contact your local real estate attorney.
Berlin Patten Ebling, PLLC
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
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