At Berlin Patten Ebling we are lucky to deal with happy real estate investors on a daily basis. Unfortunately, from time to time, we also hear from investors who’ve been stung by a purchase. Here are a few common pitfalls that we see investors fall into, and some tips to avoid them:
- Failing to Order a Title Search – This is a big deal. When you buy property you want to know that you really own it to the exclusion of everyone else, right? And you want to know that no one else has any lien or other interest in the property. A title search will reveal those issues. We get calls on a monthly basis from investors who buy properties at a foreclosure sale “for a real steal” and are then surprised to find that a foreclosure suit has been filed naming them as a defendant. What happened? A second lien holder foreclosed on a lien, and didn’t name the first lien holder as a defendant (they aren’t allowed to). So, when the investor bought the property at the foreclosure sale, they took title subject to the first lien holder’s interest. A title search would have tipped the investor off to the problem, and saved them a lot of trouble and expense. Title searches are cheap, and reveal all kinds of issues with property – investors should always order them.
- Tax Deed Issues – When property owners fail to pay their property taxes for a while the local government sells their property to recoup the unpaid taxes. Investors often buy those properties, and are granted title via a tax deed. There’s no inherent problems with tax deeds, but when investors try to sell the properties to a third party they will find that the buyer usually cannot have a title insurance policy issued unless the investor first prosecutes a quiet title action relative to the property, or waits several years to sell the property. The tax deed process isn’t prohibitively expensive, but it is a surprise cost to many investors, and it can really narrow the investor’s margin on small purchases. Should a tax deed investor get a title search done also? Yep – while the tax deed sale may wipe out most types of liens, some governmental liens will survive the sale, and the investor needs to know about those to make a good decision. And title searches are cheap.
- Failing to Conduct Foreclosure Due Diligence – Buyers of properties at foreclosure sales often feel that they are safe because the foreclosure process is overseen by a court. However, there are often mistakes that are made by the parties who prosecute a foreclosure action that can cause headaches for the buyer of property at a foreclosure sale. For instance, the Plaintiff in the foreclosure suit may have failed to name as a defendant every person who had an interest in the property, resulting in a foreclosure judgment which leaves that person’s interest intact. How does an investor find out whether or not all proper parties were named in the foreclosure lawsuit? The answer, of course, is to order a title search (they are cheap, after all). Another common problem is the failure of the plaintiff to properly serve all defendants with a copy of the lawsuit – this problem can be identified by an attorney reviewing the docket in the foreclosure case. A little bit of due diligence can go a long way when buying foreclosure properties – they can be a great deal, but they can also be an expensive headache if the original foreclosure was not properly handled. A quick review by an attorney can identify problem foreclosures so that investors can steer clear.
- Failing to Conduct Due Diligence on Loan Purchases – Some investors don’t purchase distressed property, they purchase existing loans that are secured by property. Due diligence is required here as well. The investor needs to ensure that the loan they are purchasing is properly secured (Are there any superior liens on the property secured by the loan? I bet you know how to find out … cheaply). They need to determine whether the loan paperwork is in order, is physically available, and whether it is in a form that will have evidentiary usefulness if the investor is ever forced to foreclose of the loan. That all takes legal investigation and due diligence. So, while an investor may be able to purchase a loan for 50% of its face value, if the documents supporting the loan have problems the investor may find that they are left with an unenforceable debt.
In short: lawsuits are expensive, and due diligence is cheap. Investors will find that they are well served spending a little bit of money up front to prevent large legal bills down the road.
Berlin Patten Ebling, PLLC
Article Authored by Daniel Guarnieri, Esq. firstname.lastname@example.org
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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