Foreclosure sales are a quasi-judicial sale where homes are sold after a judicial proceeding to satisfy outstanding mortgages or liens on the property incurred by the current owners. Most prospective homebuyers believe that it is typically the first position mortgagee that is foreclosing on the property and that upon the sale of the home the funds paid will satisfy all liens, mortgages, or encumbrances on the foreclosed property. Unfortunately, in many situations, this is not the case.
In many cases, the lienholder that foreclosed on the Property was the homeowners association or a subordinate mortgagee. In these situations when a subordinate mortgagee/lienholder is foreclosing on the property, the first position mortgagee does not lose his lien on the property. Stated differently, the property will still be encumbered by the first position mortgagee after the foreclosure. Now the new buyer will have to continue to pay the first position mortgage or face foreclosure of his own.
Buyers must realize that the first mortgagee is not a proper and necessary party in the subordinate mortgagee’s foreclosure action. Additionally, the doctrine of caveat emptor (or “buyer beware”) places the duty to examine and judge the value and condition of the real estate solely on the purchaser and protects the vendor from liability for any defects.
In order to avoid this scenario, the potential buyer must conduct their own due diligence. This means verifying the type of mortgagee foreclosing on the property and whether a first position mortgagee exists. This can typically be done by reviewing the public records in the county where the property is located along with the complaint and documents from the underlying foreclosure lawsuit. Further actions the potential buyer can take before bidding at an auction is to:
• obtain a title search report for the property outlining all encumbrances;
• obtain title insurance for the property;
• conduct a municipal lien search;
• receiving estoppel letters from the governing association (HOA/COA).
However, the steps listed in this blog are not inclusive of all the due diligence requirements and it is always recommended to consult with your local trusted real estate attorney if you are interested in purchasing a home via foreclosure.
Conrado Gomez Jr., Esq. email@example.com
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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