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Do your Homework before Investing
By Suzanne Brunelle, Esq.
So, you heard you could make a financial killing or find your dream home
buying property at foreclosure? That may be possible, but first you need
to beware the pitfalls of the novice and, as my father always said, "Do
your homework."
Massachusetts law requires notification of foreclosures through newspaper
publications. These publications, together with the online services
providing names and addresses of distressed properties, are the lifeline
for potential foreclosure bidders. Newspaper publications and online
services will let you know which attorney's office and auctioneer will be
conducting the foreclosure sale. These people have important information
you need to be successful at the auction. But keep in mind that they are
only able to disclose a limited amount of information. Your game plan
should be as follows:
-
The first step is to have a full 50-year title search
completed on the property. For this, you'll need the name of the
homeowner being foreclosed upon and the recording book and page
information for the subject mortgage from the newspaper or online
publication.. The title search will show you the priority position of the
mortgage being foreclosed. Additionally, the title search will reveal any
easements, restrictions and additional liens on the property. This is
vital information. A mortgage foreclosure sale will wipe out any junior
liens, with certain exceptions discussed below; however, the liens must
be recorded after the subject mortgage being foreclosed in order to be
extinguished.
Time of recording is key. If the mortgage being foreclosed is in a second
mortgage position, you will be bidding on the property with a superior
mortgage ahead of you. For example, if you know from your title search
that the mortgage being foreclosed upon was originally given for $50,000
and recorded on January 1, 2005, but there is a mortgage in superior
position to that mortgage for $100,000 recorded on December 1, 2005, you
will be bidding on the property subject to that $100,000 mortgage. So, if
your intent was to buy the property for not more than $250,000, you will
need to factor the $100,000 superior mortgage into your bidding and
therefore not bid more than $150,000.
Another important item which may be disclosed in the title search may be
IRS liens. These require special attention. If there are recorded IRS
Liens, specific notice must be given to the IRS at least 25 days prior to
the scheduled auction date. If the required notice is not made, IRS liens
will not be extinguished by the foreclosure sale and you would be buying
the property subject to a valid IRS lien. Even if proper notice is given,
the IRS still retains the right to step into the shoes of the successful
bidder at the auction, for a period of 120 days from the auction date,
and acquire title to the property for the amount of the successful bid.
This may be a factor if you are seeking conventional financing for your
purchase at auction. Some lenders require a waiver of the IRS lien, which
may or may not be possible within the time confines of the auction sale.
* Next 37 17 investors only!
You should question the attorney conducting the auction about whether the
mortgage being foreclosed is in a first mortgage position and whether any
IRS liens are of record.
- Review the terms of the Mortgagee's Sale of Real Estate
published in the paper. Almost all auctions are subject to the successful
bidder buying the property subject to any outstanding real estate taxes,
water, sewer or refuse liens and any other municipal lien you can
imagine. These liens are considered superior to a first or subsequent
mortgage and will not be extinguished by the auction. The attorney
conducting the auction should disclose this information to you, but it is
ultimately your responsibility to determine what liens are out there that
are in a superior position to the mortgage.
Ask the foreclosing attorney for a copy of the Municipal Lien
Certificate. This document is prepared by the town clerk and details tax
and other municipal liens on the subject property. A call or visit to the
town hall will also provide you with information regarding outstanding
municipal charges. Bottom line: you buy the property, you own these
liens. If possible, during your visit or call to the town hall to check
the municipal charges, pull the zoning jacket for the property. This will
let you know if there are any zoning violations and what work, if any,
has been done on the property for which a building permit was pulled.
Condominium auctions offer an additional challenge in what is referred to
as the "Super Lien statute." The Super Lien provides that condominium
association fees for a period of up to six months, and attorney's fees
and costs associated with the collection of the condominium fees, are
placed in a superior position, even to a first mortgage. Again, you need
to question the foreclosing attorney regarding these amounts or call the
condominium association directly.
- View the physical property prior to the auction. Is the
property occupied? Almost without exception, the terms of sale at the
auction will require the successful bidder to take the property AS IS. If
the property is occupied, it will be your responsibility to evict any and
all occupants. This is perhaps the most daunting challenge facing a
bidder. Again, if you require conventional financing to complete the
foreclosure sale, your lender may require an appraisal. That means you
will need some access to the property prior to closing. A positive
relationship with the occupant, or at least some knowledge of who is
occupying the property, may help you obtain access to the property after
the sale.
- Request from the foreclosure attorney a copy of the Memorandum of
Sale, prior to the auction. The Memo is the contract the successful
bidder will be required to sign at the time of the auction. Review the
requirements carefully, with special attention to the closing date and
deposit requirements. The Memorandum is required to detail all liens,
easements, and restrictions that are encumbrances on the property. These
encumbrances should match what your title search revealed. Should you
learn that the property is subject to matters recorded with the Registry
of Deeds, which are not specifically listed on the Memorandum of Sale,
you may be able to back out of purchasing the property.
An attorney well-versed in the foreclosure practice for your state is
your best ally and tutor in avoiding the pitfalls for the unwary
foreclosure bidder. Search out a good attorney to complete the necessary
homework so that you may enjoy the financial profits or find your dream
home through a foreclosure auction.
Suzanne Brunelle is an attorney with Portnoy and Greene, PC, in Needham,
MA. She can be reached at (781) 449-6050 or Suzanne_brunelle@yahoo.com.
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