Buying at a Foreclosure May Become a Disaster

Looming maturity dates (for which borrowers are not prepared to pay the remaining balance) or other monetary defaults of numerous commercial mortgages may present many opportunities for purchasing property on a discounted basis. With proper precautions and investigation, what appears to be a “deal” really can be a “deal.” However, purchasing a property at a foreclosure sale or other distressed sale has many traps for the unwary. What appears to be a bargain can quickly turn into a nightmare, if the buyer rushes into the purchase without enough information.

Bidders often forget that, at a foreclosure, they are agreeing to purchase the property “as-is,”

Buying at a foreclosure sale can become a nightmare

Bidders often forget that, at a foreclosure, they are agreeing to purchase the property “as-is,” subject to (i) no closing contingencies and (ii) all of the property’s defects and deficiencies. If a bidder is successful, the bidder is committed to completing the acquisition of the property, regardless of the condition of the property. There are countless examples of expensive post-acquisition issues that could have been easily detected with minimal due diligence. Some of these latent issues include environmental conditions, liens and deed restrictions, and major repair items. Accordingly, purchasers of real estate at a foreclosure sale should undertake the same due diligence as if they were purchasing the real estate in an arm’s length non-foreclosure transaction from a third party (even though time may be limited).

The purchase that may seem like a bargain can become a financial disaster if purchasers do not enter the purchase with their eyes wide open.

Always ask questions BEFORE investing your hard-earned money.

Prior to bidding, every bidder should obtain a title report, which will identify the liens and encumbrances that will continue to burden the property following the foreclosure purchase. In addition, although access to the property is often limited prior to foreclosures, the prospective purchaser should also try to obtain a basic property condition report prior to bidding. If purchasers are not careful, they could end up purchasing a property that is (i) subject to debt far higher than the amount of the purchase price or (ii) in very poor physical condition.

Although this may sound unfair to the buyer, the buyer is typically paying a substantially discounted price. The money saved is often spent on performing repairs and improvements that have been neglected by the financially distressed owner. Also, lenders price their loans with the anticipation that they will be able to sell the subject properties at foreclosure with minimal costs and liability exposure. If lenders were subjected to the same costs and liability as a seller in a “regular” sale, the borrowing costs and interest rates for all borrowers could increase.

Proper due diligence and consulting with your attorney on the front end can save tremendous heartache on the back end. If a deal looks too good to be true, it probably is, and the purchaser should not be afraid to walk away from the sale if they feel they do not have sufficient information.