Buying Foreclosed Property – Risky or not?

Foreclosures can be treacherous these days.

We’ve all read the news about lenders doing a shoddy job handling foreclosures. But what does that mean for buyers of foreclosed property? Can their transactions be set aside? Can they lose the properties they’ve just bought?

At this point, it's not clear who bears liability for a bungled foreclosure, but it may depend in part on where the time line is in the process. Certainly, the foreclosing lender should be responsible for not handling it correctly, but what if the sheriff's sale and a subsequent sale have already taken place? In that case, a title company will be involved which is why most title companies have received instructions from their underwriters about how to handle insuring foreclosed property.

The risk most lenders and title companies see is a lawsuit being filed after the property has already been transferred to a new buyer. While it’s likely most buyers wouldn't want the house back because they couldn't afford the mortgage payments anyway, there's always the chance that foreclosed buyers (and their lawyers) will smell $$ which will result in a lawsuit being filed (even a class action) to put pressure on a host of parties (principally the old lender and the new title insurer) to throw $$ at them to make them go away.

That said, most underwriters require Indiana title companies to take extra steps to clear the way for a valid sale, including (this isn't an exhaustive list):

1. Verifying Indiana's foreclosure requirements were met and that it's too late for an appeal.
2. Verifying the foreclosed borrower has moved out.
3. Verifying no tenants live there.
4. Making sure there aren't any rights to redeem the property (especially if agricultural land or if IRS liens were foreclosed).
5. Verifying Indiana hasn't filed a lawsuit against the foreclosing lender to stop foreclosures generally.
6. Verifying no lawsuit has been filed to attack the foreclosure or to recover damages.
7. Making sure the foreclosing lender isn't pursuing a deficiency judgment against the former owner.
8. Verifying the amount owed on the foreclosed mortgage is greater than the current sale price.

In addition, sometimes the foreclosed owner has to sign a quitclaim deed in favor of the new buyer. Realistically though, quitclaims may be hard to get.

If title companies work their way through all these issues - and most of the time they can - buyers can close. So, if the unlikely happens in the future and buyers’ properties are taken away, buyers would have claims against their title underwriters for the face amounts of their policies.