More and more I have been receiving telephone calls and emails wanting me to discuss issues relating to buyer foreclosures and short sales and REO properties.  Everyone (both qualified but usually unqualified) seems is writing or buying books on the process, so I figured it may be time to put in my two cents and talk about title issues and due diligence.

A writer emailed me about the research and especially the title search costs associated with determining to bid upon a foreclosure property.  He was upset that he would incur title search expenses and still not get the property.  Apparently the seminar he went to did not fully disclose the inherent dangers to making millions from foreclosures. This was an excellent observation by the writer and so it deserves mention here.

Status of Title -

The status of title is one of the most important aspects of buying a property, whether it is privately, in a traditional sale, or on the courthouse steps from a forced (foreclosure or sheriff's) sale.

Just knowing that the seller is the owner (the person losing the property) or has a right to sell (the clerk of the court) is totally inadequate information.  Although a court ordered sale MAY remove inferior liens from the title, you must ascertain if all inferior liens were properly named in the lawsuit (unless they arose after the filing of the lis pendens - if the lis pendens was indeed filed along with the complaint for foreclosure).

Lis Pendens -

[Here is some lawyer background on the lis pendens: see the link A LAWYER'S EXPLANATION OF THE FORECLOSURE PROCESS for a full explanation of the foreclosure process and lis pendens - Suffice it to say that the "lis pendens" is popularly and incorrectly referred to as the foreclosure complaint (ie: "I was served with a lis pendens").  The key document is the complaint, not the lis pendens.  The lis pendens means "pending litigation" and is directed to the real estate and provides notice in the public records to the public that there is litigation pending regarding that real estate.  By error some foreclosure complaints get filed without there being a lis pendens and that will result in a title issue at the end of the case.  Any claim against the real estate that arises after the filing of the lis pendens is usually wiped out by the foreclosure without naming that claimant in the law suit.  Any claim arising before the filing of the lis pendens must be named in the complaint if it to be removed via the foreclosure process.]

 The problem is there are liens that cannot be foreclosed, such as unpaid real estate taxes and code enforcement liens.  As to the latter item, in Florida at least such a lien on any property owned by the property owner extends not only to the subject violated property but to all property owned by that owner and located in that county.  Such liens can be very large and are difficult to reduce through a local administrative hearing procedure. If the property was owned by the common owner at the time of the code enforcement lien, then the foreclosure (or even a tax deed sale) will not eliminate that code enforcement lien.

Unrecorded Issues -

 Then you also have the issues of items that are not even recorded liens but can still become a problem after the sale.  A prime example is an improvement that was never permitted with the government, or a property line encroachment that a neighbor now seeks to enforce.  The improvement could be required to be removed.  Usually this problem can be resolved by backward engineering of the improvement - but that can be expensive since you need to hire an engineer to inspect the unauthorized improvement, prepare plans for it and then certify that the improvement as it exists is in compliance with all building codes presently in effect.

 You will find that buyers of foreclosures generally have on staff persons that understand the title priority law and know how to research it efficiently on their own.  If there is no staff, then the individual professional buyer has that knowledge.  Understanding and having the knowledge to research the liens avoids the costs but not the time to research before you bid. Understanding the building codes is also helpful but in a foreclosure sale it is almost never an option to be able to inspect the property on site prior to the actual bidding process.  Due diligence is a cost of being in the foreclosure purchasing business and must be considered the number two priority in your list of whether to buy a property or not - with number one being does it makes economic sense to make the purchase.

 Copyright 2009 Richard P. Zaretsky, Esq.

 Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make.  This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660  RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com  New Website www.Florida-Counsel.com.  See our easy to find articles at Need Short Sale Information? - These Articles Probably Answer Your Question