Buying properties in foreclosure can be a financially rewarding business for the wise and prudent investor, especially in these difficult economic times. It is not, however, a get rick quick scheme that is without pitfalls and dangers.
For the new investor who is looking to purchase a foreclosure property for the first time, it is imperative to verify exactly whether the mortgage that is being foreclosed is a first or second mortgage. Over the years, I have represented several clients who mistakenly purchased a foreclosure property without realizing they were bidding on a second or third mortgage. A simple "present owner" title search performed by a real estate title company will avoid any unexpected surprises in this regard.
In addition, before purchasing a foreclosure property investors should contact the local town's tax assessor to ascertain whether there are any unpaid taxes. Why? Because local real estate taxes have priority over recorded mortgages. So this means that even the bank's mortgage lien falls behind the town's property taxes. Thus, if the purchaser at a sheriff's sale buys the property the purchaser is essentially stepping into the bank's shoes and the property would be still be subject to the outstanding taxes following the foreclosure sale.
Most importantly, a prospective foreclosure purchaser should obtain an abstract of the foreclosure case on file with the Office of Foreclosure to determine whether the bank's attorneys have properly followed all procedures required under applicable law, including the New Jersey Fair Foreclosure Act. Also, a judgment search should be obtained to verify that all parties claiming an interest in the property are properly named or joined in the bank's foreclosure complaint. The reason is that a purchaser at the sheriff sale needs to ensure that all junior liens are extinguished upon the sale. If a bank's attorney negligently omits a judgment creditor from the foreclosure lawsuit, then that judgment creditor's lien would continue to remain a lien against the property even after the sheriff's sale.
Last but not least, we cannot forget about eviction post-foreclosure sale. If you think that once you acquire a property in foreclosure that you're done, think again. Most homeowners in foreclosure do not vacate the property without forcing the bank or the purchaser from going through forcible eviction proceedings. Since a foreclosed homeowner is essentially getting a "free ride" in not paying a mortgage or property taxes, there is little incentive for a foreclosed homeowner to vacate the property. A bankruptcy filing or an application by the homeowner for a hardship stay of eviction are ways in which the foreclosed party can delay eviction.
Even after a foreclosure sale, New Jersey law provides the homeowner with ten (10) days in which to save his property by paying off or redeeming the mortgage.
Other practical risks in purchasing foreclosures are environmental contamination and other defects which are not discovered until after the sheriff's sale has been completed. Since a foreclosure purchaser cannot gain access into the home prior to bidding at a sale or prior to an eviction post-sheriff's sale, there is no way to determine if a property has underground storage tanks or other environmental issues, mechanical or construction defects.
Thus, prospective investors must be diligent. If buying properties in foreclosure were truly an overnight "get rich quick" scheme, surely everyone would be doing it. But for the patient and knowledgeable investor, buying foreclosure properties in this market could be a great opportunity.
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