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Beware of Legal Landmines When Purchasing a Pre-Foreclosure Property
By David Camiel
The success stories abound. Real estate investors who have made a living
off of buying pre-foreclosure properties below market value and then
selling them to make a tidy profit.
For every one of these successes however, there is also a story of an
investor who bought a property without using due diligence to determine
the true status of the title to the property. This mistake can be the
difference between winning and losing in the pre-foreclosure game.
A wise investor will go to great lengths to determine the viability of a
particular transaction. This process will include a thorough search of
the land records to determine the marketability of the title to a
property. A full 50-year search of the county records is recommended,
and a local attorney or title examiner can do this. You can also research
the title yourself, as most Registries of Deeds are available on-line at
www.masslandrecords.com.
Keep in mind however, that a title search by itself WILL NOT disclose all
potential charges that a pre-foreclosure buyer might face. But follow the
road map below and you'll be well on your way to avoiding a financial
nightmare.
* Next 37 17 investors only!
The key point to remember in all this is that when you buy a
pre-foreclosure property outright, you are taking the property SUBJECT
TO... any mortgages, tax liens, condominium association liens, municipal
charges, probate proceedings and many other encumbrances. If you do not
account for these expenses, you may wind up paying some or all of your
profit to the holder of one of these encumbrances:
- Mortgages. Mortgages include first and secondary mortgages, equity
lines and secured lines of credit. These should appear in a title
search. At foreclosure of the first mortgage, any secondary mortgages are
extinguished. On a pre-foreclosure on the other hand, the buyer of a
property is responsible for any mortgages not paid at the time of closing.
If you are projecting that the mortgages will be paid at time of closing,
be conservative in your estimates of the payoff as they may include
principal, interest, late fees, any legal fees associated with the
foreclosure and even escrow money owed if the mortgage company has been
paying the real estate taxes on the property.
Prior mortgages which have been paid in full can be problematic as well if
they have not been discharged or have been improperly discharged at the
Registry of Deeds. A subsequent buyer may insist on a delay of the
closing to correct the problem. This can mean more carrying costs for an
investor intent on a quick turnaround sale.
- Tax Liens. This group of encumbrances includes IRS Liens,
Massachusetts Department of Revenue Liens and Medicare Liens. All should
appear in the title search. These liens are all related to the purchase
of real property, so the extent of these liens and their interest and
penalties should be determined as early in the research period as
possible. Exact payoffs can only be obtained by contacting the
governmental agency that originally put the lien on the property.
- Condominium Association Liens. These liens could be for outstanding
condominium fees or for special assessments against the unit, but may not
appear at the Registry. Be sure to check with the Condominium Board or
Management Company to determine the extent of these liens. It is required
by law that upon request by a unit owner, the association produces a 6(d)
certificate, which would provide in writing the amount of any outstanding
association fees.
- Municipal Liens. Again, any charges for municipal real estate taxes,
water and sewer and in some municipalities, electric service, will become
the responsibility of the purchaser, and may or may not appear in a title
search. Research done with the municipality's tax collector or water and
sewer department or information revealed on a municipal lien certificate,
should include these charges.
Keep in mind as well that some properties which have recently changed from
private to public water or public sewer service, or which have had
improvements done to the streets or sidewalks, might be subject to
municipal betterment charges which would become the responsibility of the
purchaser.
- Probate Proceedings. Probate relates to the death or divorce of one of
the owners of the property, and this could also result in a lien against
the property. In the case of death, a lien is automatically placed on the
property by the state and federal revenue agencies in the name of the
decedent until the estate can prove that no tax was due.
In the case of divorce, it is possible that the spouse has a claim to some
of the proceeds, which again, would decrease the potential profit for an
investor. If the probate for a death or divorce was filed in the county
where the real property lies, then a search of the probate records will
reveal any claims against the property.
- Other Encumbrances. Most other encumbrances are only enforceable if
recorded at the Registry of Deeds. These include judgments, executions
and equitable remedies.
The exception would be a mechanic's lien, which is an action available to
contractors who have worked on a property within the previous ninety-three
days, but have not been paid. Unfortunately, only the homeowners
themselves will be able to make the representations necessary to avoid
these liens.
In summary, the nature of a pre-foreclosure transaction lends itself to the
kinds of pitfalls described above. Information and documentation is often
incomplete and unreliable, and as an investor you are wise to do as much
work as possible to determine the status of the title before even
approaching the homeowner with a proposal.
One final note. As an additional layer of protection, you may want to
consider purchasing an owner's policy of title insurance. Although at
first blush this may seem expensive given the short time you intend to own
the property ($4.00/$1,000 of purchase price), the policy could pay for
itself quickly by clearing a title problem or insuring over the problem to
allow for the sale to subsequent purchaser. Owner's title insurance can be
purchased from a licensed attorney who is an agent of a title insurance
company.
David Camiel is a partner in the law firm of Gilmartin, Magence, Camiel
and Ross LLP (www.gmcrlaw.com) and has been a real estate practitioner in
Massachusetts since 1994. He was in mortgage banking for 10 years prior
to becoming an attorney, and serves as lender's counsel to over 75 lending
institutions. His trademark has become his zealous representation of
buyers, sellers, investors, brokers and mortgage officers. Attorney
Camiel is an agent of First American Title Insurance and can be reached at
his office in Newton, Massachusetts at 617-964-4300 or at
dcamiel@gmcrlaw.com.
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