Chapter 5-7 Risks for Purchasers at Foreclosure Sales

5-7 Risks for Purchasers at Foreclosure Sales

Bidding and purchasing real property at foreclosure sales can be a lucrative and rewarding endeavor, but it is fraught with pitfalls for the uninitiated—almost all relating to the title that is being acquired. As previously discussed, a Certificate of Title issued by the clerk of court only extinguishes the rights of defendants and lienholders that acquired the interest following the recording of the lis pendens. That is not to say that all interests are extinguished—particularly those of superior lienholders.

As part of her due diligence prior to bidding on real property up for auction, the prospective bidder must conduct a reliable title search. She must determine whether any lienholders were omitted from the foreclosure action. If so, taking title may not be advisable, as such will be subject to those omitted interests. She must also determine whether the property is subject to condominium or homeowner's association dues, since third-party purchasers at foreclosure are jointly and severally liable with the previous owner for all unpaid dues.⁵² In short, a thorough title examination is prudent prior to bidding on real property at foreclosure.

A purchasing foreclosure bidder also must understand that by purchasing a property at foreclosure, they are also purchasing a lawsuit. Purchasing a property at a foreclosure sale is different from an ordinary purchase in a very big way: Time. When you buy a property directly from a seller, there is an inspection period and there are title contingencies—if the title insurance underwriter's report doesn't reflect that the title is clear, the buyer generally doesn't have to go forward with the purchase and can get their deposit back—no harm. In a foreclosure sale, title insurance doesn't generally protect the bidder.

A bidder will generally not take the time and expense of obtaining a title commitment from a title insurer before making her bid. Title insurance can be expensive, it takes time, and it is far from certain whether the bidder will be the ultimate and successful bidder on the property. Indeed, it is far from certain whether the sale will take place at all. The property owner could seek a sale cancellation, file for bankruptcy or obtain a loan modification—all common occurrences in foreclosures. This would completely frustrate the bidder's plan, making her investment in time and expense in buying a full title policy not practicable. Instead, the prudent bidder...