Purchasing at Foreclosure: Some Do’s and Don’ts

(Last Updated On: January 24, 2017)

Most real estate purchase contracts provide an opportunity for the purchaser to conduct due diligence investigations between the time the contract is signed and the closing occurs.

Unacceptable conditions can give a purchaser the right to terminate the purchase contract.

Foreclosure sales are fundamentally different.  A foreclosure sale is the culmination of a process which began when an owner of real estate conveyed legal title to one or more trustees in order to secure an obligation.  Upon default, the trustees were empowered to sell the property encumbered by the deed of trust pursuant to the terms of that deed of trust and Virginia law.
Prospective purchasers of Virginia real estate at foreclosure should keep the following in mind:

•    Don’t assume you will have a due diligence period between the foreclosure sale and the closing.  You will not.  As the successful bidder, you will be required by the trustees to sign a memorandum of sale and will be obligated to close on the terms set out in that memorandum.  Consequently, conduct your due diligence investigations before the foreclosure sale.

•    Do order a full title examination and obtain a title report prior to the foreclosure sale.  Consider whether you should also obtain a title insurance commitment in anticipation of being the successful purchaser at the sale.  Obtain copies of all instruments identified as exceptions to title in the title report or title insurance commitment and understand any limitations, restrictions or encumbrances in the record.  Sometimes the foreclosing trustee will provide a pro forma title insurance commitment for prospective purchasers.  But, the trustee is not obligated to do so.  If the property is being sold subject to senior liens, obtain payoff information from that senior lender, so you can take that information into account as you formulate your bid.

•    Don’t forget about a survey.  The title report or title insurance commitment you obtain will take exception to matters which would be disclosed by a current survey of the property.  You may wish to consult a surveyor prior to the sale if potential survey concerns exist.

•    Do have your financing in place prior to the sale.  Typically, the closing will occur within days of the sale.  Your successful bid will not be contingent upon your obtaining financing.  If you are not prepared to provide the balance of the purchase price to the trustee on the date established for the closing, you will be in default, will likely forfeit your deposit, and may be responsible for damages.

•    Don’t overlook the possibility of a tenant or the debtor refusing to vacate the premises.  Typically, property is sold at foreclosure subject to the rights of parties in possession, if any.  Prior to the sale, you should inquire of the trustee whether any leases exist and whether any agreements are in place between the foreclosing lender and those tenants.  In order to obtain possession of the property, you may have to evict the prior owner or tenants who fail to vacate after you have taken title to the property.

•    Do consider the impact of zoning and other local ordinances on your plans for the property.  Checking property records and municipal codes is becoming easier as more jurisdictions provide that information on their websites.  Contacting the jurisdiction’s zoning administrator and seeking an opinion in advance will be important if you expect to be able to use the property for a particular purpose.  For example, a house converted into a duplex may not be legally conforming as a duplex.  Simply assuming that you can continue to use the property as a duplex after closing, without confirming your assumption with the zoning administrator, could be a costly mistake.

•    Do bring a cashier’s check with you to the foreclosure sale in order to meet any deposit requirement, if you have not made other arrangements for the deposit in advance with the trustee.  Up to 10 percent of the final bid price is typically required of the successful bidder as a deposit.

•    Finally, don’t overlook the obvious.  Could the property be in a flood plain?  Could hazardous materials or conditions exist in, on, under or near the property?  These and other questions could prompt further investigation prior to the sale or influence the amount you may be willing to bid at the sale.

Also available at The Roanoke Star Sentinel