Purchasing Foreclosure And Short-Sale Properties
by Thomas B. McCowan, Esq.

        "Patience is a virtue."

We are seeing a steady increase in the number of transactions where buyers are buying property from banks that have foreclosed on the prior owners. Also increasing are short-sale transactions. Complications and delays in these transactions have become so frequent, that we feel compelled to share a few observations.

You can get some good bargains in these situations, but you must have a lot of patience and expect a certain number of problems. Foreclosure purchases and short-sales often take three times longer than the normal contract period to close, and may require several extensions of the purchase and sale agreement if you remain committed to purchasing the property. You may wish to reconsider attempting one of these transactions if you have specific important deadlines for closing the transaction (such as moving from out of state without alternative housing plans while waiting for completion of the purchase; or purchasing with a loan with a short rate-lock period).

Listed here are a few kinds of problems we have consistently seen delay closings:

- The seller bank actually has not completed the court case for the foreclosure before listing the property for sale.

- Defective foreclosure documents, deeds, or powers of attorney requiring correction.

- Failure of the foreclosure to include all the land the buyer thinks they are buying, or all the land needed for the parcel to be complete.

- Damage to the property resulting from the neglect or inaction of the foreclosing bank to maintain the property and keep it heated during the winter months.

- Lengthy delay in correction of title defects by seller or in review and execution of necessary documents.

- Slow or ineffective communication channels for the selling bank.

- Lengthy delay in correction of title defects by seller or in review and execution of necessary documents.

The last of these issues is perhaps the most aggravating. In one instance, the transaction was delayed for a month simply waiting for a representative of the selling bank to sign the deed, which had already been drafted and approved. There was no explanation for the delay, but the seller's own lawyer was not able to motivate them to act more quickly.

In another instance, 1½ months elapsed waiting for the production of a necessary Power of Attorney and corrective affidavit from a selling bank. These delays were in addition to the normal escrow period.

Usually, there is little rational explanation for these delays, except that many large, national lenders are extremely overloaded with such transactions. Little individualized attention is given to each transaction. The seller's representatives are remotely located in other states with little knowledge of local land, parties, and practices. The representatives frequently have little authority to negotiate or to authorize solutions to problems without referral to other departments within the seller's hierarchy.

Often, your real estate agent will have little to no ability to speed things up. Frequently, even the listing agent and the seller's attorney will have no ability spur action. In a nutshell, if you are a bargain shopper, hang in there. You can get a good deal, but you must be very, very patient. It may also be wise to have a back-up plan.

Additionally, the foreclosure process is very technical and complicated in a way that increases the possibility of title problems. The selling banks usually convey the property by a Quitclaim Release Deed or, at best, a Quitclaim With Covenant Deed - which essentially is like buying property "AS IS, BUYER BEWARE." In these transactions, we especially recommend that a Survey Inspection be ordered and the purchase of an Owner's Title Insurance Policy. See our sections on those topics for further explanation.
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