Sean S. Hanley
Attorney at Law for Foreclosed Property Investment

San Jose, California, Bankruptcy, Foreclosure and Debt Relief Attorney at Law since 2007. In addition to bankruptcy, foreclosure and debt relief law, I specialize in real estate transaction law and general law. Call me now for a free phone consultation at 408-293-0344.

We are attorneys at law and a licensed real estate broker and private lender who specialize in all aspects of legal and real estate services relating to bankruptcy, foreclosure, debt relief, real estate loans and real estate transactions.

Pitfalls and options for investors of foreclosed property:

Some American real property investors have found that one way to profit in the real estate market that is currently in a historically unprecedented downturn with no end in sight is to purchase relatively cheap foreclosed property and quickly re-sell it for a profit. While some real estate investors have been able to profit from purchasing and re-selling foreclosed real property, they have found that doing so is oftentimes wrought with complications and legal woes.

Some reoccurring issues purchasers of foreclosed real property incur revolve around dealing with encumbrances that "run with the land" after purchasing the foreclosed property, as well as hold-over previous owners and/or tenants of the property that fail to move out of the foreclosed property after the foreclosure and resell of the property is complete.

Banks often take care of most of the issues that arise with foreclosed property purchases when the foreclosed property is bought or taken back by the bank (commonly referred to as REOs - Real Estate Owned). In these instances, after the county courthouse foreclosure auction is held, with no takers, ownership of the property reverts to the former owner's bank. By the time these bank-owned homes hit the market, the bank has successfully gotten the former owners and tenants, along with their personal property, out of the real property. The bank clears title by handling any loans/liens, back property taxes and HOA dues, and any other encumbrances that may exist on the property (garbage liens/trash etc). This ensures clear title and no ancillary issues that need to be taken care of by the new owners.

Who handles these ancillary issues when a purchaser buys foreclosed property at the county courthouse auction? The new owner of the foreclosed property takes the property "as is" and must deal with all the issues that come with the property. Why would anyone buy foreclosed property with so many potential risks involved? While a purchaser of foreclosed property may incur risks and face unresolved legal dilemmas, the benefit of a significantly reduced purchase price often outweighs the costs, especially when the purchaser knows some avenues to pursue to minimize the risks involved.

A new owner of foreclosed property has several different ways to deal with encumbrances "running with the land" and former owners/tenants refusing to leave the property. An owner of foreclosed property needs to take the legal action, which can be costly and timely, to rid foreclosed property of any encumbrance that may exist to clear title. The cost and time to rid the property of any existing encumbrances varies depending on what needs to be done.

Approaches taken by new owners to handle former owners/tenants of foreclosed property that remain on property after purchase by new owner:

Option One - Eviction:

The more significant, timely, and potentially costly problem is how to deal with former owners/tenants who refuse to leave the property after the new owner assumes ownership. A straightforward approach taken by many new homeowners is to evict the former owners/tenants. The problem with evicting the former owners/tenants of foreclosed property is that evictions in general are time consuming and costly, further, newly enacted federal and California law provides increased protections for former owners/tenants of foreclosed property facing eviction.

See Foreclosure - Guide for a discussion of the legal protections afforded to former owners/tenants of foreclosed property and Real Property Evictions for a detailed discussion of Landlord/Tenant law.

Option Two - Sell Property Back to Former Owner/Tenants:

If the new owner doesn't want to incur the time, cost, and stress associated with ridding the property of encumbrances and/or evicting the former owners/tenants that have no intention of leaving the property quietly, the new owner can offer to sell the property back to the former owners/tenants. While there is no law against selling the foreclosed property back to the former owners/tenants, there are practical roadblocks to doing so.

Chances are strong that the former owners/tenants will have a ding on their credit and will not qualify for a new mortgage loan to buy the property back from the new owner if they just incurred a foreclosure on their credit report.

See Foreclosure - Considerations for a detailed discussion of credit score impact post-foreclosure and Foreclosure - Guide for a detailed discussion on the implications of foreclosure on California homeowners.

Circumstances that allow former owners/tenants to buy back property:

There are limited factual circumstances that may allow a new owner of foreclosed property to sell the property back to the former owners/tenants of the property. For instance, one or more adults may not be named on the foreclosed mortgage, which means that they may be able to qualify for a new loan to buy the property back. Or, the former owners/tenants may have friends, relatives, or investors that may be interested in buying the property.

Another limited circumstance, which seems to be happening more often, occurs when the former owners/tenants might have cash to buy the property back from the new owner. While this scenario inherently seems less likely, with the foreclosure and unemployment rates at an all-time high, it is not uncommon for homeowners to strategically default on their mortgage payments on homes that are under water. In these cases, the homeowners may have saved a large amount of money, which makes it possible for them to buy the property outright if the eventual listing price or value of the home is within the range of their savings account.

See Foreclosure Considerations for a discussion of strategically defaulting homeowners.

Benefits of selling property to former owners/tenants:

The benefits for a purchaser of foreclosed property that re-sells the property to the former owners/tenants is clear (assuming that the purchaser's ultimate goal is to re-sell the property anyway). The purchaser of foreclosed property can forego dealing with the implications of ridding the property of any encumbrances, evicting former owners/tenants, repairing and marketing the property for sale, and any other side issues by simply selling the property back to the former owners/tenants.

See Foreclosure Considerations on credit impact as former owner may not qualify for bank loan to purchase the property.

Advice for purchasers selling foreclosed property back to former owners/tenants:

Some practical advice for purchasers of foreclosed property considering on selling the property to former owners/tenants is to think and act fast, but proceed with caution by (1) ascertaining whether there is a high likelihood that the former owners/tenants will be able to qualify for a loan to buy the property back, (2) determining whether the property will be appraised at a price that is close to the mortgage amount and (3) allowing a short time period in which the former owners/tenants must provide the new owner of a purchase offer and a mortgage preapproval letter from a lender of a reputable institution, or proof that they have cash to make the purchase. If the former owners/tenants are unable to provide a preapproval letter from a reputable lender, or proof that they have cash to make the purchase, there is a high possibility that they will not be able to make the purchase, in which case, it is best for the new owner to commence the eviction process.

Options for purchasers of foreclosed property when former owners/tenants cannot assure ability to buy:

If the former owners/tenants cannot provide proof that they will be able to purchase the property in a relatively short period of time and the new owner does not wish to incur the cost, time, and stress to evict them, there are a couple other options they can pursue. The new owner can rent the property to the former owners/tenants. This is not a viable option for many owners of newly acquired foreclosed property as their goal is to buy the property at a relatively low price and sell it quickly at a marginal profit without incurring additional responsibility. If the property is rented, the new owner takes on the sometimes arduous responsibilities of a landlord.

The other option for the new owner is to rent the property back to the former owners/tenants on a lease-with an option to buy agreement, where the former owners/tenants will rent the property with the option to purchase it sometime in the future. The lease-option scenario may be a win-win situation for both the new owner and former owners/tenants in that it gives the new owner solace that their purchase of the property is producing income without incurring the costs associated with evicting the former owners/tenants, while also giving the former owners/tenants the peace of mind that there is a possibility that they could regain title to the property at some point in the future. New owners going this route should have a Real Estate Attorney draft an inclusive agreement that protects the new owners rights, while keeping the property profitable.

The attorneys at Hanley Law have years of experience in real estate matters and know how to protect your interests in buying or selling foreclosed property. Call today for your free consultation!

Written by Sean S. Hanley © 2011. All rights reserved.

For a more detailed information about foreclosure, please see Bankruptcy and Foreclosure, Foreclosure, Foreclosure - Considerations, Foreclosure - Debt Relief Income, Foreclosure - Deed In Lieu, Foreclosure - FICO Score Impact, Foreclosure - Guide, Foreclosure - Mortgage Workout, Foreclosure - Senate Bill 458, Foreclosure - Services Pricing and Foreclosure - Short Sale.

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