When you are seriously considering purchasing any foreclosure property, the first step is to check the title of the real estate. There could be many problems with the title, and you do not want to buy any property with a multitude of problems. You only want properties that have clear titles. You do not want any clouds on the title (remember, a cloud is anything that affects the title of the property).
You should accept the fact that defaulted property owners have not been paying their bills. If they had, the property would not have been foreclosed. No matter what the reason for the foreclosure, from the legitimate mistake to the heartstring-tugging situation, the simple fact remains that the title to the property must be checked.
What could look to you like a good deal could suddenly become one to pass on because of liens now on the property. For example, you might have found a property with a potential of $20,000 profit. However, the liens exceed that amount, eliminating any potential payday for you. In this scenario it is obvious that you should simply pass on the property and look for another one.
Buying a foreclosure property does not mean the property will be given to you with a clear title. It only means the lender will deliver the property (and title) to you and have no more interest in the property. There could be subordinate liens that remain against the property.
One of the things you need to understand clearly is your state's laws regarding property liens. The lender that holds the first mortgage always has the controlling interest in the property. When it comes to being paid, the holder of the first mortgage always is paid first. Whatever is left is paid to the other lien holders before any equity is paid to the property owners.
However, you need to consult with your real-estate attorney to understand the laws of your state. Don't assume that secondary lien holders would not have an interest in the title of the property just because the mortgage holder foreclosed on it.
There are often first and a second mortgages placed on a property. The second mortgage is paid only after the first is paid in full. This is the reason that interest rates of second mortgages are higher: There is a bigger risk of default and not being paid.
Is it possible to foreclose on a second mortgage?
As the holder of a second mortgage, the only way you can foreclose and take control of the property is to pay off the first mortgage. For smaller amounts owed and unpaid, this is often an impractical solution.
Title searches are not inexpensive. A complete title search may cost between $175 to $200 or more. You may want to start your title search with a less expensive and simpler ownership and encumbrances report (sometimes called the O&E report). The O&E report should quickly reveal any potential problems with the ownership or title at a less expensive cost. O&E reports usually cost less that $100.
Never use an O&E report in place of a full title search. The O&E report should only be used as part of your due diligence and to alert you of any potential problems with the property title.
Keep in mind that a title search could be completed today, and tomorrow a new lien might be filed against the property. This is one of the pitfalls of dealing with foreclosure properties.
The Internal Revenue Service (IRS) has been granted special powers to collect taxes owed to the federal government. If the title report indicates any liens from the IRS, proceed cautiously! You must determine if the IRS was properly notified of the property foreclosure.
Current law, which is always subject to change, grants the IRS the authority to seize the property for up to 120 days following the sale. If the IRS has been properly notified twenty-five days or more before the sale and they decide to seize the property, you would be entitled to a refund of all your money plus interest. Should the IRS decide not to proceed with a seizure of the foreclosed property, the agency's right to do so will expire on the 121st day following the foreclosure sale.
As you learned earlier in this book, scheduled property auctions are often canceled and postponed. You must be certain that the IRS received proper notification of the actual sale whenever it occurred.
Current law has granted a major power to the IRS. If the Internal Revenue Service was not properly notified of the public sale, its lien remains in position as long as the lien is on file in the county's recording office. Under current law, if you purchased the real estate and there was not proper notice given to the IRS when the foreclosure sale occurred, you are sitting on a time bomb.
Why? Because at any point the IRS could opt to enforce its recorded lien against the property. There is only one way you could get clear title to the property: pay the former property owner's lien to the IRS. In other words, you get to pay someone else's taxes! You are not compensated for your loss.
Other Government Liens
Foreclosed properties often have municipal liens placed against the title for unpaid taxes, services, or other reasons. Some municipalities provide water, trash collection, or sewerage service. If the property owner did not pay the bill, the municipality likely filed a lien against the property.
Depending on your local laws, it is likely the property had been assessed. The municipality probably issued property tax bills. There could be county, local municipality (city, borough, or township) taxes, as well as taxes assessed by the local school board. If these taxes were not paid, the municipality likely placed a lien against the property.
Most municipality liens are not wiped out by a foreclosure action. To get clear title, the lien needs to be paid.
When a tradesperson works on the property, he has a right to be paid for his service and materials. If the property owner does not pay for the work, the contractor places what is known as a mechanic's lien against the property.
Mechanic's liens may or may not be enforceable against a foreclosed property. Your attorney can advise you as to what the current law is in the counties where you are going to invest in foreclosure properties.
There could be other liens placed against the foreclosed properties. For example, homeowner association fees might have been assessed and remain unpaid. It is not uncommon for homeowner associations to levy substantial fees or fines against homeowners for unpaid dues. In an attempt to collect the unpaid amount, the homeowner association can file a lien against the property.
In some jurisdictions you may not be able to acquire the property until the unpaid balance is paid in full. And unlike other liens, the homeowner association is likely to demand payment for each month since the last fee was paid.