11/10/08: Buying Property That Is About To Be Foreclosed
By Benny L. Kass
Q: A person I know has been trying unsuccessfully to sell his condominium. He bought it for $260,000 and owes approximately $180,000 on his mortgage. He has advised a close mutual friend that he plans to "walk away" from it. I'd like to buy it -- maybe for $160,000. What is the best way to do this? Do I write the mortgage holder (a bank) that I have an interest in it at a certain price?
A: It is a sad state of affairs when people want to “walk away” from their home. Everyone is a loser. The “walker's” credit rating goes down even further than it currently is, and the lender has one more property to dispose of from their ever growing portfolio.
There are several things that you have to do. First, you should meet with the current owner to make sure he is willing to sell his unit. Next, you have to find out exactly how much the lender is owed. Normally, because of privacy concerns, the lender will only provide this information if specifically authorized by the borrower, so you should get a letter of authorization signed by the condo owner.
You also have to determine if the owner has any other debts that would “cloud his title”. For example, is there a second deed of trust? Has the Internal Revenue Service filed a tax lien against the property? Have the real estate taxes been paid? Is he delinquent on his condominium fees? Most of this information can be obtained through a title search, and you should consult a real estate attorney as early as possible.
Once you get the payoff information, you have two choices. If you are willing to pay the exact amount the lender is currently owed, you should enter into a real estate sales contract with the condo owner and arrange for settlement. Your contract must contain language that it is contingent on the seller being able to convey free and clear title to you, and that there are no other liens or encumbrances other than the first deed of trust.
You do not need the lender's approval if you plan to pay the outstanding loan in full. However, you have indicated that you would like to buy the condo for approximately $20,000 less than seller owes the bank. Now, you will need the lender's approval.
This is a “short sale”. You will enter into a real estate contract with the seller, which is contingent upon the bank approving the sale. If there is a real estate agent involved, make sure that the contract spells out the amount of the commission and who pays it.
Once you have a signed contract, it must be sent to the current lender with a cover letter, requesting their approval. Because lenders currently are swamped with short-sale requests (and foreclosures), it will take a long period of time before you get a response.
I suspect that the lender will ultimately approve, especially if they understand that the alternative is foreclosure. There are two main reasons why legitimate lenders do not want to foreclose on residential properties. First, in today's economy, they may end up owning the property and then they will be stuck with having to pay the real estate taxes and the condominium fees. And in the District of Columbia, if the condo owner is behind on his condo fees, the lender is legally obligated to pay the condominium up to six months of any delinquencies.
Second, at all levels of government, lenders are being told that they must work with their borrowers rather than take legal action against them.
Since you are considering buying into a condominium, you are entitled to receive what is known as a “resale package” from the association. This will include the current legal documents (Declaration, Bylaws and Rules and Regulations), as well as the current operating budget for the association and the most recent auditor's report.
Read these documents very carefully. Make sure that the condominium has adequate reserves, especially if it is an older building. Also inquire from the property manager for the association as to the level of delinquencies. If there are too many owners who are not paying their condo fees, you do not want to buy into this association.
One final thought: ask yourself this question: “if this is such a good deal, why isn't someone else interested? Why is it coming my way?”