Ready, Set, Invest: A Due Diligence Checklist for Foreclosure Property

Foreclosure sales are an excellent resource for investors looking to purchase fixer-upper properties at low prices. However, there are many risks of buying properties sight unseen, and misconceptions about the foreclosure process can lead to nightmare scenarios of surviving liens and holdover tenants. Above all, it’s important to be able to estimate the highest bid that an investor should make while retaining a comfortable amount of equity and setting aside some funds for post-sale cleanup and eviction.

We put together the below checklist to assist investors in conducting due diligence and making wise decisions to help minimize some of the risks of buying properties at foreclosure sales.

• Before sale: Get a title search
  • There are many misconceptions about foreclosures. As a foreclosure trustee, I have seen many investors back out of their foreclosure sale contract because the investor did not realize that a bank can foreclose on a second mortgage. This means that the first deed of trust (and any liens that were recorded prior to the foreclosing deed of trust) would survive the foreclosure and would not be extinguished as a matter of law. One way to spot these prior liens is to obtain a title search of the property from a reputable title examiner.

• Before sale: Visit the property
  • Because the foreclosure sale contract will contain “AS-IS, WHERE-IS” terminology, it’s important to perform whatever due diligence is available to you before the foreclosure sale, such as driving by the property and speaking to neighbors. If it turns out that the property is occupied, it would be prudent to factor the cost of eviction into the decision of whether and how much to bid at the foreclosure sale. If there has been construction on the property, the best practice is to pull the construction permits to gain more information about what was done to the property.

• Before sale: Call the foreclosure trustee to confirm the sale date
  • Many foreclosure sales are cancelled at the last minute, as many borrowers will submit loan modification applications or will file bankruptcy in order to postpone or cancel the pending foreclosure sale. Prudent investors should call the foreclosure trustee to confirm this information just before the sale date so as not to waste time waiting on the courthouse steps for a foreclosure that will not occur.

• Before sale: Line up your financing ahead of time
  • Foreclosure trustees often will allow for only a 15-day closing timeframe. This means that if an investor or its lender takes too long to set up financing, the investor could be responsible for paying hefty penalty fees for taking too long to close and risk the foreclosure trustee releasing the investor from the contract for the winning bid. Prudent investors should have an established relationship with a banker who can streamline the loan application process and identify banking products best suited for such a quick timeframe.

• At sale: Be prepared for a bidding war
  • Due to the current property shortages in the real estate market, it’s not uncommon to see large crowds of investors bidding at foreclosure sales. Read the foreclosure trustee’s advertisement of sale carefully to determine how much earnest money deposit is being required. In lieu of carrying around large amounts of cash, and due to the fact that most foreclosure trustees will not accept more than $9,900.00 in cash, most investors obtain cashier’s checks made payable to the investor or the investment company. Foreclosure sales can be very fast paced, so keep a clear head to avoid bidding over and above the maximum amount you feel comfortable with paying.

If you are interested in learning more or have questions about the foreclosure process, contact a member of the Commercial Real Estate practice group of Woods Rogers.