Updated to include the following:
MERS: The Unreported Effects of Lost Chain of Title on Real Property Owners
David E. Woolley and Lisa D. Herzog
VII. CONSUMER PROTECTION TIPS
Although foreclosed properties may appear to be a “bargain”, no American (from the sophisticated investor to the layperson buying a home for their family to reside) should purchase a foreclosed property owned by a bank or servicer without first taking the following actions with the advice, counsel and assistance of a licensed attorney in your state well versed in real property laws and litigation, boundary disputes, title insurance, financing and contract law:
1. Do not pay cash for a foreclosure, even if you have cash available.
2. Do not rely on the “warranty” provided by an LLC or an individual seller unless they provide indemnity in the form of collateral or a security interest separate from the deed and of value equal to or greater than the purchase price of the subject property.
3. Obtain an “Owner’s Policy” from a reputable title insurer in addition to and separate from a “Lender’s Policy”.[1] The Owner’s Policy should contain specific endorsements and should protect the buyer against liens on the subject property. Consult a knowledgeable attorney for the requisite language and endorsements that must be contained in the Owner’s Policy.
4. Do not buy a foreclosure with a sequential conveyance without obtaining a chain of title on the property to be purchased (and on all adjacent parcels as these may have also been prior foreclosures). If the chain of title cannot be made available, there may be a problem.[2]
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[1]. Lenders routinely negotiate “ALTA Endorsements” to title policies. Title insurers want this additional insurance to protect their investment from adverse title claims. Oftentimes, title insurers will spend thousands of dollars on due diligence before lending on large real property loans.
166. Bevilacqua v. Rodriguez, 955 N.E.2d 884, 918 (Mass. 2011). Nemo dat trumps bona fide purchaser rights. Adam Levitin, Nemo Dat Trumps Bona Fide Purchaser, Credit Slips (Oct. 2011),
http://www.creditslips.org/creditslips/2011/10/nemo-dat-trumps-bona-fide -purchaser.html
5. Retain a qualified attorney to render a written opinion as to the status of title to the foreclosed property, title insurance coverage and any exceptions to title insurance coverage.
6. Verify that the attorney you retain has proper errors and omissions (malpractice) insurance coverage that exceeds the value of the property you are considering purchasing.
7. As an innocent purchaser, know the difference between a deed obtained by fraud and a deed that has been forged. If a deed is forged, it cannot pass good title. If a deed is procured by fraud, then it can pass good title to a bona fide purchaser without notice.[1] However, to realize the property rights may require expensive litigation and a quiet title action may have a period of time (oftentimes years) to take effect.
The bottom line is that if two properties have equal appeal and all other factors being equal between purchasing a foreclosure versus a non-foreclosure, it may be preferable to purchase a non-foreclosure unless you are willing to perform the necessary and substantial due diligence on the foreclosed property with the assistance of a qualified attorney.
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[1]. See Scotch Bonnett Realty Corp. v. Matthews, 417 Md. 570 (Bankr. D. Md. 2011).
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