RISK and REWARD of Buying Foreclosed Properties on the "Courthouse Steps"
Have you ever driven by a county courthouse on the first Tuesday of the month and noticed a lot of people congregating on the steps? That day is foreclosure day in the State of Georgia. The State of Georgia allows for nonjudicial foreclosure which means that the actual sale of the property occurs in the form of an auction on the steps of the county courthouse in every county in Georgia on the first Tuesday of the month. While purchasing property on the courthouse steps can be profitable and presents a great opportunity to get a “good deal,” there are many considerations to evaluate before leaping in blindly and without doing your homework. Any potential buyer must take the time to search the tax records and property records before they bid on the courthouse steps.
There are a myriad of issues to consider before buying property on the courthouse steps. Here are some of the risks to consider:
Sale is “AS IS” for Cash: (Certified Check) – This means your money is at risk immediately; you may be outbid; and, professionals may try to bid up the price to take advantage of you being an amateur. THE SALE IS FINAL on the COURTHOUSE STEPS!
No formal inspection allowed: At best, you can obtain a “drive by” inspection.
Borrower may destroy house: The condition of the house is definitely a concern. In some cases, former borrowers rip out fixtures prior to the foreclosure. Vagrants may also have removed the copper piping and other valuable items from the house.
No contract: You have no recourse with the seller/lender.
No statutory right of redemption: This means the sale is FINAL and the borrower (former owner) does not have a second chance to “redeem” or get the property back.
Deficiency suit: This could hold up any quick resale or refinance of the property and jeopardize your title. A deficiency suit is where a lender has filed a lawsuit against the original borrower to collect any monies it did not or will not receive from foreclosing on the property. It is an open lawsuit and therefore “clouds” your title if you buy the property. The cloud would need to be removed before you could resell the property or obtain a title policy on it. While your money is not directly as risk, a foreclosure sale could potentially be reversed by court order and a confirmation action would certainly cost a buyer at foreclosure time and money.
Title Search: You must conduct this on your own (using a title attorney service such as the service our firm can provide) to run title on the property prior to your bidding on the property. Title will show you what taxes, liens, encumbrances and other items may affect the property. For instance, is there an easement or buffer which makes part of the property undevelopable or unusable? Title will also reveal if taxes are owed, if there are third party lien purchasers, and if any judgments are in the chain of title which were not wiped out by foreclosure. The costs of due diligence, title searches from independent title examiners, and attorneys may be expensive and you would have to pay for that up front out of your pocket and would not be reimbursed for it when you buy the property. Typically, title insurance is not offered by the foreclosing attorney’s office.
No Due Diligence Period: Again, this means you DO NOT have a right to a formal inspection and DO NOT have a right to have a survey of the property done prior to foreclosure. Since you normally won’t have a current survey of the property, you won’t be able to check a new survey against the legal description of the property which you will receive on the steps. Therefore, you will not know if the legal description which you are getting is what is actually on the ground.
Procedural requirements met? The lender must have followed proper foreclosure procedures regarding notice, acceleration and advertisement. Additionally, if there is a Federal Tax Lien, lender’s attorney must give proper notice to the IRS which will then have a 120-day right of redemption. If it is later discovered that there are any procedural irregularities, there could be a claim of marketability of your title and possibly the foreclosure could be reversed and unwound. At the minimum, you will have been tied up with the property for some time without the ability to dispose of your property.
Value: You’ll need to do your homework and be confident of the value of the property. If your assessment or valuation is wrong, and you intend to flip or rent out the property, you can easily lose your investment before you even buy it.
Location: A property’s bad location can ruin your investment. For instance, is it near a railroad, flight path or garbage dump; or is it in a neighborhood with high crime, zoned for undesirable schools, or in an environmentally contaminated area? Location, location, location is still key even on the courthouse steps.
Strong competition for good properties: Many “good” properties fall off the foreclosure list prior to foreclosure due to reinstatement of the mortgage, title problems on the property, or where a borrower files for bankruptcy.
Intervening loans, subrogation claims: You could be buying property with undisclosed intervening or superior liens. You could also be buying property involved in a lawsuit and be, at a minimum, tied up in litigation, or at a maximum, lose the property you just purchased.
In short, buying property on the courthouse steps can be a tricky area, so it is important that you know the risks going into the adventure. With opportunity there is risk. If you are determined to buy on the steps, one avenue is to partner or invest with someone who already does this as a full time business and is willing to share the risk and reward. Professional foreclosure buyers know their values, and know when to move forward and when to back off. Buying foreclosure property after foreclosure when it is listed for resale is a viable option for amateurs. You retain normal rights of contract and due diligence but still can buy a bargain property.