Buying a Foreclosed House
First, laws vary by state and you should have a lawyer who specializes in real estate transactions review your paperwork. Here in AL, there are nightmare stories every day about people who lost their savings and a bunch of time after the sale was closed. Several states have redemption rights for the foreclosed person(s). Here it is a year later. They can come back at any time for any reason and redeem the property. You may or may not get your money out of it. Also, redemptive rights are considered personal property and can be sold as such. When they are sold, that sale is not recorded in any public forum. In other words, the person who was foreclosed on may never have the ability to redeem but he may have sold it to someone who does. And that person most likely will not have to pay you for any improvements made.
Second, the mortgage that was foreclosed may or may not be the primary mortgage and they are under no obligation to tell you this. This is rare but it does happen. Also, mortgages that are refinanced or second mortgages may effect the primary mortgage. The primary mortgage may not have been released or left in its original position. You bought a bad debt that you probably will never recover and you won't recover the house. You can spend years in litigation and lose even more money.
Also, they are not under any obligation to warrant title. All they have to do is give you a deed. The responsibility for the title is yours! Even then, liens have been known to re-attach themselves to that property. Some liens go with the person and not the land and some will negotiate with the new owner. Just be sure to get a search and title insurance for both sides of the sale (seller and buyer). This can be very expensive. It is based on the price of your property, but can prove worth it. Also, you can purchase title bonds that will cover all expenses incurred with correcting title.
One more thing is the disclosures. If you live in a caveat emptor state, you may already know that it is your responsibility to check out real property. In foreclosures, they have absolutely no way to disclose any defects with the property. Home inspections may or may not reveal hidden defects. Your inspector is only liable for the amount of money you pay him for the job. In a regular inspection, they usually do not inspect things like roofs or concealed plumbing or siding (EFIS). So, if you get into a property and then find out the pipes are leaking into the wall and has ruined the foundation and you had it inspected, your inspector is only going to be required to pay out what you paid him. Make sure you can afford to fix what is wrong. Homeowners are not going to pay for a pre-existing condition. They usually argue that it is all pre-existing if it's within a year of the purchase.
In short, the entire responsibility lies with the purchaser. Do your homework. Go to the courthouse and do your research. Talk with the neighbors. Do everything you can possibly do to protect yourself. Ignorance is no excuse under the law. The more you buy, the easier it will be; that is if you choose to do this for investment. Buying foreclosures can be complex, frustrating, and very rewarding. However, it makes good financial and business sense to protect and prepare yourself and your family.
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