No matter how much preparation you do for an auction eventually, you're going to have to deal with problems when they crop up. No amount of research can prevent this, but what separates the average investor from the professional one is how they deal with the problem. They can either let it break them, or figure out a way to profit even if they've made mistakes.
A client of mine invests heavily in foreclosure auctions. And when I say heavily, I mean millions of dollars a month. We recently purchased a very nice single family home at an auction for a great discount. The property needed almost no repairs, just some cosmetic work, and could be sold for $100,000 profit most likely within ninety to one hundred and twenty days. Sounds like every investor's dream purchase. It was except for one problem that came up after the auction ended. The legal description on the foreclosure action was not an exact match to the legal description on the deed.
The problem is that this meant the foreclosure action was flawed and could be challenged by the homeowner during the redemption period. The legal description had one set of numbers reversed. Instead of saying “block 241” it said “block 214.” A small error to be sure, but more than enough to invalidate the foreclosure...
Now as the purchasers at auction we had two choices. We could cancel our bid, in which case the court would keep our $15,000 deposit and we would have to file a motion to have it released to us which could well take months. Or we could continue with the purchase.
We looked at the property again and it had no other liens on it except for the mortgage. The taxes were all paid in full, there was no homeowners association and no other municipal liens to deal with. The lender who held the mortgage was a small, local bank. We realized that if we continued with the purchase, the Certificate of Title we received from the court would not be valid as it would also have the wrong legal description on it. We really did not want to cancel this auction since it was such a great deal, if only we could just figure out how to get clean title to the property.
We went to the property and found the homeowner was still living there. We met with him and explained that we'd just purchased the property at the foreclosure auction. He replied that he was in the process of packing and would be out by the end of the month if that was okay with us. We responded that we would get back to him as soon as we could.
Next, we went and contacted the attorney for the bank holding the loan. We told them about the mistake in the foreclosure filing and that we were willing to proceed with the transaction so long as they guaranteed they would file a satisfaction of the mortgage which they happily agreed to do since their only other option was to start the foreclosure proceeding all over again from the beginning.
Now we had confirmed that the mortgage, which was the only remaining lien on the property, would be satisfied. The last problem we had to solve was getting a clean title. We went back to the homeowner and told him that we would be happy to let him stay in the property until the end of the month and would also give him $2,000 towards his moving expenses, but we needed him to sign over the deed in return. We told him that although we could get a Certificate of Title from the court we preferred to have a deed directly from the homeowner whenever possible. Our fear was not that he would challenge the foreclosure but would decide to stay in the house for another year while the new foreclosure proceeding worked it's way through the court.
He happily accepted our offer and our cash, and signed over the deed which contained the proper legal description on it. Now we had cleared the property of all liens and also obtained clean title directly from the homeowner.
This was a deal that many investor's would have just written off as a lost cause but knowing how title laws work and having the right team of professionals working with you can turn what looks like a sure loser into a winner.
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