How a "PERFECT" NY auction bid became a two year lawsuit and LOSS

[Brandon B.]

I found a "perfect" starter deal in Queens, NY during December 2019. This deal had beginner written all over it - nearly guaranteed profit, simple labor, no major city violations, initially found by a trusted wholesaler. Perfect is in quotes because this deal turned out to be anything but perfect. The winning bid on the property was $370K, with an ARV of $540K and about $20K of work required, doable by a novice in less than 30 days - paint scraping, concrete repair, minor window repair, appliance upgrades. I mean this was a flipper's dream for the area - risk was minimal, profit was all but guaranteed, property was vacant and in good shape, there were offers to purchase the property before any work was done for $495K. That would have turned me $100k in profit just by signing my name twice, giving the foreclosing lender cash, and selling the as-is home to the end user.

It turns out, as I went to close, there was an emergency appeal on the foreclosure suit, claiming essentially what is improper foreclosure and mortgage fraud. The wholesaler who I got the bid from decided he wanted out and suggested I do the same; I declined and took the risk and assumed his bid, effectively making it my bid. Buyer ALLEGEDLY claims that the mortgage that he, again, ALLEGEDLY, took out was not actually taken out in his name, he never received any mortgage bills, and the first time he heard that he was foreclosed on was when they came to tell him "time to go." This initiated a two year process in which the lawsuit proceeded through multiple Queens courts, which to my basic understanding of the law and with some info from my lawyer, ended with the superior court allowing the owner to pay back a smaller amount of money than the initial mortgage was for (the one he allegedly claimed that he did not take out and did not have the money to pay), and in turn, the foreclosure would be vacated.

During the lawsuits, the old owner broke into the property and moved back in, changed locks, did renovations, etc. This likely helped the lawsuit in his favor - how are you now going to foreclose on someone who just renovated their property because they "reasonably believed" that they owned it free and clear. Although the property was being frequently checked on, it was no use for the strong squatter's rights laws in NY. A year-old utility bill was enough to allow him to stay under squatters rights provisions to say "I have been here for over a year what are you talking about? Vacant! No, I was here!" Even after one occupant admitted to being there less than thirty days, the year-old bill provided by a different occupant was enough to invoke squatter's rights.

Throughout the two year process, the foreclosing lender would not let me out of the deal even though it had gone past any reasonable closing date, and had my money tied in a no-interest account. Also during this time, we have seen absolutely historical appreciation in both the stock market and real estate market. The opportunity cost of this perfect deal is now significant. By the time the lawsuit was said and done, the ARV of the property had gone up to $600-650K - a WHOPPING ~15% appreciation. Buying a random property at market value and doing nothing with it at end of 2019 would have now yielded me an acceptable return, whereas this "perfect" deal dealt me a net loss.

KEY TAKEAWAYS THAT BEGINNERS SHOULD KNOW:

When securing a property at auction, even if you have done your research and scouted it before the auction, ANYTHING can happen. An improper foreclosure lawsuit, squatters breaking in with fake bills and leases, violations that do not show up on title searches, etc. When you bid, be prepared to tie up that money for a very long time. Additionally, factor in lawyer fees, mileage, ancillary expenses for travel/accounting/consulting and other deal expenses, and you can quickly be out $5,000 without even closing on the property.

SOLUTIONS:

Learn as much as you can about the local auction market before you bid. Are the courts known to side with squatters, renters, past-owners? Budget that in. Are squatter laws and insurance laws unfavorable to land owners in the area? Consider a different market a few counties over. Can you reasonably find foreclosures from a trusted wholesaler as opposed to risking going through the auction and court system? ?y wholesaler secured 5 other properties, including waterfront deals for a cheaper price, during this time period which would have returned 25%+ for basic manual labor. Network is key here, and had I leaned on my network and trusted my wholesaler in the beginning when placing the auction bid I may have saved myself two years and turned profit somewhere else.

If anyone has any auction advice, please leave me some comments with stories, suggestions, etc. We all need to help each other in the name of fair, transparent, and efficient real estate markets. How can any of us succeed without others sharing stories such as this one where we can learn from each other's mistakes.

[Account Closed]

Hi @Account Closed ! 

The wholesaler initially placed the bid at the foreclosure auction and won. He esentially was selling his winning bid.

By "the winning bid on the property was $370K" I mean the wholesaler placed that bid at auction and won.

We did run title, and the title seemed to be pretty clear, it seemed to be a run of the mill foreclosure.

I am not sure what you mean by the selling owner having to sign some documents - he really didn't want to sign anything as the defense was that he was foreclosed on without his knowledge and would fight it.

The mortgage lender did have signed documents from the borrower, except the borrower claimed he did not actually sign it and it was not him, even though there were no signs that would lead anyone to that conclusion. Additionally, the lender was a small lender who represented that this was a cut-and-dry foreclosure, and if my understanding is correct, the lender's attorney remembered physically seeing the client signing the loan documents. I do not want to go and accuse anyone of any criminal wrongdoing, but with the facts that were presented to me, one of the parties I was dealing with did materially misrepresent events that transpired. Very puzzling indeed.

Got it. It wasn't clear when you gained interest. I had a similar experience back in 06'. Mine went all the way to federal court in the 9th district and ran 6 years from start to finish. 

This was on a house I bought in 2001, 5 years earlier. There is a 3 year statute of limitation on that kind of transaction. Ouch! The court ignored the SOL. Yep. I bought the house in 2001 and was sued in 2006. Same issue. The seller claimed he didn't sign the documents. Well, he did finally claim he signed the documents in 2012 (after 6 years of claiming he didn't sign) to support a technical appeal that they lost anyway. Perjury all the way. But, there was no consequence to him or his attorney who knew exactly what was going on. No one was interested that he committed perjury. It's all a game to them.

I won at every level and they appealed each time on something totally different. Oh, did I mention he was a "broke" minority represented by a minority attorney pro bono (who was going to split the windfall with him)? The lawsuit was for $1,000,000. Heh, heh. I fight & I don't back down. It was Crazy. 

Anyway, during that time, a federal judge told me that "everyone lies in court". The bottom line is that in the legal industry (yes, it's an industry where people are paid very well and have little to lose) deed ownership isn't settled until it is heard by a "trier of fact" (Judge or jury and an opinion rendered). Of course most cases by far don't go to trial and there is a settlement instead. But, as I stated, I don't settle. 

So in your case, since the wholesaler had indeed put up the money to buy at auction and was the successful bidder, the auction occured in "good faith" and you chose to buy the rights to the property, yeah, you're kinda on the hook.

Sorry it turned out so badly. 

 What's the current status?  Were you granted title?