Foreclosure Due Diligence Q & A

[Terry Portier]

In looking at a bank owned REOs, courthouse steps or online auctions like auction.com, HUD, etc, or just wanting to understand basic REI principles, please provide some insight and correct me if I am wrong so far.

1. Register of Deeds (ROD) office, all mortgage activity (1st, 2nd, 3rd), but not mechanic liens, is made legal by public record. Caution here recent activity may not be shown online always a good idea to call. You can get a legal description at the clerk’s office ROD will need

2. Civil court is where foreclosure takes place there is a public auction at the sheriff’s office. It is important to understand redemption rights; value and when the redemption period ends or basically when the person foreclosed on gave up there interest to the property. I’m not sure how you determine value since ROD list mortgages assigned and do not reflect what’s owed? The court can also give the attorney’s name, and identify any mechanic liens. You will need a name which can be obtained at the ROD site on the mortgage, to obtain a case #.

3. Some sellers may issue a “Quick Claims Deed” that does not mean title is free and clear, a “Warrantee Deed” does. I’m not sure what this means, if there is a problem the deed is a contract under warrantee or not? Is there a third party involved here?

4. Title insurance protects the buyer in any law suit if title is not free and clear? So regardless of due diligence if you miss something you are covered?

5. Find out back taxes at the appraisers office.

I learned all that yesterday lol after almost bidding on auction.com. I have read you have to be a seasoned investor that understands due diligence, so I thought if anyone cares to educate us noobs feel free. I backed out because I don’t feel I am educated enough.

Thanks! :)

[Bill Gulley]

Terry, as to #1, the name of the office varies, in all states for any lien or encumbrance to be perfected or enforceable public notice must be given and that is accomplished by filings in the property records to the subject property. And, you are correct that due to the physical filing process a lien may not be shown when you search title. When properties are sold a "final clearance" is given which entails searching title records of the property sold after settlement but before filing documents of that settlement. This is to ensure that no lien was filed, say a few minutes prior to the closing transaction. Such a filing could become superior to the liens filed from that transaction, so they ensure there is clean title. With a foreclosure, generally such liens, with the exception of some like taxes, are wiped out from such sale. But after the sale a new lien could be filed after you buy it. I'll mention this later.

#2. There are two types of foreclosure, a judicial foreclosure which is a matter before the court and no-judicial foreclosures where the power of sale is vested in a Trustee by agreement. A njf, may be taken to a judicial proceeding if either party files suit. In either case, you can obtain the entry bid or payoff required by a lien holder. Understand that the value of the property has nothing to do with what is owed on any lien. Property values are determined by the analysis of the market to the subject property.

#3. Never, never, never buy a property using a Quit Claim Deed. A CQD only conveys that interest the grantor MAY have in a property and gives no warranty of any kind. I'll be happy to sell you the Empire State Building for $1,000 on a QCD! A General Watranty Deed is what you want in any sale, which warrants good and merchantable title. Sometimes a seller will not give such a warranty or sells a property that is subject to another lien, inwhich case a Special Warranty Deed is used, it will generally give full warranty but excepts out certain matters that are not covered, like a first mortgage. There are other deeds as well that fall under the category of Special Deeds, these are used for estate planning, granting easements and specific matters that put requirements on future owners or uses of the property.

#4. Title insurance insures the fnancial interest of an owner or lien holder as to good title up to the date the title is insured, not beyond. The American Land Title Assocition governs title practices and title insurance companies use a standard policy. The policy will have a section BII, Exceptions, which needs to be read carefully. There are standared exceptions, like liens and encumbrances not shown of public record and claims from such are not covered. There may also be special exceptions, such as an unrecorded easement for a driveway or road. Title coverage also insures the settlement or closing when the closing is accomplished by an "insured closing agent", so the acts and omissions or errors inhe settelment will be covered. This would be a function of running that final clearance I mentioned above, if a lien was filed minues prior to closing was not found with the deeds and new liens being filed, coverage would be afforded. Title insurance does not insure the market value in the future, it only protects you to the limit of coveage obtained and is set at the sale price from the transaction. If you purchase a 15K property and put 60K in it, you need additional coverage (if you intend to hold it) as our verage would only be 15K.

5. Not the appraiser's office, the Assessors office. :)