Purchasing a foreclosed property is a lucrative investment opportunity that comes with its fair share of legal complexities.
Thankfully, the attorneys at LPJ Legal are experienced in overseeing a wide range of commercial real estate transactions, including foreclosure purchases. Here are a few tips to help you successfully navigate your next foreclosed property purchase.
New to LPJ Legal? We’re a dedicated group of experienced and highly credible legal professionals, proudly representing clients both locally and internationally with domestic offices in D.C., Maryland, Virginia, and Georgia. At LPJ Legal, we believe that a law firm should be more than a legal resource; it should be a trusted partner. Our team is committed to safeguarding our clients’ businesses, properties, and futures, providing powerful legal insights to help ensure their success. To become a commercial real estate client, visit the LPJ Legal website, or call us directly at 202-643-6211.
1. Understanding the Foreclosure Process
Foreclosure occurs when a property owner defaults on their mortgage, leading the lender to seize and sell the property to recover the outstanding loan balance. For understanding’s sake, you could compare this process to when a car is repossessed for nonpayment.
The foreclosure process varies by state but typically involves one of two types:
- Judicial Foreclosure: Requires court approval and follows a legal process that allows the borrower to contest the foreclosure. This process can be lengthy, but it often provides more transparency and legal protections for buyers.
- Non-Judicial Foreclosure: Follows state laws allowing lenders to foreclose without court involvement, often resulting in a faster sale. However, buyers must be cautious, as there may be fewer opportunities to resolve title issues before purchasing.
Understanding the differences between these processes is key; the different foreclosure processes will impact the timeline, legal risks, and your approach as a buyer.
By design, foreclosures are cost-effective ways to gain residential or commercial property ownership. However, it is important to fully understand the risks associated with “as-is” foreclosure property purchases.
2. Finding a Foreclosed Property
Here are a few places to begin your search for a competitive foreclosed property:
- Government Websites: HUD Home Store, Fannie Mae HomePath, Freddie Mac HomeSteps, or US Treasury Auctions
- Bank or Lender websites
- County Clerk’s Website – just search for “foreclosure sales” or “public notices”
- State or County Court Websites
- Newspaper websites (or the physical newspaper)
Pro Tip: Start by Googling “[Your County] foreclosure listings site:.gov”
3. Conducting Due Diligence Before Purchase
Unlike traditional real estate transactions, foreclosed properties are often sold “as-is,” meaning that the buyer assumes all risks related to property conditions and legal encumbrances. To reduce the long-term risks associated with a property, perform thorough due diligence prior to purchasing a foreclosed property. Key legal due diligence steps include:
- Title Search: Check for outstanding liens, unpaid taxes, or legal disputes that could affect your ownership.
- Property Inspections: If possible, assess structural issues or damages that could lead to costly repairs.
- Zoning and Land Use Compliance: Ensure the property aligns with your intended commercial use and local zoning laws.
Skipping due diligence can lead to costly legal battles or unexpected expenses post-purchase.
4. Buying at Auction vs. Bank-Owned Properties
Foreclosed properties are typically sold in one of two ways:
- Auction Sales: Properties are sold to the highest bidder at a foreclosure auction, often requiring cash payment and immediate closing. Legal risks include unclear property titles and limited buyer protections.
- Auction Tips:
- Know the location. Auctions can be in person, online, or held at courthouses.
- Know the amount of money necessary to hold the property. Will you need a minimum deposit or the full dollar amount?
- Bank-Owned Properties (REOs): If a property doesn’t sell at auction, it becomes a Real Estate Owned (REO) property, which banks sell directly to real estate investors or homebuyers. These sales usually involve a more traditional closing process but may still have legal hurdles.
Pro Tip: Consult with a real estate attorney before foreclosure auctions to avoid costly mistakes.
5. Handling Tenant and Occupancy Issues
Because foreclosures occur due to nonpayment, some foreclosed properties may be sold while tenants still occupy the space. If you are considering a foreclosed property with tenants, you must address the tenants’ legal rights before taking possession of the property. Failing to navigate tenant laws correctly can lead to costly legal disputes and delays. Contact us for advice on your area’s eviction procedures and landlord-tenant laws to avoid pitfalls.
Depending on the situation, you may want to consider:
- Commercial Lease Agreements: If the property’s tenants have valid leases, the new owners may be legally required to continue honoring the lease terms.
- Eviction Procedures: Removing unauthorized occupants or previous owners who refuse to vacate a foreclosed property, will require formal eviction proceedings. Consult with experienced legal counsel at LPJ Legal as these proceedings vary by state.
More bang for your buck: In addition to real estate law, LPJ Legal also specializes in landlord-tenant issues, providing expert advice throughout the complexities of the foreclosure process.
6. Reviewing Lender and Government Programs
In foreclosures, cash is KING. However, financing foreclosed properties is still possible. Certain government-backed loans, such as FHA, VA, or SBA loans, have specific requirements when purchasing foreclosed properties.
- FHA 203K Loan Program – Allows buyers to finance both the purchase price and renovation costs of a foreclosed home.
- USDA Rural Loan Development– If the foreclosure is in a rural area, this loan offers zero down payment financing for eligible buyers.
- VA Loans (for veterans)– Veterans can use VA financing to buy foreclosures with zero down payment and favorable loan terms.
The bottom line? Working with an experienced real estate attorney will make all the difference in securing a successful foreclosure transaction.
7. Do You Need a Real Estate Attorney?
Given the legal risks involved in buying foreclosed properties, working with a knowledgeable real estate attorney is crucial. A knowledgeable real estate attorney can help you with:
- Title searches and clearing encumbrances
- Drafting and reviewing purchase agreements
- Navigating eviction laws and tenant disputes
- Ensuring compliance with zoning and land use laws
At LPJ Legal, we specialize in guiding investors, business owners, and developers through complex real estate transactions, including foreclosures. Our attorneys ensure you minimize risk and maximize value when purchasing foreclosed properties. To become a commercial real estate client, visit the LPJ Legal website or call us directly at 202-643-6211.
