Editor’s note: With foreclosures on the rise in many parts of the country, Inman News examines the legal risks of investing in foreclosed properties at auction, describing the most common legal problems that arise and explaining how two investors had to fight in court to keep the property they purchased at auction after the former owner raised legal challenges. (See Part 1 and Part 2.)
When Herman, the owner of the property my friend and I had purchased at a foreclosure auction, suddenly woke up and claimed he hadn’t heard one word about the foreclosure action against him, we’d already paid almost $200,000 in cash for the property. We weren’t allowed to enter the property while Herman made his legal arguments that essentially asked for a do-over of the entire foreclosure. All we could do was pay the debt service on our investment — and fight back.
Our problem was that we had no legal standing to dispute Herman’s claims. In other words, we weren’t parties to the foreclosure action, so we had no legal right to appear in court to tell the judge that our investment was at risk.
Good thing we’re lawyers. We drafted a motion to intervene, which essentially told the judge that because we’d sunk a huge amount of cash into the property at the auction, we had a legal right to protect our interests during Herman’s action challenging the entire foreclosure. Herman actually disagreed and filed a motion opposing our intervention.
The judge granted our motion. Step one accomplished, but two months was lost in achieving just that goal.
Once we became parties, my friend and I sought to recoup our growing costs and to make it less comfortable for Herman to stretch out his legal challenge. We asked the court for rent in the amount of our debt service for each month that Herman lived in the property. It was granted. And even though Herman hadn’t paid his mortgage regularly, his attorney must have told him it would be bad form to disobey the court order requiring him to pay monthly rent while his challenge was pending; he paid every penny.
Step two accomplished, but another month was lost, and we still had no right to enter the property to inspect it. Out of spite, Herman could have been destroying things like drywall, kitchen cabinets, or even toilets.
“I’ve run into investors who’ve been stunned at the condition of the property,” said Jon Goodman, an attorney with Frascona, Joiner, Goodman and Greenstein, P.C. in Boulder, Colo., who represents both mortgage holders and foreclosure investors. “In Colorado, the owner and foreclosure lien holders have post-foreclosure redemption rights [which means the owner has the right for a certain amount of time to buy the property back by paying the amount due in the judgment of foreclosure], which can create a substantial gap between the time the investor puts up her money and actually takes title. It’s not unheard of for owners to trash the property after they realize they’re going to lose it.”
“The most dramatic example I saw involved an owner who took a sledgehammer and punched holes in the drywall between the 2-by-4s,” Goodman said. “Vandalizing a property can be criminal, but prosecution of the crime doesn’t help put money in the foreclosure investor’s pocket,” he said, “and sure, the investor could sue the owner for the damage. But generally it’s not productive against people who’ve lost their home to foreclosure.”
In the end, the judge found that Herman’s claim of improper service was groundless and confirmed the sale, but it took months for the judge to reach that conclusion. If we’d had to pay a lawyer to represent us against Herman’s challenge, it probably would have cost us another $5,000 just in legal fees. All for a legal challenge that’s impossible to foresee with certainty.
Our legal problems weren’t over, though. The final legal hurdle we faced is so common that it’s silly not to expect it. Herman wouldn’t willingly leave the property.
In Florida, if investors must have a sheriff forcibly remove a former owner or tenant, said Ben-Ezra, the eviction can take as long as six weeks.
In New York, a stubborn owner or tenant can drag the process out for as long as a year, said Michael Resnikoff, an attorney who works with Bruce Bronster on foreclosure litigation at Dreier LLP. Usually, he said, you can get the owner or a tenant out by reaching a financial settlement that includes a date for the resident to be out.
“A prudent investor will start the eviction right away and then try to work something out with the tenant,” said Resnikoff. If the parties agree, the stipulation of settlement between them will state that a warrant for the sheriff to forcibly evict the resident will issue immediately after the date the resident agreed to be out.
Herman finally left just before the sheriff was scheduled to forcibly evict him. That cost us another month in delays and another several hundred dollars in sheriff’s fees to arrange the forcible eviction.
When we finally walked into the unit six months after we’d paid in full for it, we saw that Herman had left junk everywhere (about 40 garbage bags of stuff). His cats had soiled carpeting throughout the unit. And the hardwood flooring that we thought was in Herman’s huge living room and hallway was actually soiled carpeting. But there was no intentional damage. We were lucky.
We began the rehab, which took several months, and closed on the sale of the remodeled unit a few days after our one-year anniversary of its purchase
Goodman sums up exactly my advice about investing in foreclosures. “Buying property at foreclosure auction isn’t for the novice or the dabbler, but everybody has to start someplace,” he said. “It’s not easy. If it was, everyone would do it, and that would decrease the returns. It’s generally for serious, sophisticated investors.”
“My message is do your due diligence,” Bronster said. “You’re not going to get rich quick without working your butt off. If you identify a property in an area you know, you might be able to learn anecdotally what’s going on in the property and understand the value of it. If it’s in another neighborhood, that’s a whole other can of worms, and you might not know those things. Do the work, and you might get a diamond.”
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