The risks of buying foreclosures with second mortgages

Buyer beware!

It’s perhaps the most important nugget of advice as it relates to investing in and/or buying foreclosed homes.

What you see isn’t always what you get, especially when distressed properties hit the auction block. Whether it’s a structural problem that costs thousands to fix or an encumbrance on the title that is virtually not fixable, foreclosures are inherently risky investments.

The Strand family, which purchased a deed at a foreclosure auction earlier this year for $96,000 cash, found out the hard way.

From the San Francisco Chronicle:

“Apparently, unbeknownst to us, Wachovia sold us a worthless second mortgage that was part of a piggyback loan made to the” previous owners. Both loans were originated, signed and recorded on the same date. Rather than foreclose on both loans at the same time, Wachovia chose to foreclose, market and sell the worthless junior lien, purporting it to be the real property, which is what we purchased.”

That’s right, $96,000 on essentially, a worthless note. The first mortgage, which was worth about $298,000, was later reclaimed by the lender after it failed to sell at a separate auction.

The good news is that the Strand family and the lender “negotiated a confidential settlement.”

Nonetheless, the lesson is clear: Do your homework! Sure, there are loads of great deals hitting the auction block every day, but there are also a fair share of land mines that have the power to blow up your bank account.

To be safe rather than sorry, the report offers up these helpful tips for bargain hunters:

  • Engage a real estate attorney and/or a professional investor.
  • Hire a title company to make sure there are no liens.
  • Observe some auctions before bidding.
  • Research the property history at the county recorder’s office or subscription websites like RealtyTrac and ForeclosureRadar.
  • Be prepared to pay cash.
  • Understand that the property has no guarantees on title or condition.
  • Consider buying a bank-owned property instead.

For more detailed information about buying foreclosed homes at auction we recommend that you also check out “Outsmart Experts at Foreclosure Auctions and Win!

Good luck!

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