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Thoughts on buying distressed property

Closing Thoughts by Jim Young
Sponsored by Andrews & Young, PC
January 23, 2015

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While we talk about buying property that is “distressed,” it seems that those who seek to buy such property often become “distressed” as well.

I most commonly encounter distressed property in the following situations: 1) a bank is selling a property it has foreclosed upon (sometimes called REO for “real estate owned”), or 2) an owner is trying to sell a property for less than the liens against it (a “short sale” where all lienholders must agree to release their liens for what is available to pay them), or 3) a court-ordered foreclosure sale.

You most likely will encounter distressed property after a bank has taken title through a foreclosure. In some ways this situation presents fewer complications than the other two, but in other ways this is the most uncomfortable situation.

Typically when you make an offer to pur- chase property with your real estate agent you will make a written offer to the seller, and that offer is usually upon a form of contract approved by the local board of real estate agents. One could say this contract is generally intended to strike some balance between interests of the seller and of the buyer.

However, in my experience, at least regarding REO owned by large national institutions, the response to an offer to purchase an REO property will include an addendum or counteroffer which goes on for many pages and which materially rewrites the contract into one which removes many of the standard terms intended to protect the buyer and replaces them with oppressive terms that favor the seller. The resulting contract, to the extent it makes any sense at all, can be “appalling” (in the words of a colleague who recently reviewed one of these contracts), and I think that opinion is widely shared among real estate practitioners.

When these counteroffer/addenda first started appearing years ago I made some efforts at trying to negotiate the terms of these documents only to quickly learn that the sellers would not entertain any amend- ments at all, even ones simply designed to make the contract more intelligible. The most recent contract I have reviewed includes a provision that says that if the buyer defaults upon the contract the seller gets to retain the deposit of the buyer as liquidated damages. On the other hand, if the seller defaults (one contract I read said even if the seller simply decides to sell the property to someone else) the sole remedy of the buyer is to recover back their deposit.

So these contracts are not for the faint of heart, or even old English Majors. These days I think buyers can be well advised to do the best they can with the contract on a couple of important points and not expect the contract to really make sense in many ways. They can also reduce their risk by making as small a deposit as possible. Then, they should aggressively inspect the prop- erty and put their faith in their attorney and title insurance company to make sure the title to the property is marketable.

Short sales are also common these days. A buyer interested in pursuing such a property should have the patience of Job. It can take a seller a very long time to attempt to negotiate terms with the lienholders on a property, and during that time a buyer may not really know the status of those negotia- tions. When inquiry is made as to the status of seller/lienholder negotiations, one is sometimes told by the seller’s representa- tives that it is only going to take “another couple of weeks” to get the approval from all the lienholders. So the contract should include a firm and reasonable deadline for the seller to get all approvals, or the buyer can get his or her deposit back.

A buyer can be well advised to have a title search done of the property concerned early on after signing the contract. That way, they’ll be able to present the seller with a list of all of the liens which the buyer’s attorney believes need to be released. I was once involved in a case where the seller’s representatives overlooked one lien; after negotiating releases with all of the other lien holders, the deal fell apart when no accommodation could be made for the over- looked lienholder.

The third situation arises when a parcel of real estate is foreclosed upon in the Supe- rior Court and, based on an appraisal, it appears there is value in the property over and above the debt owed to the foreclosing party and others with liens prior in right to foreclosing party. In that case the Court orders a “foreclosure by sale.”

As part of this order, the judge appoints an attorney to act as the “Committee of Sale.” The judgment typically bars the com- mittee from incurring any expenses before a certain date. But once that date is passed, the committee will order an appraisal of the property, and a title search, and will have a foreclosure sign posted upon the property, and will cause an ad to be placed in a news- paper, and will cause more information to be posted onto the Web site created by the Superior Court as a source of information to interested parties.

On the day of the auction, the committee will arrive at the property about two hours before the time of the auction. They will, to the extent reasonably possible, allow interested parties to inspect the property; this will hopefully include the opportunity to view the interior of the property, though such may not be possible. This procedure can lead to poignant moments, and comical ones, too. If they look through the property and notice some issues, e.g. warped wood, holes in the floors, etc. and they have been inhabited with some pests that haven’t been mentioned/noticed before, it is important that this gets seen straight away with services like or others that are similar, so this can be rectified. This may also give them cause to ask for a lower price if applicable.

The committee will typically read a “notice to bidders” just before the auction occurs. The notice emphasizes that the sale of the property shall be “as is” and is subject only to the confirmation by the Superior Court. One downside to these sales is that the ability of the buyer to inspect the property is much more limited than in the other situations discussed above.

Each sale is a bit of an adventure, with the drama of a live auction. One property for which I recently acted as Committee of Sale had been vacant for a number of years, and the front and rear entrances were covered thickly with bramble bushes. I was able to provide access to the inside of the property only by engaging in some landscaping work to clear the brush away from the front and the rear door. Thankfully, the brush likely discouraged the kind of thieves who prey on these kinds of properties; much to the surprise of one of the bidders, the copper pipes were still in the house.

When the house is vacant, there can be a sense of the presence of the prior owner. Personal items, including family photo albums and other mementoes, are sometimes left behind. At the moment, I am thinking about properties where the last owner passed away, or moved to a nursing home, and it appears there was no immediate family or friends to care about these belongings. And this can lead one to reflect a bit on the transitory nature of our time on this earth. Upon returning home after the sale, we may hug our spouses a little more tightly than we did when we left our homes in the morning.

Of course, in some situations the owner is still in the house, and that is another story entirely. Many years ago I remember going intoonehouseandfindingthatthefamily had converted part of the house to a chicken coop. Sometimes the person being fore- closed upon is in denial about what is going on and suffering family problems; that can lead to awkward and uncomfortable situa- tions, which the committee needs to handle with some tact.

The contracts for these foreclosure sales are cash sales. A buyer must know before bidding that they will be able to come up with the cash to close within, say, 40 days of the auction, very roughly speaking. The auction results must be confirmed by the Superior Court, and the legal proceedings on confirmation can drag on for a long time. Keep in mind that the buyer’s deposit will be tied up during this time.

These properties can be an opportunity for investors or those looking to get a good deal on a home. But for those who are inexperienced, or who are not represented by capable advisors, dangers lurk. In all cases, please make sure you have an experienced team of advisors to help you through the process.

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