Purchasing Property at a Foreclosure Sale – As noted in both Oregon’s Senate Bill 952 and the federal Protecting Tenants at Foreclosure Act, it is essential for the purchaser at a foreclosure sale to exercise due diligence in finding out: (a) If the property is occupied, and if so, the terms of the tenancy; and (b) The physical condition of the property. Unfortunately, if the property is rented out, a potential purchaser at the sale has no legal right of entry to inspect the property ahead of time.₁ Moreover, lenders are not subject to Oregon’s property disclosure law,₂ so they need not make any disclosures to potential purchasers at the foreclosure sale. This leaves a bidder hamstrung in finding anything out about the condition of the property ahead of time. Although the lender has a legal right to prevent waste of its security interest, it is doubtful they would demand an inspection without a court order, which would be time consuming and costly.

Although not addressed in the federal law, under the SB 952 a purchaser could inadvertently accept the rent from a tenant under a long-term lease and find himself/herself ratifying that lease. What this essentially means is that during the 30 and 60-day periods, under Oregon law a landlord cannot accept rent. In other words, the tenant’s payment obligation is suspended following the foreclosure sale and the landlord may not file for eviction for nonpayment of rent. However, nothing prevents the purchaser at the sale from entering into a written agreement with the tenant to leave before expiration of the 30 or 60 – day periods.

Purchasing Bank Owned (“REO”) Property – The advantage of purchasing after the foreclosure sale when the bank has taken back possession, is that the ability to view and inspect the property is available. There is still no duty on the bank’s part to issue a property disclosure form, and most REO sales make it abundantly clear that it is an “AS-IS” sale. So extreme due diligence is imperative. Although many experts would probably recommend a “title search,” the lender already has a foreclosure report which informs them who should be named in the foreclosure to clear off all objection encumbrances on the title. So before spending money on a title report, potential buyers should first see what the foreclosure report says. If it appears that this property would make a good investment or home, then an owner’s policy (with extended coverage) should be obtained. It is important to remember that the owner is likely no longer available to contact, and title policies say nothing about encroachments or other physical conditions existing on the property, so one or more visual inspections are recommended – as well as contacting the neighbors just to make sure there are no known boundary issues. If possible, locate the original corner survey pins. Lastly, with the current credit crunch, it is wise to survey the lending market to see what kind of loans are available and what the LTVs are.

Purchasing Short Sale Properties – Short sale properties are fraught with issues for sellers and buyer both. From the buyer’s standpoint, the purchase has one major contingency, i.e. the bank’s acceptance of the buyer’s offer on terms acceptable to the seller and buyer. The OREF Short Sale Addendum makes this clear, and this, or a form with a similar clause, should be used on all short sale purchases. Without that clause, the short sale contingency could be deemed satisfied if the bank accepted the offer, but added other conditions. Remember, the bank is not a party to the transaction, so new conditions might not be legally construed as a “counter-offer.” Secondly, buyers of short sales must remember to insert a deadline after which time they can withdraw if the bank is slow to respond. Again, without such a clause, the buyer is theoretically “stuck” in the transaction all the way to the closing date unless the bank accepts another offer. Buyers should be aware that many title and escrow companies are wary of short sale buyers whom they suspect of flipping. If there is any indication of an impending flip, a double closing, the apparent use of a strawman (i.e. a false purchaser), or hint of fraud, they will halt the transaction. In some instances, title companies are known to either write an exception to coverage in the title policy, or inserting into the deed language prohibiting transfer for a certain period of time such as six or twelve months. Lastly, although the topic is not without debate, there remains an open issue as to whether the seller and buyer may agree that the lender will not be notified if another – perhaps better – offer is submitted. There are those who feel this is loan fraud, while others see nothing wrong with such an arrangement. However, most lawyers would say that the better approach is the conservative one, i.e. simply ask the lender up front, whether they want to entertain offers one-at-a-time, or accumulate all offers and then decide on the best one.

As with all purchases of distressed properties, it is likely that there will be deferred maintenance. For that reason, the more the buyer can learn about the property in advance, the better.

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Footnotes

1. Note: Oregon law does permit access with not less than 24-hours written notice, but the tenant does retain the right to say no. An owner’s only alternative is court, which is not an attractive alternative in most cases.
2. ORS 105.464