With a significant number of “repos” – or real estate being offered for sale by lenders who have recently foreclosed – potential buyers need to be aware of the risks inherent in purchasing such properties.

In addition to the typical due-diligence items, such as title, financing and inspection, repos are also subject to additional issues, such as whether the foreclosure was conducted properly; possession issues and third-party liens; warranty of title or lack thereof, and a seller-dictated process that is clearly one-sided.

In Maine, foreclosure is a strictly regulated process, and failure to adhere to all the requirements will result in a defective title, or worse, lack of clear title.

CONSIDER TITLE NSURANCE

A real estate attorney or title company should be able to do a comprehensive review of such matters to be sure that everything has been done in compliance with the law.

Such a review would include determining whether the homeowner’s right of redemption has expired, whether all liens or second mortgages on the property have been extinguished, and whether any robo-signing issues may exist.

A bona fide purchaser for value without prior knowledge of any of these issues who purchases owner’s title insurance can take comfort that the title insurance company can limit or eliminate any potential damages to them.

Often, a foreclosing lender has either evicted the prior homeowner or the homeowner has abandoned the property. This leaves the potential buyer with no guarantee that no one else has the right to occupy the property and no assurance that there are no pending liens.

Such issues can be avoided if the repo seller agrees to take financial responsibility for ensuring the property is free of tenants and occupants and that no contractors have filed any liens against the property or have any reason to do so.

Maine law allows a contractor to file a lien against a property within 90 days of completion of work or furnishing materials, regardless of whether the property was sold during that 90-day period. executing a parties in possession/mechanics lien affidavit at closing, a buyer will be able to enforce a claim against the seller if it is later determined that possession or mechanics liens are an issue.

Further, a purchaser should always inspect the property closely to determine whether the property has been abused or damaged from lying vacant for a significant amount of time. Vacancy and abuse often result in latent or hidden defects that can be costly to address.

LEGAL REPRESENTATION CAN HELP

Repo sellers who acquired title involuntarily (i.e., through foreclosure or by a deed in lieu of foreclosure) are usually unwilling to convey it by warranty deed since they do not wish to warrant title to a new buyer. Therefore, such a seller may make the sale conditional on the buyer’s accepting a quitclaim or release deed.

While these deeds are not defective per se, they do significantly limit the buyer’s ability to recover from such a seller if there is a problem with the title.

Legal representation at the time the contract is executed can keep these types of deeds from being used or, alternatively, can ensure that the limits they impose are understood by the buyer.

In addition to the conveyance issues noted above, sellers frequently impose conditions in the purchase-and-sale agreement that severely limit the buyer’s right to terminate the contract.

Repo sellers often require that the buyer use their form contract, which allows the seller to determine the type of title to be delivered (see above) and limits the scope of services the seller must perform.

Furthermore, many form contracts require that the buyer use the seller’s title company to examine the title records and to accept the title insurance proffered by the company.

It may seem obvious that this is not a good practice for the buyer, but with the pressure of the sale, the lure of a good price and the opportunity to close quickly, many buyers will be swayed to commit to a contract before realizing that they have few or no options if a title issue arises.

The risks can be minimized or even eliminated with proper scrutiny:

First, have an attorney review any contracts or agreements with the repo seller and its broker before signing.

Second, have the title searched and the foreclosure process reviewed by an expert.

Third, purchase owner’s title insurance, as it may provide you with the security needed in the event that a title issue arises.

Finally, be sure that you can terminate the process and receive the earnest money deposit back if the seller is unwilling to correct a defect that may turn up in the title or the property’s improvements.

Buying a repo can be lucrative if you minimize your risk and financial exposure.

However, what appears to be a jewel in the rough can often saddle you with unexpected problems and costs after closing if you do not proceed with caution.

Robert E. Danielson is principal of his own law firm and a principal and president of Old Port Title, an independent title company. He can be reached at 879-1337, [email protected] or http://danielsonlawoffice.com.