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A Costly Foreclosure Purchase - No book will tell you this

I have worked with an investor for over 18 years and we had something happen two years ago that I never thought I would ever see.  My investor buys foreclosures either by himself or the two of us together.  This really happened to my client.   I doubt seriously you will read this in any book on foreclosure investment.

"Jim" purchased a foreclosure on his own this time.  He went through the typical steps.   1)  We investigated the property and determined it had value if purchased at the right price, 2) We did a title search typically referred to as a "Lot & Block", 3) We verified the loan being foreclosed on was a 1st which it was, 4)  Jim successfully purchased the property at the Trustees Sale,  4)  Jim cleans up the property and we put the property back on the market in "As Is" condition 5)  A buyer comes along and makes an acceptable offer and we successfully go to closing.

Sounds like a dream transaction right?  That's what we all thought until Jim was served with a law suit 9 months later.  Turns out the buyer refinanced the property 7 months after they purchased it from Jim and found a 2nd mortgage in the amount of $65,000.  The law suite was filed by the title company that did the closing for the resale and issued the title insurance when we resold the property.

I could write a book on this but what happened is that the party that was foreclosed upon apparently took out a 2nd deed of trust on the property 3 years prior to Jim purchasing it.  The problem arose when the 2nd deed of trust that was taken out it was recorded using the address of the property instead of the legal description as is typical.

After Jim purchased the property he took out an owner's policy and nothing showed up.  When we resold the property again nothing came up by the 2nd title company.  It was a fluke that when the buyers refinanced the the home that the $65,000 2nd showed up.

The title company that insured the home when we resold the property and had to pay the buyers claim sued my client for failure to disclose a 2nd deed of trust.  Of course there is no way my client would have purchased the property with a 2nd on it but the title company said they had no choice but to sue.

The suit went on for 7 months and was settled out of court and was very costly.

The lesson learned is that even doing a lot and block and having the trustee verify we were dealing with a 1st deed of trust was not enough to protect my client from this bizarre case.  If Jim would have taken out an "Owners Policy" of title insurance before he purchased the property he would have been protected and the company issuing the policy would have had to pay any claim.  Jim purchased the policy after he purchased the home at trustee's sale so he was not covered for this case.

From that time on we ALWAYS purchase an "Owners Policy" every time we just bid on a home and before the Trustee's sale takes place even though it cost a few hundred dollars.  It helps us to sleep better at night.

 

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Comment balloon 47 commentsGeorge Tallabas • April 29 2007 08:26PM

Comments

Wow,  Thanks for the information.  I will keep that in mind if I ever buy a foreclosure or work with a client that does.
Posted by Ronda Myers-Waters (Willems Realtors, Principal Broker) almost 12 years ago
Thank you Ronda....this was quite an experience!
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
Didn't know you could buy a policy before you purchased the property!  Very good information.
Posted by Endea Thibodeaux, CLHMS, RECS (Tarver Realty Group) almost 12 years ago
Thank you Endea...Yes, we found this out the hard way!
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
Here in Texas everyone has to have a title policy.  I have people always complaining about the expense but now will relate your story. 
Posted by Marchel Peterson, Spring TX Real Estate E-Pro (Results Realty) almost 12 years ago
Sadly, I've run into ths, as well.  Title companies do their best, your client did his best, still happened.  Thanks for sharing.
Posted by Chris Lengquist, Kansas City Real Estate Investing (Ad Astra Realty) almost 12 years ago
Good advice.I know someone that was inexperienced and purchesed a home at the court house steps, paid cash for it and found out it had a 1st on it. The second foreclosed.
Posted by Jeff Fulgham, Broker E-Pro ABR (T.U.P. Realty) almost 12 years ago
Thanks for the great info George!!
Posted by John Caylor, Post Falls, ID Mortgages (Infinity Financial Group) almost 12 years ago

Wow! What a nightmare.  I still can't understand why the Title company would sue your seller considering he had no knowledge of the 2nd.  Also thanks for sharing info on the fact that an Owners policy can be purchased prior to the property itself.

Cheers,
Uzi Husain
Arizona Realtor, serving Goodyear & The Phoenix metropolitan area

Posted by Uzi Husain (Keller Williams Integrity First) almost 12 years ago
Thanks Marchel...take care
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
Thank you Chris....I just wanted to caution everyone
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
Ouch Jeff....expensive lesson!
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
John, you are welcome my friend.
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
You are welcome Uzi...yes this shocked the both of us to say the least.
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago

Thanks for sharing this story. 

So many people want to become investors these days, and it they all want to jump head first without knowing all the details.  Just goes to show you that even the experienced investors still get burned from time to time.   What a crazy scenario!

Posted by Julie Ferenzi, Julie Ferenzi (john greene Realtor) almost 12 years ago
What a story!!! I am going to share this or alarm those who say "oh, no thank you, we are going to purchase a foreclosure home".
Posted by Mana Tulberg, Real Estate Agent - Camarillo CA (805 County Real Estate) almost 12 years ago
George, I didn't know you could purchase a title policy before you close on property.  Wouldn't the title company be liable for that instead of Jim?  They are the ones who did the title search?
Posted by Kay Van Kampen, Realtor®, Springfield Mo Real Estate (RE/MAX Broker, RE/MAX) almost 12 years ago

George,

You have no choice but to take out insurance here.

We just had one where a mortgage was not recorded but paid...it added 3 weeks to fix it.

Posted by Neal Bloom, Realtor CRS-Weston FL Real Estate (eXp Realty) almost 12 years ago

Ouch!!!  what a way to learn a lesson!!!  :^(


Posted by Karen Rice, Northeast PA & Lake Wallenpaupack Home Sales (Davis R. Chant, REALTORS) almost 12 years ago
Very strange that an 18 year veteran of investment property made such a critical mistake and didn't take ou the coverage for short money.
Posted by Michael Ross, North Shore of Boston (Coldwell Banker Residential Brokerage) almost 12 years ago
Very strange that an 18 year veteran of investment property made such a critical mistake and didn't take ou the coverage for short money.
Posted by Michael Ross, North Shore of Boston (Coldwell Banker Residential Brokerage) almost 12 years ago
Julie, Thanks and keep this in mind
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
Mana, thank you and please use the information
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
Karen, If Jim would have purchased it before the sale he would have been covered.  As it was he purchase the policy days after the sale for financing he took out on the home and then it was too late.
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
Thanks Neal....I appreciate your feedback
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
Karen Rice - yes a very expensive lesson
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
Michael...99% of all investors regardless of experience don't take out the Owners Policy until they have won the bid.
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
Thank you so much for sharing this information.  Buying foreclosures is not for the feint of heart!
Posted by Marlene Bridges, Laguna Homes|Laguna Condos|Laguna Real Estate (Village Real Estate Services, Inc.) almost 12 years ago
Thanks Marlene....so very true!  One better know what they are doing and have some knowledge and intelliegence.
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
YIKES!!!  Thank you for sharing this. 
Posted by Doreen McPherson, Phoenix Arizona Real Estate ~ (Homesmart ~ Scottsdale ~ Tempe) almost 12 years ago
You are welcome Doreen
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
Scary stuff...just goes to show you it's always something!  I started to buy a forclosure but wouldn't have known about this. Thanks for sharing.
Posted by Lizette Fitzpatrick, Lizette Realty, Lexington KY MLS - Kentucky Homes (Lizette Realty - Richmond KY) almost 12 years ago
You are very welcome Lizette...good luck to you
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
First this posted should have a gold star next to it.  Title insurance is a very important part of any transaction, the Owners Policy is most important of them all.
Posted by Beth Bastian, Simi Valley Real Estate (Rosemont Financial Inc) almost 12 years ago

Thank you so much Beth!  I doubt if the Active Rain gods will give me a star but you can give me a rating of a BIG 5 if you wich :-)  Have a great evening.

Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
George - WOW! Even when we do everything "by the book", sometimes, things happen. Thankfully, we have Title Insurance.
Posted by Paula Henry, Realtor - Indianapolis Real Estate - 317-605-4174 (Home to Indy Team @ HomeSmart Realty Group) almost 12 years ago
Thank you Paula....I just wanted to share this so everyone would know how scary it can be.  Knowledge is everything.
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
I am thinking the next time a seller or buyer complains about title insurance this is a great article to show them exactly what can happen. thanks
Posted by Thesa Chambers, Principal Broker - Licensed in Oregon (Fred Real Estate Group) almost 12 years ago

Thanks George...good information to have. Sorry your investor learned it the hard way!!

Heather

Posted by Heather Elias (Century 21 Redwood Realty) almost 12 years ago
Thanks Thesa, this is not only about buying title insurance.  It's about knowing when to buy it.  If the truth were known I would bet 99.9% of investors never buy title insurance before they bid on a property at Trustee's sale because they don't know if they will win the bid or not.  We are now buying title insurance on "Every" property we bid on whether or not we win the bid.  This is the only way to protect ourselves against something like this happening again.
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
Thanks Heather...we moved on a long time ago.  I just wanted to share this with others in a hope to help others avoid this same scenario.  Have a great day.
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago

That's a bizarre one, George. just more evidence that surprises may rear their ugly heads when you least expect it, even if you are diligent in your research.  Great support for title insurance, eh?

Thanks for sharing.

Jeff

Posted by Jeff Dowler, CRS, The Southern California Relocation Dude (Solutions Real Estate ) almost 12 years ago
Thank you Jeff....and thanks for stopping by
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
Very interesting and informative post!  I heard recently of an agent purchasing a home for his own investment.  Purchased a 150K home where an IRS tax lien was not properly recorded by the county...  The lien was for twice what the property is worth... 8 months later it showed up.  IRS tax liens go with the land.  Buyer beware.
Posted by Jim Crawford, Jim Crawford Atlanta Best Listing Agents & REALTOR (Crye-Leike REALTORS®) almost 12 years ago
Thanks Jim and thanks for sharing this story.  Very interesting.  Take good care
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago
Unfortunate story. Thanks for the heads-up.
Posted by Wayne B. Pruner, Tigard Oregon Homes for Sale, Realtor, GRI (Oregon First) almost 12 years ago
Thanks Wayne...I hope it helps educate everyone out there.  Have a great evening.
Posted by George Tallabas, Idaho Real Estate (RE/MAX Advantage) almost 12 years ago

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