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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