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To help buyers understand the dynamics
of the foreclosure market in the Boston Area, we sat down
for a Q&A session with Attorney Robert D. Stewart, Partner
at Parker | Scheer LLP and head of the firm’s Real Estate
Practice Group.
Q: What can you tell us about the foreclosure climate today and what people can expect if they are looking to buy a foreclosed property.
A: With foreclosure rates skyrocketing in Boston and surrounding communities in Massachusetts, many buyers, (investors as well as residential home buyers) are looking into buying property out of foreclosure. However, the process for purchasing foreclosed property is very different from the standard one in which the property is purchased from the current owner or resident. The negotiations and the issues that face Buyers and Lenders after the Purchase and Sale is signed and the closing is scheduled are very different than from the traditional purchase and sale agreement.
Q: Give us an example of how.
A: When a buyer sees a property under foreclosure they contact the broker representing them. If they decide to go forward the next step is to submit an Offer to Purchase or Purchase and Sale agreement. This part of the process happens in all real estate transactions but for a foreclosed property there are more complexities.
Typically, when a Buyer finds a property they are interested in the first thing they want to do is to have the property inspected to evaluate the structure, the land, the zoning, and to make sure there aren’t any setback issues or other open issues with the property. However for foreclosure properties, the owner is often a bank, that may not even be local. These large institutions often have standard contracts that are more bank-friendly than Buyer-friendly and tend to eliminate language that addresses Buyers rights. In some cases Buyers often face a situation where a home inspection is not allowed. The bank has a property that it is in distress, the current owner has defaulted on their loan, property rates are in decline and the property itself is not even worth the amount on the mortgage. The bank is desperate to sell it as fast as possible so they price it at a steep discount and refuse to negotiate any further blaming the property’s poor condition. It is up to the Buyer himself to determine the condition of the property without an inspection, or decide that it is worth the risk because it is such a great bargain; they are willing to forgo a home inspection. This becomes a sticking point for a lot of Buyers because they are used to the notion of having an inspection. An inspection not only advises the Buyer of the condition of the property, it also provides a couple of extra days for them to think about the deal. This doesn’t happen with foreclosure properties. The deposits for foreclosure properties are usually smaller than for regular residential homes. Because of this, the potential Buyer may pay less upfront, but they may also be buying all of the potential risk as well.
Q: What about liens or title issues?
A: At the time of the closing, the seller, (the bank that his holding the foreclosed property), has to deliver good title. If the bank is unwilling to negotiate this, the Buyer should walk away. Related to that, when properties are in foreclosure, there are many steps involved in making sure the property is clear of any lien or title issues before the sale can go through. For example, a new regulation passed effective May 1, 2008, requiring the bank that owns the foreclosed property on which the mortgage is in default, to produce an Affidavit showing that the person who defaulted was given proper notice of his/her rights but failed to take the necessary steps to renegotiate the mortgage or find another solution. Also, there is usually an Order of the Court stating that the foreclosure was handled properly, that notice was published in the newspaper, and that the Court approved the bank taking back possession of the property. When the bank holds the mortgage on a property it is not an ownership interest, it is a security interest. The rights to ownership only occur when there is a default and the borrower fails to resolve it. Lastly, there are multiple steps that must be taken for the title to become legally vested to the bank. All these documents need to be assembled and executed in recordable form and delivered to the closing.
Q: Are the timetables of these closings different too?
A: The standard residential closing takes place about 45 days from the day the Purchase and Sale agreement is signed. The banks are desperate to get rid of properties and often want to see 14 - 21 days from the time of the Purchase and Sale agreement. However, because there are so many things that need to be done, coupled with the fact that they are pushing for a closing, they are often not ready at closing. This is a potential problem because often the Buyer is borrowing against another mortgage and they have loan commitments and debt commitments. If there is a need to extend these commitments because the bank is not ready, they may end up having to negotiate with their own bank. Since this is so common, I advise clients that before they buy a foreclosure property they should make sure the bank will be flexible on their rate. This question must be answered before a Purchase and Sale for a foreclosed property is done.
Q: In terms of the Buyer purchasing a foreclosed property, what are the main issues that can be prevented from happening?
A: To be honest it is the logistics more than anything else. As we just discussed, there may be 3 or 4 documents required in the chain to get from the mortgage holder to the person who is actually showing up at the closing to sign the deed. The logistics of simply getting the documents prepared, reviewing them to make sure they are correct, confirming that all the deed references and dates of publication are accurate, takes a lot of time. Documents are often being sent from Boston to Chicago to LA to Dallas and back to Boston. Even in the age of Fed Ex, paperwork sits on people’s desks. It is very frustrating to a lawyer to try to explain to a client who is buying a foreclosure why it is not happening. They say, “Why can’t we just get these documents signed?” From our experience, as a practical matter, each step of the process takes time, invariably causing a delay in the actual closing. As the Buyer’s lawyer we include language that states that if the seller isn’t ready to close we will give them a reasonable amount of time to clear up these title issues, provided that it doesn’t effect the Buyer’s mortgage loan, and that they won’t have to pay any more interest or extension fees. Again, going back to the beginning of the process, the Sellers of the foreclosed property often are very unwilling to negotiate any of these terms.
Q: Is the foreclosure process different depending on the type of the property, like single-family homes, multi-family homes, or condominiums?
A: Yes. There are issues related to the different types of properties. With multifamily homes you can have an owner who defaults on his mortgage but also has legal obligations to the people that he rents to. The mortgage and the tenant lease may be completely separate. So the Buyer of a foreclosed multifamily home needs to really understand what the status is of the tenancies; whether they are written leases enforceable for a year, whether they are at will, whether the tenants have vacated the property, and whether the lease has already been terminated. These are the key things that they want to investigate early on.
Q: What happens when a multifamily home is foreclosed on and there are tenants who have a lease, say three people are living there. What does the law say? Are they allowed to stay there or if the owner is in default, does the bank take over?
A: It depends on how the loan was secured. When you have an investment property with tenants, there are often mortgages with periodic payments as well as provisions within the mortgage and with other documents that secure the loan relating to the rents. If the homeowner, (landlord) stops making his mortgage payments, the rents are collected directly by the bank. For example, if you rented a unit in a 3-family home in Cambridge, and the landlord stopped paying the mortgage, the bank can step in and collect the money directly from the tenants. This can preserve the tenant’s rights because as long as they are making their monthly payments, they are current under the lease. These tenants are going to be frustrated because if the landlord can’t pay his mortgage he is probably not taking care of the property either. It also depends on the type of mortgage it is and the security and rights the bank preserved in the mortgage. When the lawyer goes to the registry to see the documents and finds that there is a default, he can learn if and how it may affect the tenants. Massachusetts is a pro-tenant jurisdiction so there may be instances where people are on a piece of property, and even though technically they don’t have the right to stay, they do. Or, if there are health violations, the tenant may have grounds to stay without paying any rent. These questions can be answered in advance by looking at the documents of record, seeing what rights the landlord’s mortgage holder has, and get copies of the leases to see what the tenant status is.
Q: Would the same be true for a condominium if one of the condominium owners within a complex were foreclosed upon?
A: Most condominiums use recognized language and are covered by the original documents that were written when the condominium started. The master deed and by-laws spell out the rights of the mortgage holder of the unit. For this very reason, lenders will require their lawyers to review the condominium documents and make sure that they can enforce their rights. These are called the Fannie Mae provisions. Fannie Mae, the entity that overseas the majority of residential mortgage lending in the United States uses language that preserves the rights of the Fannie Mae lender to foreclose on a property. These are typically in the condominium documents so the bank can go forward. Typically for a bank to go forward with the sale of a foreclosed condominium they do not need additional permission from the other unit or mortgage holders. However, one thing that often exists in cases like these is that Massachusetts condominiums are governed by statue called Chapter 183A. This statute has what is called a “super lien” provision to protect the owners within a condominium. Often a condominium owner who is no longer able to make their mortgage payments will also stop paying the condo and common area fees. Chapter 183A creates a lien in favor of the rest of the owners because they are all operating jointly as a whole. The association can put a lien on the unit if the common area charges are not being paid. So a Buyer looking at a foreclosed condo unit needs to speak to the realtor or the management company to find out if there are outstanding fees that will need to be paid.
Q: How does the foreclosure process work?
A: There is a formal process for property foreclosure. A notice is given to the borrower that alerts them of the situation and gives them time to catch up on the money that is delinquent. The bank has to show proof that the owner is not a member of the military or covered by the Soldiers and Sailors Civil Relief Act (SSCRA). Notice of the foreclosure has to be published in the newspaper; and there are filings in the Land Court. All of this has to happen before the bank takes back the title. Another thing that is becoming popular are properties in distress. These are situations in which the owner has tried to resolve the problem but is still in jeopardy of being foreclosed on. There are brokers, lenders and investors out there who are focusing on these properties and trying to negotiate what is called “a short sale.” A short sale is when the property is being purchased for less than it’s worth, and less than what is owed on the mortgage. From the banks’ stand point a short sale is better than going through the hassle of foreclosing and ending up selling it for less anyway. You are agreeing with the mortgage company that in exchange for paying the purchase price, they will give you a Discharge of Mortgage even though it is for less than the mortgage.
Q: So the bank essentially settles for less.
A: Yes it is a settlement. The bank has the liability. They have a mortgage that is worth more than the house is worth. They know they have this cumbersome legal process to go through to foreclose and they don’t want to do it, so they decide they are better off crediting their losses and take some sort of an amount.
Q: What are the five things a person needs to focus on when buying a foreclosed property?
A: I would say the five things are:
1) The Process. First understand what has to happen. Speak with a qualified Real Estate Lawyer who understands the process.
2) Title. Make sure the title is clear.
3) Terms. Understand what the terms are and are not likely to be subject to negotiations of the sale. Make sure the lender offers flexibility because there will always be delays.
4) Multifamily. Understand how multifamily properties with tenants can create problems.
5) Condos. Understand the special issues related to purchasing foreclosed condo units.
I really think that the biggest consideration
is to make sure that the lender will be flexible because delays
are common. Often once these deals go past the deadline, you
are pretty much operating on good faith. You rarely have the
right to negotiate with these contracts. It is uncommon to
create a legal obligation on the bank’s part. Again,
it is risk in exchange for value. You really need to assess
your own risk aversions. You can minimize it at the beginning
of the process you can in the beginning by keeping your deposit
as small as possible and negotiating as many rights as you
can but knowing you're entering into a transaction that is
going to have an element of uncertainty when you get to the
date. It is very different than the way the standard real
estate transactions are done. When every right and obligation
is spelled out and time is of the essence and the Seller doesn’t
do what he is supposed to do, the Buyer has enforceable rights.
One of the biggest things you will find
in these deals, one of the bedrock legal principles as it
relates to real estate contracts is that every real estate
property is unique. Two houses may be next to each other on
the same street, been built by the same person at the same
time, and look identical, but they are not. For that reason,
in real estate contracts, if the Seller defaults, typically
the Buyer has the right to invoke a “specifically enforced
contract” forcing them to sell. However these contracts
are almost always written in favor of the bank. Buyers’
rights are almost always negotiated away by the bank. For
the bank, it has nothing to do with real estate. It has to
do with making a bad loan and needing to deal with it. This
type of contract is the Buyer’s true remedy. The right
party makes the wronged party “whole”. . This
is often not part of these transactions.
For more
information on buying a foreclosure in Boston, or a foreclosure
in Massachusetts, or if you are looking for a real estate
attorney in Boston, please contact Rob D. Stewart. If you prefer,
you can also telephone our offices in Boston seven days a
week at toll free 866-414-0400.
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