When it comes to purchasing foreclosures, two things are typically a given: you are looking to buy at a discount and you must buy with cash. Buying with cash can be difficult since the price of the property may be close to the amount of available cash. In these situations, the faster you can turn the property for a profit, the sooner you get paid and can move on to your next deal. This is the way it is supposed to work but like everything in this market, you will find that Stercus accidit.
Clear title is a problem that has plagued purchasers of foreclosures for the past year. When entering one of these transactions, you may be left wondering if the bank has a clear title to the property or if the foreclosure was flawed. In either case, you run the risk of landing yourself in a court battle with the homeowner and the bank. Some view this risk as a cost of doing business, but this is a worst-case scenario to a small investor with limited capital. Many of my clients do not have the reserves to ride out a lengthy lawsuit. When you are making a living deal to deal, one bump in the road can lead to financial ruin. Thankfully, the fears of many investors have been alleviated by the serious headway banks and the legal system have made on these issues.
In January of this year, one of my clients, John, bought a house at auction. After tendering over three hundred thousand ($300,000) at the sale, John received a Trustee’s Deed. The lender, Wells Fargo, contacted him within a few weeks and informed him of their intent to rescind the sale. (Apparently, Wells had entered into a modification agreement with the homeowner and their foreclosure department was not notified. To avoid a lawsuit with the homeowner, Wells decided the safer course of action was to take the property back from my client.) John told Wells he would gladly sell them the property back at 15% under what he could receive on the open market. That was not going to happen.
John contacted me irate over the lender’s demand and wanted to know what he could do. The first thing I told him was to hold off on starting any rehab work. John could fight the rescission given he has bona fide purchaser status. However, I informed him that during the course of the lawsuit, his money would be tied up and the property could not be sold. The unfortunate reality is if you do not have extremely deep pockets to pay an attorney, your best bet is to let the property go and take your money back. John swallowed his bitters and went on to another project.
Most states have statutes that allow a bank to rescind a trustee sale in limited circumstances. Typically these statutes allow rescission where (1) the borrower has filed for bankruptcy, (2) there was a statutory problem with the sale (on other words, some legal requirement was not met), (3) the default was cured prior to sale, or (4) the lender and the borrower agreed to cancel the sale upon the borrower’s payment of the amount due and that amount has been paid. In John’s case, the lender did not meet these requirements and was out of line.
A possible solution to John’s dilemma would be to sell the property to a closely controlled entity such as a LLC or Land Trust within a few days of receiving title. To give the appearance that the sale was to an unrelated party, the entity should not bear your name, i.e., you should not be listed as an officer, director, manager, etc. with the Secretary of State. A Nevada Limited Liability Company or Corporation would offer this anonymity. Here is my thinking: When the lender approaches and seeks to rescind the sale, you can inform the lender that you no longer own the property. This would undoubtedly create chain of title issues for the lender and significantly complicate the process, leading to the end result of you likely being able to keep the property.