October 13, 2020Client Alert

Can You Purchase Real Estate Safely from Bankruptcy, Foreclosure, or a Receiver?

Yes, but only if it is done carefully.

All three of these options are procedures intended to secure the most money from the sale for the payment of creditors, and to leave the Seller creditor with no post-closing liability, but the procedure is not set up to provide a Buyer the most protection. However, if you proceed carefully, you can secure the major protections you need, in most circumstances.

Compare these procedures. In a normal contractual sale, a Buyer usually has the following protections:

  • warranties and representations from the Seller (as to at least the Seller’s knowledge) of the condition of the property, permits and zoning, unrecorded leases, and construction liens;
  • delivery of due diligence documents from the Seller about the property, including leases, and perhaps Phase I reports, surveys, and structural and mechanical reports;
  • contingencies, and time for inspection of the property so the Buyer can satisfy itself and its lender about the suitability of the property for Buyer’s use; and
  • Seller’s delivery of a title report and a commitment to deliver clear title at the Closing.

In all three of these creditor purchases, none of these protections are built in. If a Buyer purchases without special protection, in general:

  • the Buyer is purchasing from someone who is a stranger to the property;
  • the purchase contains no automatic contingency period to inspect the property, perform a Phase I or have a new survey drawn;
  • the Seller is not obligated to provide the usual title affidavits to confirm there are no unrecorded leases, survey problems or contractor liens;
  • the purchase does not obligate the Seller to provide clear title or a title policy; and
  • there is no assurance that the property is reserved for any one buyer.

In a foreclosure, a Buyer at Sheriff’s Sale takes title “subject to all legal encumbrances.”  The Sheriff’s Deed and the Foreclosure court Order sell the property free and clear of all liens and encumbrances of those parties properly named as defendants in the lawsuit. However, if the plaintiff in the foreclosure did not have the first lien, or did not properly name as defendants, everyone who had a lien against that property – or if the plaintiff did not properly finish the foreclosure against the liens of the defendants – those liens remain. In a foreclosure, bankruptcy or receivership action, a court can order that the existing liens are terminated, but a Satisfaction of those liens may not be recorded in the Register of Deed’s Office, leaving a Buyer to clean up the title.

In a contractual sale, the Seller has the obligation to carry out the offer and sell to a Buyer. In a foreclosure, at the Sheriff’s Sale, the plaintiff and sheriff are obligated to take the highest bidder’s price, so a Buyer can do all the due diligence prior to the sale, and have another bidder win the property by bidding $1 more. In a receivership action, a potential Buyer can enter into a contract with the Receiver as a “stalking horse” buyer, but that offer will be contingent on no other Buyer bidding more for the property at the hearing to confirm the sale. In a bankruptcy case, the sale must also be confirmed by the Bankruptcy Court and the creditors.

So how can you safely purchase such a property? If you understand the obligations and motivations of the lender, current owner and other creditors, you can often come to an agreement about allowing inspections, viewing existing due diligence information, and securing a title policy that will protect a Buyer if that Buyer is the successful bidder. A Buyer will need to invest some time and effort in performing that due diligence, and even lining up financing for the purchase, without the certainty of knowing that Buyer will be the final successful bidder. Especially in the case of  foreclosure action, since the current owner debtor has a statutory right to redeem the property from the foreclosure action, a three-way redemption purchase agreement is possible, which results in the Buyer taking title to the property, the lender receiving its mortgage payout, and the current owner being relieved of the loan obligation and the risk of the Sheriff’s Sale.

Each fact situation is different, so bring your information to the Michael Best’s foreclosure and workout team, and we can help review the possible options in securing a great property at a bargain price.

For more information about purchasing a property out of a foreclosure, bankruptcy or receivership, contact Nancy Leary Haggerty.

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