By Seeking Ithaca, WCI Guest Writer
As the title implies, I’m the frustrated owner of a foreclosed home. To be clear, I wasn’t foreclosed upon but purchased the foreclosure from the bank. Both as a bit of personal catharsis and to impart, much like Marley’s ghost in A Christmas Carol, a bit of admonition regarding such a transaction, I plan to walk you step-by-step through the process to date.
The scene: it’s roughly two years ago, and I’ve been offered a distinguished job opportunity in another state. I began to look at housing, and thinking myself the wit, I searched through the lists of foreclosures, meager though they were, in hopes of finding a diamond in the rough. I have some small background in real estate and thought to use that ostensible savvy to my advantage in sorting through the various listings. Coming upon a listing in an established and well-heeled neighborhood, I noticed that the purchase price was approximately 25% below comparable home values.
Disregarding The White Coat Investor’s caution to refrain from immediately purchasing a house in a new location, I submitted a bid on the beautiful home and won it. The one small hitch was that the home was currently occupied by the previous owners. Not a problem, I thought. Such people who might live in such a nice neighborhood would doubtlessly give up the house upon being presented with a deed by its new owner. Surely there would be social ramifications in the small town where the home was purchased whereby the former owners, should they squat illegally in the house, would be castigated. As goes the saying regarding the best-laid plans of men, my supposed deal in the purchase of the home also went awry.
First things first, however. I am not a lawyer, real estate agent, or financial advisor. I have no formal training, and your state’s laws likely vary to some degree. I am relating here only my experience, so please take it as such.
What to Ask If You're Purchasing a Foreclosure
If you're purchasing a home at auction, the first question you should ask yourself is, “Why would a house be so cheap?” Homes are sold at auction for several reasons. One is that the owners couldn’t make payments, and the lender exercised their right to obtain the property (which is the collateral in a mortgage). Another reason might be that the home is entangled in some social dilemma, like a matter of probate in which multiple people may have some social or financial claim against an indivisible physical property, and the executor of the estate may want to hand off the matter of selling the home to avoid being an interlocutor in the proceedings.
Regardless, most homes sold at auction sell reasonably close to that which they are valued as most debtors (banks) know that with a little patience, they’ll eventually find someone to purchase the home, barring extenuating circumstances. An occupied foreclosed home is one of those extenuating circumstances.
Occupancy gives certain rights to the person or family who lives in a home. Whether the home was previously in the occupant’s name or whether the occupant leased or rented the home, there are legal rights accorded to both squatters and renters. These vary state by state and are a remedy against the unlawful removal of a family from their home. In my state, the removal of squatters from a home is called an ejection. Because ejections (and evictions) can be lengthy, expensive proceedings encumbered by a glacially-slow legal system, many debtors will simply choose to take a haircut on the sale of the home to avoid ejecting the squatters themselves. This is what happened in my case; the sale of the home at such a low price was an enticement to a sucker . . . *ahem* purchaser . . . like myself.
The first learning point here is that there’s no free lunch when it comes to an auction. You’re likely getting what you pay for.
Know Who You’re Dealing With
I learned later that you can have a most checkered financial history and can still qualify for a several hundred thousand dollar loan from a bank. In my case, the squatters residing in my house are not neophytes but are battle-hardened veterans in drawing out the legal process. During the ejection process, I began to look into the people with whom I was in conflict and, to my surprise, found that they’d been the targets of multiple civil suits, all demanding payment in some form or another to debtors. They’d even filed for Chapter 7 bankruptcy before obtaining their six-figure mortgage.
The original debts had been incurred by the first spouse—who then, after having had a bankruptcy and multiple legal inquiries into the debts, had their credit ruined. The subsequent mortgage with which they obtained their-now-my home, was in the second spouse’s name whose record was heretofore clean. If you’re wondering where I’m going with this, outside of airing grievances, it’s to let you know that you can and should look up who you might be dealing with. In the case where the squatters were the previous owners, you can look up their names and information on the county tax assessor website, where this is public information. Once you have that information, you can browse judicial proceedings via your local circuit court’s website, though there may be a fee involved.
Civil proceedings in the United States are open to the public and are a matter of public record. If you find that the former owner of a potentially sweet-looking real estate deal is, like my current squatters, veterans of the legal system, think twice about opening that Pandora’s box.
But back to the purchase . . .
How to Buy a Foreclosure
The auction venue that I used was auction.com, and it demanded cash or the cash equivalent within a certain number of days after closing. So, if you’re a young attending or professional, know that you’ll most likely have to come in with a full cash offer. I had a good friend at a local bank who extended me a line of credit valued at a few thousand above the purchase price of the home minus what I had in cash at hand.
Once I’d won the bid, I had 48 hours to wire the down payment, and I think ours was about $15,000. The rest was handled through the closing attorney retained by auction.com. During this process, my wife and I were offered what was to be the most valuable insurance policy I’ve ever used to date, title insurance. This title insurance saved my proverbial bacon, and if there’s one thing to take away from this article, it's that any auction that you purchase should be covered by title insurance. Remember, you can shop title insurance just like you can shop life insurance, and a routine title search will turn up most, but not all, title inconsistencies. Little did I know how much I would appreciate that $800 policy.
Bringing in a Lawyer
Fast forward, and we’ve secured a rental house for the time being in the town in which I was to work. We calculated it would take a few months to get the squatters out, but we signed a lease for six months just in case it took longer. The next step in getting my house was to make sure the deed was filed in the county in which the house resided. This took an agonizing eight days, and I laugh now somewhat bitterly because my wife and I have been at this for more than a year and a half.
In those eight days, I retained an attorney who told me the first step was to serve the squatters notice that I’d purchased the house and to send them a demand for possession. They drafted the demand letter, and it was sent via certified mail and posted on the front door of the house along with a copy of my deed. We took a picture of the notice posted with a daily newspaper to confirm the date on which the notice was posted. My wife and I had someone else post the notice at the suggestion of our attorney and then send us an email that the notice had been posted with pictures of the same.
The time for delivery laid out by the demand for possession ended (10 days), and we’d heard nothing from the squatters. We filed a complaint at the local courthouse laying out our two counts: 1) that we want the squatters ejected from the house and, 2) that the squatters had lost their “right of redemption.” This is important because in my state, those who have lost their house due to foreclosure can “redeem” the property by doing two things: vacating within the aforementioned 10 days after the demand for possession and paying the full amount of my purchase price (or the amount owed to the mortgage company if still owned by them) plus interest, taxes, insurance, and any improvements. Redemption has to be performed within a certain timeframe, but the timeframe is very generous.
The squatters in our house did not move out within the 10 days’ time frame, so they lost that right.
Dealing with the Legal System
As with the demand for possession, the complaint had a duration (30 days) from the date it was served to the squatters by which they had to give a legal response. If they didn’t respond, we could request a default judgment; this is basically like the judge ruling in someone’s favor because the opposing party just didn’t show up. The squatters filed a response, which didn’t actually answer my complaint but instead requested more time to “look into all avenues and consult with a lawyer.”
This leads me to my next point: the legal system is largely overburdened, and a judge will be glad to kick the can down the road to focus on the litany of things that can’t wait. I had an attorney tell me once, when I spoke to him rather candidly about our case, that the legal system is only mediocre at dispensing what you would truly call “justice” but that it is excellent at dispensing time. The crux is this: especially in larger metropolitan areas where the judges are likely to be more tenant- or squatter-friendly, you’re fighting an uphill battle in seeking an expedient ruling.
Asking for a Summary Judgment
In response to the squatters filing for more time, I asked my attorney to file a motion for summary judgment. Fundamentally, a motion for summary judgment says this, “Judge, there are no ‘triable’ or disputable facts at issue here. If these facts are true, and they are, then the other party has no case as there is nothing to try in court.” I’m sure I’m missing several valid nuances to this argument and that there’s far more to a motion for summary judgment than this, but it’s the best that this non-lawyer has.
We got a response, via a 19-page behemoth of legal jargon, consisting of repetitions of the same points; citations of specific sections of the Code of Federal Regulations, which barely looked even remotely germane to the suit; and, with the pièce de résistance, a claim of emotional and physical harm. Of course, they requested damages in consideration of the “irreparable harm to character and future sales prospects of their home.” It is at this point that I became viscerally cognizant of the true import of WC Fields’ quote “If you can’t dazzle them with brilliance, baffle them with bull****.”
After my blood pressure returned to the low triple digits, I settled in to wait for the judge to render the response. Weeks later, it came in the form of a Zoom hearing (the hearing being scheduled at the height of COVID) on the motion for summary judgment. I asked my attorney if I should be present, and he told me (quite rightly) that I’d just get irritated and couldn’t really talk anyway. Two months pass, and we have our hearing. It apparently lasted only 30 minutes, and my phone conversation with my attorney left me feeling nonplussed.
My attorney told me that the squatters were requesting more time to find the documents to prove that the foreclosure was handled incorrectly. I thought it rather ludicrous that they hadn’t protested the foreclosure proceedings when the foreclosure had been carried out nine months earlier, but my attorney said that these things were at the judge’s discretion and that the judge allowed it. Please see my point above about time and the legal system.
Countermoves in Court
Contained within the squatters' response to my complaint were two items of note. The first was a countersuit against the original mortgage company through which the squatters obtained their home loan. This is clever for one major reason: it makes the mortgage company clam up and only sparingly give out information on their case. This, in effect, makes it more difficult for me to get information from them regarding the validity of the foreclosure and the subsequent sale to me.
One would think that the mortgage company, having ostensibly performed the mortgage correctly and fairly, would be free with information to me so that I could basically try this case and leave them out of it. However, there is a litany of legal requirements before a home can be foreclosed upon—a notice of acceleration, a notice of default, ways to remedy the default, timeline given, informational sources, legal help, etc., etc. If any of the multitude of foreclosure proceedings were to have been neglected by mistake, then the foreclosure could be declared invalid. The mortgage company, wanting to avoid unearthing an untoward fact, offers no more information than legally compelled. The second item which is notable in the squatter's response is that the squatters alleged that I had no title. This is incredibly important as I now had a reason to invoke my title insurance policy.
I brought up the idea to my original attorney of calling the title company, but he suggested we wait and see whether he could get the mortgage company to hand over documents willingly. After weeks of prevarication on the mortgagee, I contacted the title company to see what it could do. The next takeaway: be your own advocate, even if you have no legal background. You may be surprised at what your attorney may not tell you or do in a case because they feel that there’s a better course of action; however, litigation is a lot like life in that you don’t get what you deserve but what you ask for.
Before I go further, let’s dissect title insurance a bit. You probably understand title insurance like I did. If I found out the house belonged to someone else, then I’d get my money back from the title company. That’s part of the truth but not all of it. Title insurance is much like malpractice insurance in that the insurance company may elect to pay out the claim, but it may also elect to fight the case. Since the question for the company is a business question, not a matter of your feelings toward your home (and squatters), it dispenses with the idea in a dollars and cents manner. If the company feels it’s cheaper to litigate, it’ll do so. If the litigation would be expensive, particularly onerous, or with a high chance of failure, then it may choose to just pay the claim.
Here’s one more caveat: the company can elect to pay the claim at any time. If the litigation becomes too expensive or the company thinks it’ll lose, it’ll just pay the claim and be done with it. What are the ramifications if the title insurance company just pays me? Well, I would receive the purchase price of the house back because the insurance policy has that nominal dollar value. In that instance, the insurance company would have no more legal obligation to me. I could choose to continue to litigate the house to whatever end that entails, attempt to sell the house as an occupied property and let some other chump deal with it, try and make some deal with the squatters to let them stay as paying tenants, or sell them the house back (probably for a laughably low price as I still would not have been legally able to remove them in the first place) and generally try to make lemonade out of lemons.
I’ll leave the rest for a subsequent blog post as there is much more story to tell. Unfortunately, it is still unwinding after two years with potentially months, if not years, left in this process. Until then, caveat emptor!
And make sure to read part 2 of this saga.
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Have you ever bought a foreclosed house? What did you learn? Would you do so again? Comment below!