Understanding Local and State Foreclosure Laws

Purchasing a foreclosed property can be a relatively inexpensive way to enter the world of home ownership for the first time or buy into a neighborhood you wouldn’t otherwise be able to afford. While it’s true that you could save up to 30 percent by purchasing a foreclosed property, there are risks involved, and a wise buyer is always an educated one.

Be aware, first and foremost, that foreclosure laws vary from state to state. There is no one-size-fits-all national set of rules. A way you can distinguish one state’s laws from another is to know whether yours is a mortgage state or a deed of trust state.

What is a mortgage state?

A mortgage state uses mortgages to secure a loan. In many cases, mortgage states require the judicial foreclosure — or foreclosure by judicial sale — process to foreclose loans.

What is a deed of trust state?

A deed of trust state uses deeds of trust to secure a loan. While the judicial foreclosure process is available in deed of trust states, in many cases lenders use the nonjudicial foreclosure process, which is much quicker.

Do your homework

There are certain red flags to watch out for when purchasing a foreclosed property, regardless of whether it is located in a mortgage state or a deed of trust state. These red flags include:

• Federal (IRS) tax liens
• State tax liens
• Unpaid real property tax liens
• Judgments against the owner

Contact the city or town where the property is located

Check with the city or town for unpaid property taxes that have not been filed with the county recorder’s office, and also for the property’s assessed value. If the property assessment is considerably lower than others in the neighborhood, that could be a sign of some hidden property issues.

Get a title search

You can find out whether the foreclosed property you're interested in has any red flags attached by requesting a title search of the property records.

Foreclosure does not automatically remove all potential title issues or risks to the new property owner. Utility companies may hold easements (rights to use the property) for access to utility lines, or the property may be affected by an access easement (rights of others to pass through the property). Some localities impose restrictions, such as fence height. A foreclosure specialist can help you uncover these issues so you know exactly what you’re getting into before you buy.

Addressing red flags

What should you do if there are any red flags and you still want the property?

If any red flags do exist, then it’s time to get in touch with legal counsel for advice on how to proceed. Issues that seem insurmountable at first may be disposed of through the foreclosure process, but you won’t know that until you consult an attorney who specializes in foreclosure cases.