For whoever has been reading this blog. This wont be my usual tongue in cheek post. This post really deals with the nuts and bolts of buying properties during the foreclosure process in TN. My apologies but if you want to pursue your own homestead here in TN (or in any state) this might be the most useful post to date.
Ok so now the bank is foreclosing. Like the disclaimer says I am not a lawyer ,real estate agent or anyone who has ever done this before. What does it mean?How do I buy it? Who do I buy it from? What are the pitfalls?
Now in this case I did have an advantage. I am self employed."TLA" and I own a business which re-markets bank repossessed cars and trucks (and any thing else you can drive tow or drag ) for the secured creditors.We do this through our licensed TN car lot REPO TN. This means that I have a lot of contact with the collections managers at banks and credit unions.They all have land foreclosures that they deal with so they were a great source of advice. I am also a research junkie. I keep a link to the TN legal code on my home page.I had being told by know it alls "such and such is the law". I have a lawyer but asking him anything is literally the $150 question. You can usually get the gist if not the nuance of the "legaleze" if you are willing to plow through it. Here is what I was able to discern for how it works in TN.(Oh and please read the disclaimer on the right hand sidebar RIGHT NOW!)
- First when you see properties on your local MLS that are listed as foreclosures they have already passed the "courthouse steps" phase. They are the property of the bank.
- And no you cant buy the property from the bank before it makes it to the courthouse steps. Because literally they don't own it yet. TN offers both judicial and non judicial foreclosures. Most if not all foreclosures are non judicial.That means that the secured creditor establishes through a "deed of trust" registered in the county courthouse a procedure that the debtor and the secured creditor agree to in advance in the case of default in the loan.This procedure requires certain notification requirements and names in advance a "trustee" (usually the banks lawyer) to execute a sale of the property in the event of a default. That sale must take place on the courthouse steps of the county in which the property is located between the hours of 10am and 4pm Monday through Friday. The debtor must be notified of default and be given an opportunity to make the note current prior to the sale. The sale must be announced in a newspaper or lacking a newspaper posted in a public place at least three times in the weeks prior to the sale.
- At the sale the property is sold to the highest CASH bidder. However the secured creditor may bid up to the amount owed on the property without forking over any cash. Until they go through this process they don't truly own the property.Any monies left over after paying ,any lien holders with prior and superior claims (IE taxes),the cost of the trustee and the secured creditor in full (in that order) must be given to the debtor.However if the sale fails to cover those amounts the debtor is responsible to the secured creditor for any deficiency balance. Typically the secured creditor will open with a bid that is a percentage of the appraised value or the amount owed and then waits for a buyer to counter bid.In this economy the banks opening bid is usually what they want and they rarely counter bid if someone else joins the party.
- Where this process varies from a repossessed car is that once the process clears the courthouse steps the debtor can receive no further relief from subsequent sales of the property.For example Joe owes $150K on his mortgage.It goes to the courthouse steps and the bank bids $90K. No one else bids. Joe is responsible for the $60K deficiency plus costs.That will never change.Even if the bank then sells the property the next day for $250K Joe is still on the hook for the deficiency. Its up to the Bank if they want to pursue him.He has no other relief.
OK this all sounds pretty easy. And that alone always scares me. My contacts said that at the typical courthouse step auction in this economy serious bidders rarely appear.Just "catfish" a.k.a. bottom feeders.But since the bank has no cash out of pocket to protect their secured interest they make their bid scare the "catfish" away and the property goes into the pile of folders on some collections managers desk that constitute the banks foreclosure portfolio. Then they recondition,list it with an agent and try to sell it (typically at a fire sale price)
So what can go wrong with that.Well I had 19 days to find out and this is what I found
- TN right of redemption- In TN a foreclosed debtor has a right of redemption.That is he has two years to pay the note and get the property back.If that right of redemption is not expressly waived in the deed of trust you cant get clear title to the property for two years.Now everybody supposedly has this in their deed of trust but unless you can actually read it you wont be positive about that. Luckily CRS lets you access any deed of trust on file and for a fee get a copy of it right off of your desk top or laptop.
- Prior or superior liens- In Tennessee certain liens take precedent in a foreclosure proceeding. Government liens such as back property taxes will always take priority. Without a knowledge of whats pending against the property you can walk into a stack of bills.Also any liens filed prior to the date of the deed of trust are not wiped out by a foreclosure proceeding.These could include prior mortgages or contractor liens. Those liens filed after the deed of trust in foreclosure are wiped out by the foreclosure process.
- As is where is-It is what it is. No recourse to the buyer for any structural issue of any kind. No contingencies to the purchase
- Tenants in possession-If there are renters on the property they don't disappear with the foreclosure. They have certain rights and if they are tenacious evictions can get expensive and messy
- Cash only- You better have cash or be pre-approved because you will usually have to close within 30 days.
Now these are some of the issues that you run into if you buy in the foreclosure process. That is if you outbid the bank on the courthouse steps. If all this is too intimidating the answer might be just go and approach the bank immediately after the sale. Let them deal with the issues. Just realize there may be a cost doing it that way.
Now in our case we potentially had a lot of those issues on the property we were chasing. On the advice of my sources I rushed and got a title search. It was not for the faint of heart. Combined with our research this is what we found.
- Right of redemption-As I expected a review of the deed of trust had a clause where the debtor waived this right.It was interesting that the collections manager for the bank couldn't answer that question for me. He wasn't aware of existence of the right.
- Prior liens- Sure enough the taxes for 2008 and 2009 were past due. Luckily here in TN and especially in McMinn taxes are incredibly low.The taxes on this property are only $441 a year! Even with penalties and interest this was only about $1100.More importantly though the bank in the foreclosure had issued the debtor two mortgages in the history of the property.A first mortgage that was refinanced by the mortgage that was now in foreclosure. The title search revealed that both liens were still in place.This created a prior lien situation.I was able to resolve this by obtaining a commitment from the bank that both liens would be released if I decided to bid,and was the winning bidder,on the court house steps.
- As is- I had inspected the property during the MLS process.Structurally sound to the eye there were and still are concerns about electrical ,plumbing and HVAC systems.Seeing the foreclosure process the debtor or someone close to them had stripped the structure.
- Tenants in possession-The debtors brother was still in residence on the property.He was living in a single wide trailer that the MLS listing claimed was part of the property.The brother insisted the listing was inaccurate (imagine that) and that he owned the trailer and was paying rent for the privilege to be there.
- Cash is king- I had prepared our finances to be ready for this.
Not for the faint of heart is it. But I actually saw some potential opportunities here.Opportunities to get a much lower price and to limit the competition for the property.
While each of the above items was an issue for me I would only have one property to deal with. The collections manager for this bank wouldn't have it so good.It just so happens that this particular bank had an onerous property foreclosure portfolio. The headlines in the local business section talked about how this bank was committing more reserves to cover this portfolio.When a bank forecloses (but does not sell) they have to prepare to write down the loan by setting aside cash.That cash reduces their federally mandated cash reserve and reduces the amount of cash they can loan. Loaning cash is the way banks make money.To paraphrase Woody Allen in "Annie Hall", banks are like sharks when they stop moving forward (loaning cash) they die. If the property sells on the courthouse steps they book the loss,bank the cash and move on.Painful but it doesn't detract from their ability to continue lending. People are also people. They want to clear their in boxes.I had been to the collections managers office to talk to him about the property. He pulled the file from a conference table covered in similar files. I made sure I covered all the above issues (the condition of the double wide and the tenant in possession moist pointedly) and offered that maybe I was crazy to mess with this.A better strategy might be to let him,the collections manager, deal with all this and just buy it from him after he waded through these issues for me.It was a bluff (probably a bad one). I WANTED to buy this on the courthouse steps.We had worked hard to be in position to make a cash offer. Only cash offers could play at the courthouse.Remember there supposedly had been 3 previous offers on the property during the MLS listing process.Once the bank got it the cash requirement would disappear. All previous and any new players could now enter the game and drive up the price. I just needed to pick a bid just under the banks tolerance of pain. Then hope the prospect of closing this file out quickly would let me walk away with the best price possible
On November 18th the sale was scheduled at 10:30 on the McMinn County Courthouse steps in Athens TN. I arrived an hour early. When the time came we actually moved inside the entrance to get out of the wind. I was there along with the banks collection manager,the lawyer acting as trustee and one other bidder (a woman who owned the adjoining property). The announcement was read dryly and the lawyer asked if there were any opening bids. I said $85,000. the other bidder declined to bid and the banks representative said nothing. It took less than 20 seconds for the bidding process to be complete and our lifetime dream had happened. I texted "TLA" ... Put some champagne on ice...
On December 1st we closed on 25 acres plus a double wide for $85,000 plus closing costs plus back taxes for a combined total of $87,486.
We are now up to date on the history of the journey for our homestead. From here on in its a real time process. All the issues with the tenant, the double wide, the building of our homestead dream lie ahead. I invite you to travel with us, comment and please help us when you can. I have decided to be very open about costs. I hate those articles and blogs that never give you the real dollar figure on projects.
I take no personal credit for the above process.
I am not that smart, I am not that lucky,but I have been that blessed and I offer prayers of gratitude for those blessings each night. I serve a generous God.