(Published in Granite State Builder Magazine, March 2011)
Lawyers have a phrase to warn buyers about property without warranties: caveat emptor, buyer beware. A major difference between buying a property in a traditional transaction and buying a property from a foreclosure sale is that when you buy a property at foreclosure, you buy the property as is, frequently site unseen. Any problems that run with the land – financial liens, environmental problems, conservations easements, etc. – are purchased along with the property at foreclosure. Sometimes these issues represent someone else’s problems or someone else’s mistakes.
For professional builders and developers, there are amazing resources available online to begin research on a foreclosure property. What, a few years ago, would have taken multiple trips to town planning offices and county registries of deeds can now be done online from the home or office. Whether you are interested in purchasing a commercial property for relocation of your business operation or a residential property for investment, there are resources available through town, county, and state websites that allow you to get a better idea of potential issues that could affect the foreclosure property. This article outlines the online resources available and some of the opportunities to begin due diligence.
Before beginning, it’s important to remember that the resources presented here are intended for initial inspection. You should not consider a review of the deeds, zoning decisions, and other potential documents to be the same as a thorough and complete review of a property’s history. You should consult with a real estate attorney to discuss any questions you have about a property or any issues you identify on a property.
According to New Hampshire Housing, residential foreclosures have risen from 462 in 2005 to 3,953 in 2010, an increase of more than 750%. The current economic conditions and past excesses continue to produce an active foreclosure market. Consequently, some residential properties that appear in foreclosure sales represent genuine bargains.
However, that is not true of all residential properties. Because of the lending habits that contributed to the real estate bubble, many banks required little to no down payment from home buyers, offering instead multiple mortgages to finance purchases. Even homes that were owned by longtime home owners may be burdened by multiple mortgages, as the escalating real estate prices between 1999 and 2005 convinced many people to take out a second mortgage using the increased equity in their homes as collateral. These multiple mortgages represent a potential trap for anyone who purchases a residential property at a foreclosure sale.
Knowing whether a foreclosure sale is by a first or second mortgage lender is important for the purchaser of a foreclosed property. When a mortgage is foreclosed upon, all of the mortgages that attached to the property after the defaulted note get wiped out, but all of the mortgages that attached to the property before the defaulted note remain. If you buy a residential property at a foreclosure sale held by a first mortgage lender, it will wipe out any junior mortgage. However, if you buy the same property at a sale by the second mortgage lender, you would own the property subject to the first mortgage, which is likely in default as well and must be repaid.
Other liabilities such as unpaid real estate taxes, will also not be terminated by the foreclosure. Because of this, it is extremely important to know what is hiding in the chain of title for any property you purchase at foreclosure. Fortunately, mortgages – along with deeds, notices of lease, and easements – are recorded at each county’s registry of deeds and are all publicly available. You can review them by going to www.nhdeeds.com and selecting the appropriate county, although Carroll County is still not available. These online databases are searchable by the names of the grantors and grantees. Typically, each document will reference earlier documents by book and page number, allowing you to trace the history of a property through its legal transactions. Such research can help you discover which mortgage caused the foreclosure and whether there will be other mortgages and liabilities on the property that survive the foreclosure sale.
The same mortgage issues that potentially cloud the title of a residential property can be a warning sign for commercial properties purchased at foreclosure too. In addition to mortgages, commercial properties may be subject to multiple liabilities that do not appear in the registry of deeds. Properties that were formerly industrial sites or hosted manufacturing facilities are prime suspects for environmental liabilities. The New Hampshire Department of Environmental Services as well as the registry of deeds may have some environmental history of the site.
Most zoning districts in New Hampshire towns permit residences by right, but commercial and industrial uses are typically restricted to limited areas. In addition, commercial uses or change in uses require Planning Board site plan approval. A town’s website will usually have some planning department information. Towns typically keep their zoning ordinance, site plan regulations, and all application forms online. If you hope to relocate your business to a commercial property you plan on purchasing at foreclosure, this information – as well as a quick phone call to the planning office – can help you determine if you’re going to need a variance or special exception before your business can begin operations on site. Additionally, the property likely has a file at the town office containing records of any land use proceedings concerning the property. Reviewing these records may reveal conditions placed on the property by a land use board, approved site plans, or existing variances. Once you have researched a property’s title and land use history, an experienced real estate attorney can discuss potential solutions to any issues related to the property that may disrupt your business plans for the site.
You can also find tax cards and assessment data on many towns’ websites, showing a variety of information about a property: zoning district, land value, value of improvements, current use status, diagrams of buildings on the property, etc. These documents can help to give you a better idea of a reasonable auction price based on recent assessments, although bear in mind that municipal assessments often do not accurately reflect the market. Similarly, reviewing a property’s tax card can give you a better idea of how much property tax you can expect to pay, should you purchase the property.
The resources discussed here can give you a better idea of the state of the financial obligations, use restrictions, and other potential issues associated with properties for sale by foreclosure. However, it is difficult to use these resources alone to eliminate all possible problems connected to a property. It is important to seek professional legal and title searching assistance before purchasing a property, residential or commercial, in foreclosure. Remember: Buyer beware. You can buy more than real estate at a foreclosure sale. You can also buy someone else’s problems.
John Weaver is a member of the Real Estate Department at the law firm of McLane, Graf, Raulerson & Middleton, Professional Association. He can be reached at 603-628-1442 or [email protected]. The McLane Law Firm is the largest full-service law firm in the state of New Hampshire, with offices in Concord, Manchester and Portsmouth.