October 19, 2015
How Can Purchasers Protect Themselves at Foreclosure Sales?
What reasonable steps can investors take to build a better foreclosure property portfolio? People who have access to more information tend to make better decisions in the long haul. In the 1990’s Sci-fi TV show, The X Files, David Duchovny portrayed a rogue FBI agent determined to uncover a government conspiracy to cover-up the existence of UFO’s. In the opening sequences announcing the name of the show and the cast there was a message, “The Truth is Out there.” While few people claim to be able to relate to experiences with UFO’s (not me), shows like The X Files are popular because everyone experiences feelings of curiosity, distrust and fear from time to time. In the world of real estate foreclosure, investors owe it to themselves to get to as much of the “truth” as may be “out there” before making a commitment to purchase a property shrouded in mystery. There are ways purchasers protect themselves at foreclosure sales.
On March 4, 2015, I published a blog post comparing buying real estate through brokers vs. foreclosure sales. That article explained how foreclosures come at lower prices because of greater risks. These concerns rightfully discourage many shoppers from looking for a personal residence at a foreclosure sale. For those investors for whom bidding at foreclosure sales makes sense, how can they manage the risks and increase the likelihood that the purchase will be a rewarding? Even before making a bid, the purchaser makes a time investment by reading the classified advertisements, researching sales data, driving by the property, lining up the purchase money and going to go to the auction. Why should a purchaser spend any more time on one opportunity than it deserves? The following are strategies that foreclosure investors can easily take to increase their success:
- Research the Property. In some commercial foreclosures, the trustee evicts the occupants first and holds an open house for potential buyers. When this is not available, a potential purchaser can at least drive by the property. What are the neighboring land uses? The bidders can obtain comparable sales data online first to see what is happening in the neighborhood. City or county tax assessment data is publically available online.
- Research Pending Lawsuits. The purchaser is already at the courthouse to bid on the property. Why not check to see if there are any active lawsuits involving the property? Hopefully, the trustee would know this and react appropriately, but a bidder can only know for sure by checking.
- Obtain a Title Examination. Ordinarily, a purchaser would not worry about title problems until someone alerted them. This is normally the concern of the settlement company in origination of the title policy. Many investors assume that the trustee conducting the foreclosure will not sign the deed unless they are prepared to stand behind it. Experienced investors purchase title insurance as a precaution. While these steps are reasonable, there is nothing that prevents an investor from spending a couple hundred dollars on a title report or taking time to research land records themselves. Any deviation in the foreclosure process from the terms of the deed of trust may be grounds for a suit filed by the borrower. I discussed this in a May 14, 2014 blog post about a lender’s failure to conduct a pre-foreclosure face-to-face meeting with the borrower. In Squire v. VDHA, the deed of trust incorporated HUD regulations requiring an effort to conduct such a meeting. The Supreme Court of Virginia observed that,
A trustee’s power to foreclose is conferred by the deed of trust. That power does not accrue until its conditions precedent have been fulfilled. The fact that a borrower is in arrears does not allow the trustee to circumvent the conditions precedent.
Foreclosure trustees may be under various pressures to ignore provisions in the loan documents. Without a copy of the deed of trust, the bidder won’t know whether things are off course until after making a substantial deposit.
- Investigate the Community Association. Many properties are subject to covenants, rules and regulations of the neighborhood property owner’s association. A new purchaser will be bound by the governance of the board of directors and their property manager. Covenants and bylaws are found in the land records. Some associations post their rules and regulations on the internet. Whatever the new purchaser wants to do with the property may be limited by how the HOA rules are enforced. Associations can range from boards that reasonably collect and spend dues to cover essential maintenance of common areas to aggressive debt collectors using fines for rule violations to generate revenue. Under Virginia law, a purchaser becomes a party to the HOA covenants (contract) at the consummation of the sale. While not strictly a foreclosure related issue, dealing with the HOA is a part of the true cost of ownership. Many investors incorrectly believe their HOA responsibilities are limited to paying the monthly dues.
- Review the Memorandum of Sale. If the purchaser makes the highest bid, the trustee will give her a Memorandum of Sale. This written agreement functions similar to the Regional Sales Contracts that real estate agents complete for their clients. Foreclosure sales typically occur in front of the courthouse. Buyers may not feel motivated to carefully read these Memoranda. Everyone is standing up, the weather may be unpleasant and people are waiting to leave. These distractions do not diminish the commitment represented by signing the document and making the deposit. The terms of the Memorandum of Sale will define the rights of the parties in anticipation of the real estate closing. This includes if and when the Trustee or the purchaser can get out of the contract. A purchaser can compare the Notice of Sale, Trustee Appointment and the Deed of Trust to the Memorandum of Sale before signing anything. The Deed of Trust reflects the trustee’s authority to conduct the sale. A Trustee may even be willing to share a copy of their form before the sale occurs.
- Ask the Trustee Questions. Purchasers can have a hard time talking with people associated with a property. The current occupants probably aren’t talking much. When asked questions, the trustee may respond that they have duties to the lender and the borrower. The trustee may not volunteer as much information as a realtor would in a conventional transaction. However, to the extent the trustee and the purchaser are both signing the Memorandum of Sale, the purchaser has a reasonable expectation that the trustee answer questions about those terms.
Time constraints may not allow an investor to investigate all of these issues before every trustee’s sale. The property may go into litigation or have problems with its physical condition even if these steps do not reveal a problem. The same could be said about any investment. One of the other messages related in the opening sequences of The X Files was “Trust No One.” This reflect one extreme on the trust/distrust spectrum. People who live on this extreme are less likely to put themselves at litigation risk but often find themselves living in isolation or vulnerable to manipulation. In the world of real estate, many investors want to make quick, substantial returns while investing as little time as possible. Under these pressures, it is easy to operate to far on the opposite, overly trustful side of the spectrum. Potential buyers with the financial means to make this kind of investment have the discretion and the right to decide how much of these issues they want to deal with up front and which they can live with as a risk of doing business. Careful purchasers protect themselves at foreclosure sales. Expect the trustee to be an experienced foreclosure lawyer. Anyone investing in foreclosures should have qualified legal counsel of their own retained even before they make their first bid.
Squire v. Virginia Housing Development Authority, 287 Va. 507 (2014)
Gillian Anderson & David Duchovny via photopin (license)
A_23 College Hill – H. P. Lovecraft’s Final Home – The Samuel B. Mumford House (1825) – 65 Prospect Street – Looking South-South-West (from the Meeting Street side) via photopin (license)
May 21, 2014
Dealing With Trust Issues: Fiduciary Duties of Foreclosure Trustees
In Virginia, unlike some other states, a foreclosure is a transaction and not necessarily a court proceeding. A trustee appointed by the lender auctions the property. The proceeds of the sale must be applied to reduce the outstanding loan amount and transaction costs. A Trustee has special duties to the parties as their “fiduciary.” What are the fiduciary duties of foreclosure trustees?
At real estate closings, settlement attorneys present borrowers with a document entitled “Deed of Trust.” In this document, the borrower pledges the purchased property as collateral. The Deed of Trust provides the legal framework for the lender to pursue foreclosure in a default. It also procedurally protects the borrower’s property rights. When the lender records the Deed of Trust in the land records, a lien encumbers the property until the debt is released. The Deed of Trusts names one or more persons as Trustees for the property. It describes the borrower as the creator of the trust and the bank as the beneficiary. If the borrowers avoid falling into persistent default of their loan obligations, this trust language is largely irrelevant.
If the borrower experiences economic hardship and falls behind on their payments, however, they will begin to receive notices referencing the Deed of Trust. The bank may appoint a Substitute Trustee to handle the foreclosure. The culmination of the foreclosure process is the Foreclosure Trustee’s public auction of the property to satisfy the distressed loan. What does the foreclosure process have to do with trusts and trustees? Generally, under Virginia law, a breach of a trustee’s duties gives rise to a Breach of Fiduciary Duty legal claim. Lawyers like to pursue these claims because they may impose duties and remedies not articulated in the contract. Does this trust relationship give the homeowner greater or fewer protections against breaches by the bank’s agents during the process?
On May 16, 2014, I posted an article about the materiality of technical errors committed by the mortgage investors in the foreclosure process. That post focused on two new April 2014 court opinions providing some guidance on what remedies borrowers may have for those errors. Those new court opinions also provide fresh guidance about fiduciary duties of foreclosure trustees. Today’s blog post is about dealing with trust issues in foreclosure.
Bonnie Mayo v. Wells Fargo Bank & Samuel I. White, PC:
The Deed of Trust on Bonnie Mayo’s Williamsburg home listed Wells Fargo Bank as the “beneficiary” and the foreclosure law firm Samuel I. White, PC, as the Trustee. Mayo’s post-foreclosure sale lawsuit alleged that the White Firm breached its fiduciary duties to the borrower. For example, Mayo’s Deed of Trust required the lender to state in written default notices that she may sue to assert her defenses to foreclosure. The lender’s notices did not advise her of this, and she did not sue until after the foreclosure occurred. The Federal Judge considering her claims noted that there is conflicting legal authority on the extent to which a foreclosure Trustee can be sued for Breach of Fiduciary Duty. In his April 11, 2014 opinion, Judge Jackson observed that under Virginia law, a Foreclosure Trustee is a fiduciary for both the borrowing homeowner and the mortgage investor. While courts impose those duties on Foreclosure Trustees set forth in the Deed of Trust, they are reluctant to impose all general trust law principles.
Judge Jackson concluded that in addition to those duties set forth or incorporated into the Deed of Trust, the only other imposed on Trustees is the duty of impartiality. For example a foreclosure sale must be set aside where a trustee failed to refrain from placing himself in a position where his personal interests conflicted with the interests of the borrower and the lender. For example, the Trustee may not purchase the auctioned property himself or assist the bank in setting its bid. The Federal Judge dismissed Ms. Mayo’s Breach of Fiduciary Duty claims against the White Law firm, since impartiality was not adequately pled in the lawsuit.
Squire v. Virginia Housing & Development Authority:
In an April 17, 2014 opinion, the Supreme Court of Virginia focused on the limited nature of a Foreclosure Trustee’s powers. In this case, the Deed of Trust required the lender to try to conduct a face-to-face meeting with the borrower between the default and the foreclosure. The lender’s Trustee foreclosed, even though the lender did not make such an effort. The Court observed that the trustee’s authority to foreclose is set forth in the Deed of Trust. The Trustee’s power to conduct the sale does not accrue until the specified conditions are met. The borrowers’ failure to make monthly payments does not constitute a waiver of their right to expect the lender’s appointee to follow the rules. The fact that the borrower is in default does not authorize the mortgage investor and the trustee to disregard the Borrower’s protections set forth in the Deed of Trust and any incorporated regulations.
This holding is consistent with Virginia’s practice of conducting foreclosures out of court. The procedures set forth in the deed of trust provide the lender with a means of selling the property without the time & expense of a judicial sale. If the procedural nature of those rights is not preserved, then foreclosure disputes will go to court more often, depriving the lenders of the convenience of non-judicial foreclosure.
Ms. King alleged that the Foreclosure Trustee breached its fiduciary duty by conducting the sale prior to a required face-to-face meeting with the borrower. The Supreme Court of Virginia found that the Breach of Fiduciary duty claim was improperly dismissed by the Norfolk judge. The Court sent the case back down for consideration of damages.
These two new court opinions show how breach of fiduciary duty claims against foreclosure trustees require legal interpretation of the deed of trust. If the lender and trustee digress from its procedures, impartiality may be easier to prove.
Discussed Case Opinions:
Mayo v. Wells Fargo Bank, No. 4:13-CV-163 (E.D.Va. Apr. 11, 2014)(Jackson, J.)
Squire v. Virginia Housing Development Authority, 287 Va. 507 (2014)(Powell, J.)
Credits: Trust Arch photo credit: Lars Plougmann via photopin cc Williamsburg photo credit: Corvair Owner via photopin cc (for illustrative/informational purposes only. Depicts colonial Williamsburg, not Ms. Mayo’s home)
December 19, 2013
Navigating the Walk Through – Part I
From the moment the first person piled up rocks or rough-hewn timber to distinguish his farmland from the neighbors’, real estate has been visually-oriented. In the business of real estate, the walk-through of the premises provides you with an eyes-wide-open basis for due diligence and negotiation in sales, leases and dispute resolution. In the age of internet videos, Smartphone photography, Google maps, engineer drawings and online public land records, it is possible to learn much about a property without actually visiting it. However, real estate professionals still swear to the value of a real walk-through when your property is going through a transition. A photograph or video recording of a property may identify a desirable asset or potential problem without the time consuming task of driving to a location and talking a look. However, any kind of recording, photograph, drawing or description is at best a useful abstract of the property at a specific moment in time. If an entrepreneur desires to lease or purchase a property for purposes of operation of a unique business activity there, it is unlikely that a set of records could illustrate whether the property can fit her creative purpose. It is difficult to communicate with another party regarding a unique property concern without looking first.
Many buyers, tenants and lenders are drawn towards relying upon the representations of other people when entering into contracts. Business relationships do need trust in order to bear fruit. However, if someone insists that you make a decision without significant investigation, slow things down. The general rule in Virginia is caveat emptor –let the buyer beware. The law expects folks to be reasonably wary when it comes to entering into contracts. Further, once a party begins to conduct an investigation of matters underlying a contractual decision, the burden is on him or her to complete that investigation to the extent warranted by the situation. Of course, if the other party knowingly conceals a problem with real estate, the purchaser may have a basis to void the contract. After the fact, the burden of proving any kind of deceit would fall on the party suffering the harm. Generally speaking, the law expects parties entering into real estate contracts to do so reasonably self-informed about the subject property and the terms of the contract itself.
Part II of this post will explore the inspection process in more detail.