That happens to be a popular question these days. The truth of the matter is hardly anything that may have a benefit comes totally risk free. Amazingly enough, however, foreclosed homes generally come with less baggage than you might think.
When a foreclosure action is commenced, every party that has a recorded interest in the property must be made a party defendant to the lawsuit. Say for example you have a recorded lien in the amount of $5,000 and the property goes into foreclosure. You will be served a summons and then have a chance to respond to the filed complaint. In general terms, the property will ultimately be sold at a public sale and one of two things will happen to your lien: The first scenario is you will be paid out of the sale funds if there is any excess beyond what the mortgage company is owed. The second scenario is when there will not be enough money out of the sale to pay your lien. Your interest will be legally extinguished without any payment being made to you. Considering most properties that go into foreclosure are underwater nowadays, this is the more common scenario. Either way, the title will be cleared of your lien and of no concern to a buyer.
Condominiums however can be a bit challenging when it comes to unpaid association dues. One can assume that if someone has stopped paying their mortgage they have also stopped paying their monthly assessments. Under Illinois law (765 ILCS 605/9), the mortgage company that receives title to a condominium unit through a foreclosure sale is responsible for condominium dues beginning after the first day of the month after the date of the public sale. That leaves some potential responsibility on the part of the buyer that purchases the unit from the mortgage company. Under the statute, the buyer may have the obligation of paying dues that were left unpaid by the former owner, and would have become due during the six months before legal action was taken by the association to collect the assessments. This could be a sizeable amount. The information is obtainable by the buyer in a couple of different documents that should be requested by the buyer’s attorney during the attorney review period as the contract may allow.
The other possible pitfall in the purchase of a foreclosed home has to do with the physical condition of the property. Essentially all mortgage companies selling their foreclosed properties, or REOS, have very stringent sales agreements that require total “As-Is” purchases. Therefore you will have no recourse for any defects or problems with the condition of the property whatsoever after the closing. This makes a professional home inspection more important than ever. Awhile back there was a real estate investor in the process of purchasing a foreclosure in Round Lake Beach. The water was not turned on at the time of the home inspection and the plumbing could not be checked. The inspection period was extended until the water could be turned on for another inspection. When the water was turned on, a geyser that would rival Old Faithful erupted in the basement. The buyer was happy to walk away with his earnest money.
Purchasing a foreclosed property can be a great deal but due diligence is a must.