How to Buy Bankruptcy Foreclosures

Consult with an attorney. Buying a property from a bankruptcy estate carries different concerns than buying a property directly from the owner. It is a good idea to consult with an attorney. The attorney can help you understand the sale procedures, particularly the parts that are different in bankruptcy. Some of the legal issues that arise from a bankruptcy purchase are:^[4]

• whether the property is sold free and clear of all debts
• whether you are responsible for any outstanding obligations on the property
• whether you may be responsible for environmental problems on the property
• how you can enforce your purchase against other interested parties
• whether the former owner has any rights to redeem or repurchase the property

Secure pre-approval for financing. Once you find a property is advertised for sale in a bankruptcy case, the procedure tends to move fairly quickly, and you are not likely to be able to slow it down to get financing. A bankruptcy sale involves many interested parties, including the debtor, the bankruptcy trustee, the court itself, the mortgage holder, and the unsecured creditors. All these people are often awaiting the outcome of the sale of the property, in order to learn if there will be cash to distribute in the bankruptcy case. The court is not likely to postpone a sale to accommodate you.^{[5] [6]}

Determine the legal owner of the property. When a property is an asset in a bankruptcy case, the legal owner -- the person with the right to sell it -- may not be the individual debtor. You, your attorney or your real estate agent, will need to investigate the court records to determine the legal owner.^{[7] [8]}

• If the debtor has filed a Chapter 7 bankruptcy, then all the property legally transfers to a bankruptcy trustee. The bankruptcy trustee is the person with the authority to negotiate the sale of the property. You can find out the identity of the trustee by contacting the Bankruptcy Court and checking the official docket of the debtor’s bankruptcy case.
• If the debtor has filed a Chapter 11 or Chapter 13 bankruptcy case, then the debtor retains legal ownership of the property and has authority to negotiate the sale.

Attempt to view or inspect the property. Very often, properties that are sold through bankruptcy cases are sold “as is.” You will usually have very limited opportunity to view the property, other than driving by the outside. Nevertheless, you, or your agent or attorney, should try to contact the debtor or bankruptcy trustee and get permission for a more thorough inspection.^[9]

• As with the purchase of any home, you are responsible for the cost of your own inspection, if you choose to hire a professional home inspector.
• Sometimes, the newspaper advertising that lists the bankruptcy property for sale will also advertise an open house. If you see this, you should take this opportunity to view the property in more detail.
• These are considered as distressed properties. Be careful of the risks you might be taking if you buy the as-is property.

Research the fair market value of the property. A real estate agent should be able to help you with this, although Internet sources can help you do some of the work yourself. You will want to compare the property with other properties of similar size, function and location. Find out if similar properties have sold recently in the area and compile those sale prices. The fair market value of the property you are considering should be somewhat similar.^[10]

• Some online websites make this process very simple. You can simply type in the street address of any property, and the site will pinpoint it on a map, identify nearby sales, and present you with a range for the property value. Some sites that offer this feature are zillow.com, redfin.com, or homes.com.
• Work with a specialized foreclosure agent and get a professional inspection done to find out any additional liens on the foreclosed property.

Research the outstanding debts on the property. If the property is being sold as part of a bankruptcy case, then you can go to the bankruptcy court and research the obligations that the debtor reported. Specifically, you will be most interested in the debtor’s Schedule C, which is the list of secured debts. Review it carefully to see the total amount of mortgages on the property.

• You may need to search the bankruptcy docket for other documents as well. It is possible that the debtor may have left a creditor off his Schedule C report, and that creditor might file a subsequent notice of secured claim.
• Work with a specialized foreclosure agent and get a professional inspection done to find out any additional liens on the foreclosed property.

Calculate your offer amount. Knowing the amount of debts on the property can help you anticipate what you may have to offer as a purchase price. You will not want to exceed what you believe is the fair market value of the property, of course, but your offer will probably need to exceed the amount of the outstanding loans. Under bankruptcy law, the creditors do have the right to object to a sale price that they consider too low.^[11]

• Consider, for example, a home in bankruptcy that has a first mortgage of $150,000 due, and a second mortgage of $70,000, for a total of $220,000. If you submit an offer of $100,000, the first mortgage would only receive partial payment, and the second mortgage would receive nothing. It is unlikely that such an offer would be accepted.
• Suppose, with the same data, that you estimate the value of the property to be about $300,000. You could make an offer of $220,000. Then both mortgages would be paid in full, and you would have the house for about 70% of its value.
• Some properties are simply “underwater.” This means that the mortgages exceed the value. You would not be expected or required to bid higher than the fair market value of the property. In such a case, the mortgage holders are likely to lose money.
• Most lenders with first and second liens will enter a bid for the property at least equal to the loan amount to ensure they receive the property and can dispose of it in a separate transaction.

Negotiate a purchase price. After you have decided what you believe to be a fair price for the property, you can make your offer to the owner or trustee. As in any negotiation, you should be prepared for some back-and-forth communication as you try to reach an agreement. Eventually, you will either reach a common price or you will decide to give up on the purchase.

Review a purchase and sale agreement. As a buyer in bankruptcy, you will likely be presented with a purchase and sale agreement from the debtor/owner or the trustee. This is the stage where you should have an attorney or real estate agent assist you. Many of the terms of a standard purchase and sale agreement may not apply to a bankruptcy sale. For example, a standard sale may be made contingent on obtaining financing, but a bankruptcy sale will usually demand that you have that pre-arranged. You will want to check the following details about the agreement:

• accurate description of the property
• accurate representation of the purchase price
• closing costs that you may be responsible for
• special stipulations
• closing date

Attend a hearing in Bankruptcy Court. This is perhaps the biggest difference between negotiating a private property sale, or even a bank owned foreclosure sale, and a sale in a bankruptcy case. As a sale of an asset in a bankruptcy estate, the sale must be approved by the bankruptcy judge. The judge will review the estimated fair market value of the property (as presented by the debtor or trustee) and the outstanding loans. The judge’s main purpose is to make sure that the procedures of the bankruptcy court are followed and that the sale is in the best interest of the creditors in general.^[12]

Be prepared to bid at auction. The main thing you need to understand about purchasing a property through a bankruptcy case is that your purchase is not final until order by the court. Even though you may have a signed purchase and sale agreement, that agreement is subject to final approval of the court. The court has the authority to turn a private sale into an open auction, depending on the value of the property.^[13]

• For example, consider the earlier example of a property with mortgages totaling $220,000, and an estimated fair market value of $300,000. If you negotiate a sale price of $220,000, the two mortgage holders will be satisfied. However, the rest of the debtor’s creditors would receive nothing. The bankruptcy judge may order an auction to sell the property for a higher price. Any price between $220,000 and $300,000 would still be a bargain for the buyer, and would generate money to pay off the debtor’s other debts.

Obtain a court order for a “free and clear” sale. Eventually, whether you buy the property through your own negotiated agreement or through a bankruptcy auction, the sale will have to be approved by the judge. A sale in bankruptcy is generally completed with an order that states that your purchase is “free and clear” of all liens, encumbrances or other claims to the property.^[14]

• The “free and clear” order means that you do not need to worry about other mortgage holders demanding payment from you for any outstanding loans. Their only course of action is through the bankruptcy court as a creditor.