By David Camiel

The success stories abound. Real estate investors who have made a living off of buying pre-foreclosure properties below market value and then selling them to make a tidy profit.

For every one of these successes however, there is also a story of an investor who bought a property without using due diligence to determine the true status of the title to the property. This mistake can be the difference between winning and losing in the pre-foreclosure game.

A wise investor will go to great lengths to determine the viability of a particular transaction. This process will include a thorough search of the land records to determine the marketability of the title to a property. A full 50-year search of the county records is recommended, and a local attorney or title examiner can do this. You can also research the title yourself, as most Registries of Deeds are available on-line at www.masslandrecords.com.

Keep in mind however, that a title search by itself WILL NOT disclose all potential charges that a pre-foreclosure buyer might face. But follow the road map below and you'll be well on your way to avoiding a financial nightmare.

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The key point to remember in all this is that when you buy a pre-foreclosure property outright, you are taking the property SUBJECT TO... any mortgages, tax liens, condominium association liens, municipal charges, probate proceedings and many other encumbrances. If you do not account for these expenses, you may wind up paying some or all of your profit to the holder of one of these encumbrances:

• Mortgages. Mortgages include first and secondary mortgages, equity lines and secured lines of credit. These should appear in a title search. At foreclosure of the first mortgage, any secondary mortgages are extinguished. On a pre-foreclosure on the other hand, the buyer of a property is responsible for any mortgages not paid at the time of closing.

  If you are projecting that the mortgages will be paid at time of closing, be conservative in your estimates of the payoff as they may include principal, interest, late fees, any legal fees associated with the foreclosure and even escrow money owed if the mortgage company has been paying the real estate taxes on the property.

  Prior mortgages which have been paid in full can be problematic as well if they have not been discharged or have been improperly discharged at the Registry of Deeds. A subsequent buyer may insist on a delay of the closing to correct the problem. This can mean more carrying costs for an investor intent on a quick turnaround sale.

• Tax Liens. This group of encumbrances includes IRS Liens, Massachusetts Department of Revenue Liens and Medicare Liens. All should appear in the title search. These liens are all related to the purchase of real property, so the extent of these liens and their interest and penalties should be determined as early in the research period as possible. Exact payoffs can only be obtained by contacting the governmental agency that originally put the lien on the property.

• Condominium Association Liens. These liens could be for outstanding condominium fees or for special assessments against the unit, but may not appear at the Registry. Be sure to check with the Condominium Board or Management Company to determine the extent of these liens. It is required by law that upon request by a unit owner, the association produces a 6(d) certificate, which would provide in writing the amount of any outstanding association fees.

• Municipal Liens. Again, any charges for municipal real estate taxes, water and sewer and in some municipalities, electric service, will become the responsibility of the purchaser, and may or may not appear in a title search. Research done with the municipality's tax collector or water and sewer department or information revealed on a municipal lien certificate, should include these charges.

  Keep in mind as well that some properties which have recently changed from private to public water or public sewer service, or which have had improvements done to the streets or sidewalks, might be subject to municipal betterment charges which would become the responsibility of the purchaser.

• Probate Proceedings. Probate relates to the death or divorce of one of the owners of the property, and this could also result in a lien against the property. In the case of death, a lien is automatically placed on the property by the state and federal revenue agencies in the name of the decedent until the estate can prove that no tax was due.

  In the case of divorce, it is possible that the spouse has a claim to some of the proceeds, which again, would decrease the potential profit for an investor. If the probate for a death or divorce was filed in the county where the real property lies, then a search of the probate records will reveal any claims against the property.

• Other Encumbrances. Most other encumbrances are only enforceable if recorded at the Registry of Deeds. These include judgments, executions and equitable remedies.

  The exception would be a mechanic's lien, which is an action available to contractors who have worked on a property within the previous ninety-three days, but have not been paid. Unfortunately, only the homeowners themselves will be able to make the representations necessary to avoid these liens.

In summary, the nature of a pre-foreclosure transaction lends itself to the kinds of pitfalls described above. Information and documentation is often incomplete and unreliable, and as an investor you are wise to do as much work as possible to determine the status of the title before even approaching the homeowner with a proposal.

One final note. As an additional layer of protection, you may want to consider purchasing an owner's policy of title insurance. Although at first blush this may seem expensive given the short time you intend to own the property ($4.00/$1,000 of purchase price), the policy could pay for itself quickly by clearing a title problem or insuring over the problem to allow for the sale to subsequent purchaser. Owner's title insurance can be purchased from a licensed attorney who is an agent of a title insurance company.

David Camiel is a partner in the law firm of Gilmartin, Magence, Camiel and Ross LLP (www.gmcrlaw.com) and has been a real estate practitioner in Massachusetts since 1994. He was in mortgage banking for 10 years prior to becoming an attorney, and serves as lender's counsel to over 75 lending institutions. His trademark has become his zealous representation of buyers, sellers, investors, brokers and mortgage officers. Attorney Camiel is an agent of First American Title Insurance and can be reached at his office in Newton, Massachusetts at 617-964-4300 or at dcamiel@gmcrlaw.com.

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August 2006

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