Month: November 2019

Buying foreclosures is a great way for real estate investors to get bargain prices on properties. However, there are certain things that every investor should be aware of before buying foreclosures.

1. Foreclosure Auctions can be more complicated than you think. There are additional steps after the winning bid before you can close. Buying Properties from Strict Foreclosure is Easier.

In Connecticut, there are two types of foreclosures. If there is equity, the court will order a foreclosure auction and the property is sold to the highest bidder. If there is no equity or the property is underwater, there will be a strict foreclosure, where the owner and interest holders prior in right to the bank will get a chance to redeem the note, and if none do, the bank then becomes the owner.

…it is easier to buy foreclosed properties that have been foreclosed through strict foreclosure.

Edward Schenkel

From a legal perspective, it is easier to buy foreclosed properties that have been foreclosed through strict foreclosure. When the bank takes title by strict foreclosure, the bank owns the property and can enter into a contract with you directly at hopefully a bargain price. Buying a property already owned by the bank is easier than going through the auction process.

If there is equity, the court will order an auction where anyone can bid, including lienholders, the owner, other investors, and so forth. At the auction, the highest bidder wins the auction. However, all investors should know that is not the end of it. The proposed bid has to be approved by the court as reasonable, giving other parties (including the owner) a chance to object to the bid. Usually the court approves it, but not always. Then you may have done a lot of work for nothing. If the court does not approve the bid, another auction will take place.

Both foreclosure sales and strict foreclosures are good opportunities to get good deals. Investors should know that buying foreclosures after strict foreclosure instead of at auctions is a much easier process, and perhaps less risky.

2. The Property will be Sold As Is and No Disclosures. The Inspection is critical.

…the inspection is critical when purchasing foreclosures.

Edward Schenkel

The inspection is always important and is particularly critical for buying foreclosed properties. The banks will typically not provide condition disclosures and even if they did they would not be worth that much since the bank does not have extensive knowledge about the condition of the property. Similarly, the bank will not make any warranties as to the condition of the property and will sell “as is.” Therefore, the inspection is critical when purchasing foreclosures. Make sure you use a good inspection company.

3. You will likely Not Get a Warranty Deed

…title insurance is critical when buying foreclosures.

Edward Schenkel

The bank is usually unwilling to provide you warranty deed, which provides you with certain warranties concerning the title of the property. You will likely receive a special warranty deed or a quit claim deed, which provide you as the buyer with less protection. Therefore, title insurance is critical when buying foreclosures.

4. The Tenants may have the Right to Continue to Occupy the Premises

…you may be stuck with the tenants in the foreclosed properties until the end of the lease term…

Edward Schenkel

If there are tenants in the building or house, they may have certain protections depending on whether the lease is written or oral, the duration of the lease, and when the lease was executed. In short, you may be stuck with the tenants in the foreclosed properties until the end of the lease term in certain scenarios. This is something you should look into with the help of counsel, especially if you are planning rehab.

5. Tax Liens and other Liens on the Property – Beware.

Make sure you look into this and factor it into your decision to purchase.

Edward Schenkel

When purchasing foreclosures, only liens subsequent in right to the bank’s mortgage are extinguished. Therefore, prior liens, particularly tax liens, may still remain on the property after the foreclosure. Make sure you look into this and factor it into your decision to purchase.

Many clients have approached me inquiring about claims they can make against a builder or contractor that performs substandard work. Unfortunately, builders and contractors make mistakes all the time through human error, cutting corners, or hiring the wrong subcontractors for the job. When things go wrong, sometimes the work is not up to par with standards in the industry while other times there are blatant violations of the building, fire, or zoning code. Either way, defective work is very problematic for property owners, particular those who paid significant sums of money and do not get the results they bargained for. What types of claims can you make against a builder or contract who performs shoddy work?

1.Breach of Contract

As a preliminary point, it is a good idea to have a written construction contract with your builder or contractor to protect yourself. There are a number of essential provisions to include in such contract, however it is imperative to make sure the scope is properly defined both in the main body of the contract and by attaching an plans or specifications, if possible. Other important provisions include warranties and requiring the builder to maintain adequate insurance. It is a good idea to review the contract with an experienced attorney to make sure you are protected.

…a written contract will be vital in bringing a breach of contract claim…

Edward Schenkel

If there is defective work, a written contract will be vital in bringing a breach of contract claim, so you can claim the work is not in compliance with the contract. If the plans are made a part of the contract, failure to comply with the plans is likely a breach of contract in itself. Similarly, if certain materials are called out, failure to use these materials may be a breach in itself as well. Often, a provision is included requiring the builder or contractor to perform in accordance with industry standards. If there is defective work, arguably there is a breach of this provision as well.

2.Negligence

If a builder or contractor performs defective work, you also may be able to bring a negligence claim. You may be able to bring negligence claims against all of the subcontractors that performed the defective work, not just the general contractor. Suing all the subcontractors in a breach of contract claim is more complicated since you likely only have a contract with the general contractor or construction company.

A builder is held to be under a duty to exercise a degree of care…

Edward Schenkle

In order to bring a negligence claim, you must show that the builder owed a duty of care, that duty of care was breached by failing to meet the standard of care, and that the breach was a proximate (foreseeable) and direct cause of the damages. A builder is held to be under a duty to exercise a degree of care which a skilled builder of ordinary prudence would have exercised under the same circumstances. Therefore, you will need to prove the hired builder did perform as a builder of ordinary prudence would have performed. At trial, you will likely need to call experts in the industry to demonstrate that your builder did not perform prudently and therefore breached the duty of care.

3.Breach of Warranty

You may also be able to bring breach of warranty claim against your builder for defective work, both express and implied warranted. An express warranty may be included in the contract by a builder in a construction contract, typically by making a representation about the quality of the work and providing a period of time in which the builder will fix any problems at no cost to the client. Often, a builder will provide a warranty that the work is performed in a workmanlike manner, meaning that it is up to industry standards. If the work is not up to industry standards, you may have a claim for breach of express warranty.

…a breach of implied warranty is another claim you may be able to make against a builder…

Edward Schenkel

There are also statutes that create implied warranties in new construction contracts. There are four implied warranties in such contracts: (1) an implied warranty that the construction improvement is free from faulty materials; (2) an implied warranty that the construction improvement was constructed according to sound engineering standards; (3) an implied warranty to construct in a workmanlike manner; and (4) an implied warranty of habitability at the time of delivery or the time of completion of an improvement if not completed when deed is delivered. There are certain exceptions, however a breach of implied warranty is another claim you may be able to make against a builder for faulty work in new construction.

4.Misrepresentation

If the builder or contractor made a misrepresentation either in the contract or orally to you prior signing, you may also be able to make a claim for misrepresentation. For example, if a contractor represented it would include certain materials in the work performed and did not, this may amount to a claim of misrepresentation. A misrepresentation may also allow you to make another claim under the Connecticut Unfair Trade Practice Act, which allows recovery from businesses that engage in unethical, immoral, and/or unscrupulous conduct.

…you may be entitled to additional damages…

Edward Schenkel

As you can see, there a number of different types of claims you should think about if your builder or contractor performed defective work. It is a good idea to think about filing multiple claims in a lawsuit in case one of them fails for one reason or another. Moreover, you may be entitled to additional damages for certain types of claims v. others, which will be discussed in another post.