Buying Foreclosures – Beware of Banks and Rescissions

When it comes to purchasing foreclosure two things are typically a given, you are looking to buy at a discount and you must buy with cash. The second is more difficult than the first given the price of the property may use up much of your cash thus, the faster you can turn the property for a profit the sooner you get paid and can move on to your next deal. This is the way it is supposed to work but like everything in this market, you will find that Stercus accidit.

One of the problems that have plagued purchasers of foreclosures for the past year is clear title. Did the bank have good title to the property you bought at auction or was the foreclosure flawed? In either case, you run the risk of landing in a court battle with the homeowner and the bank. Some say it is a cost of doing business but to the small investor with limited capital this is a definite worst-case scenario. Many of my clients do not have the reserves to ride out a lengthy lawsuit. They are making a living on a deal by deal basis and one bump in the road can lead to ruin. Thankfully, in the past six to eight months serious headway was made by both banks and the legal system to fix these deficiencies allying some of the investors fears however, this does not imply calm seas.

In January of this year one of my investor/clients, whom I will refer to as John, bought a house at auction. After tendering over three hundred thousand ($300,000) at the sale, John received a Trustee’s Deed. The lender, Wellsfargo, contacted him within a few weeks and informed him of their intent to rescind the sale. (Apparently, Wells had entered into a modification agreement with the homeowner and their foreclosure department was not notified. To avoid a lawsuit with the homeowner Wells, decide the safer course of action was to take the property back from my client.) John told Wells he would gladly sell them the property back at 15% under what he could receive on the open market. That was not going to happen.

John contacted me irate over the lender’s demand and wanted to know what he could do. First thing I told him was to hold off starting any rehab work. John could fight the rescission given he has bona fide purchaser status but, during the course of the lawsuit, his money would be tied up and the property would could not be sold. The unfortunate reality is if you do not have extremely deep pockets or LegalShield Services Inc. ( to pay an attorney, your best bet is to let the property go and take your money back. John swallowed his bitters and went on to another project.

Keep in mind that most states have statutes that allow a bank to rescind a trustee sale in limited circumstances. Typically these statutes allow rescission where (1) the borrower has filed for bankruptcy, (2) there was a statutory problem with the sale (on other words, some legal requirement was not met) (3) the default was cured prior to sale or (4) the lender and the borrower agreed to cancel the sale upon the borrower’s payment of the amount due and that amount has been paid. In John’s case the lender was out of line.

A possible solution to John’s dilemma would be to sell the property to a closely controlled entity such as a LLC or Land Trust within a few days of receiving title. To give the appearance that the sale was to an unrelated party, the entity should not bear you name, i.e., you should not be listed as an officer, director, manager, etc. with the secretary of state. A Nevada Limited Liability Company or Corporation would offer this anonymity. Here is my thinking. When the lender approaches and seeks to rescind the sale, you can inform them that you no longer own the property. This would undoubtedly create chain of title issues for the lender and complicate the process. The end result being that you probably keep the property.

*God Speed*
TLD Investments LLC


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