In recent years, many foreclosed properties have been offered for sale by banks and other financial institutions. There are a number of dangers any prospective buyer should be aware of when purchasing foreclosed properties – even if the purchase is made after a sheriff’s sale directly from the purchaser at the sheriff’s sale. Banks often insist upon selling a foreclosed property “as-is” – without any warranties or representations as to the property’s condition. There have been numerous cases in which prior owners performed work on a property which was not in compliance with local building code (such as plumbing, electrical, heating, roofing, windows, or construction of an addition), and/or was never inspected by an appropriate building inspector. When the non-code compliant renovations were later discovered by the municipality, costly repairs were required by the municipality for which the selling party refused to take responsibility. Beware of “as-is” purchases.

Another foreclosure practice to approach cautiously is when an out-of-state seller insists upon giving a “special warranty deed” rather than the typical “warranty deed.” Under Wisconsin law, it is unclear what a “special warranty deed” actually means. Foreclosure sellers may contend, based on language from states other than Wisconsin, that a “special warranty deed” only warrants against defects created by the seller. In other words, if the foreclosed prior owner executed a mortgage or easement that does not show up on a preliminary title search, the seller (bank or other financial institution) may not be held responsible for the title defect. I was involved in a recent Walworth County case in which the foreclosure attorney failed to properly serve notice of the foreclosure proceedings on a second mortgage holder. This second mortgage holder later brought a motion to reopen the foreclosure action because of this improper service. The foreclosure buyer almost lost the property at far less than market value after paying more than $200,000 in an attempt to redeem the property. The title company refused to agree to correction of the judgment which had been incorrectly entered so the buyer had to hire independent legal counsel to appeal the previous court’s decision. The buyer was successful on appeal, but the seller, seller’s counsel, seller’s title insurer and the title insurance underwrite all refused to reimburse the buyer for its actual, reasonable attorneys’ fees and costs. A second lawsuit was necessary in order for buyer to collect approximately 80% of the more than $100,000 in legal fees and costs buyer incurred simply to protect its ownership interest in the property. I believe that before a “special warranty deed” is accepted by a buyer, the title company should specifically insure the special warranty deed and any title defect which is not covered by the seller’s “special” warranty. The language of current standard title insurance commitments should cover this situation, but as the Walworth County case clearly illustrates, the title insurance companies and underwriters do not necessarily live up to their promises.

Thomas L. Frenn