Buying an apartment in foreclosure – how to proceed and what to watch out for?

Is the property being purchased in foreclosure?

Whether the owner himself mentions the foreclosure or there has been no mention of it, it is always advisable to check the property. It is best if you go straight to the land registry, where you will find all liens and therefore also any foreclosures in the attached title deed.

If there are no visible foreclosures on the property, this does not necessarily mean a complete win. It is also advisable to check the owner for other debts that could lead to a lien on the property.

If you discover any irregularities, it is advisable to contact the bailiff dealing with the case directly. However, this is where it will be useful to work with the property owner, who should provide you with the number of the foreclosure and the contact details of the foreclosing party. You will need to find out the exact amount of the debt from the bailiff, as this information is crucial for further action. In addition, the bailiff, as well as other creditors, must agree to the sale of the property.

How does buying a foreclosed home differ from a standard purchase?

Buying a flat in foreclosure differs from the standard procedure in a few basic steps that need to be taken before signing the purchase contract.

For example, we don’t start with a standard reservation contract, but with a contract for a future purchase agreement. At the time of signing it, it is of course necessary to know the nature and amount of all foreclosures that are pending against the property owner, and ideally also those that are not yet final (but it is not easy to detect them and unless the debtor himself mentions them, it is difficult to get the necessary information). Check all the seller’s debts before signing. The central register of foreclosures is charged a fee of tens of crowns by decree. Some databases are free (or pretend to be). However, you need to check their credibility beforehand. Insolvency is to be distinguished from execution. To find out, use the insolvency register maintained by the Ministry of Justice. This database is freely accessible, provides a fairly wide range of data on the debtor and all information is provided free of charge.

The contract of sale and purchase agreement must contain a complete list of amounts owed, which you will pay directly to the bailiff after signing. Once everything necessary has been paid, the bailiff will issue you with a written confirmation that the debt has been repaid (= so-called receipt).

With this receipt, you can now head to the land registry office, where you can apply to have the foreclosure records removed from the title deed. Once the title deed does not contain any foreclosures, it is possible to sign the purchase contract and effect the transfer of ownership in the Land Registry.

If you are going to finance the property with a mortgage loan, you cannot, in principle, create a lien on it in favour of the bank. You will therefore need to guarantee the loan with another property.

What are the risks of buying a flat in foreclosure?

We have already mentioned that knowing the exact amount owed (foreclosure claims) is key. Why? Because the problem arises the moment the amount owed exceeds the value you are willing to pay for the property. In such a case, we recommend that you take your hands off the purchase quickly, as such a deal would only bring complications and problems.

Another risk is new foreclosures, which may appear even after the debt has been paid and the records have been removed from the land registry. In this case, you will have to deal with the payment of the amount owed and its deletion from the title deed as soon as possible, which of course increases the amount you originally intended to invest.

Not all foreclosures are always easy to trace. Especially when it comes to those that are not yet final. You won’t find records of them in any registry yet, yet they can appear during the property transfer and complicate the whole situation. You should always check all available registers, keep in touch with the bailiffs and ideally the relevant court.

Purchase from the owner (debtor) vs. purchase from the auctioneer

The procedures and risks we have described so far are related to cases where you are buying the property directly from the owner, i.e. from the borrower itself. In practice, however, there is another way of buying a property in foreclosure. This is buying at auction, where you buy the property from its auctioneer. The auction of the property is resorted to when the debtor is unable to pay his/her debts in any other way after the commencement of foreclosure proceedings.

The auction can be conducted in cooperation with the debtor, but it can also be conducted if the debtor does not agree (so-called voluntary and involuntary auction). A starting price is always determined and a public auction is held according to the predefined conditions described in the auction notice. Each participant must pay a pre-determined auction security, which allows him or her access to the auction. This is then, of course, refunded to all those who do not bid for the property.

The advantage of the auction is that you, as the auctioneer , acquire the property without legal defects. Individual creditors will be satisfied from the proceeds of the property, the liabilities on the property are cancelled and the property is cleared. The downside may be that auctions are held in public, either physically or electronically, and you will face the risk of a higher bidder. We have covered this issue in detail in a separate article.

Encumbrances on real estate by easements

Whether you buy the property directly from the owner or at auction, it may remain encumbered by easements. Some of them are not extinguished by auction or transfer to a new owner. While in the case of an auction, the auctioneer will notify you of all encumbrances (those that cease and those that remain), if you buy directly from the owner, you must check the details with the Land Registry.

Some easements will not restrict you too much. These are mainly those that are attached to the land. For example, it is quite common to see utility easements in favour of energy suppliers and other services. Slightly more complicated then can be the rights of neighbours to use part of your land (for example, to drive on your own plot).

For potential buyers, the worst category of easements are those that attach to certain people – i.e., a lifetime easement, where, for example, the owner’s parents have the right to use the property for life.

Don’t risk financial loss

If you don’t mind the extra administrative burden and the property is well vetted, there is no need to worry about buying. On the contrary, you can get your dream property at a much better price.

More than ever, however, we recommend using a lawyer who has experience in such transactions. Buying a home with a foreclosure is a rather complicated transaction and it is easy to make mistakes that in some cases can be truly fatal. Cases where the new owner lost the property due to incorrectly identified and treated foreclosures are no exception. Therefore, think first of all about your safety and seek the help of a professional.

Please note that the real estate acquisition tax has been abolished and the effective date in this respect is 31 March 2020. For more information, see the article Abolition of real estate acquisition tax.

At Affordable Advocate, we can help you buy

We are happy to advise you on how to proceed with the purchase of a home with a foreclosure. We will help with all the details and make sure the whole process goes smoothly and completely safely.