real estate

Who owns the foreclosure you bought?

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Highlights
  • Paperwork scandal raises questions about who owns foreclosures.
  • Proper title insurance goes a long way toward protecting buyers.
  • Scandal may complicate future sale of home.

As the foreclosure documentation scandal grows, buyers who purchased a distressed property in recent years may wonder if they really own their home.

After all, if the foreclosure was improperly handled, the previous owners could file a lawsuit against their lender and the attorneys who handled the foreclosure.

The good news is that legal experts say there is little risk such purchasers would lose their homes or become liable for financial compensation to the foreclosure victim.

"The biggest protection is the 'bona fide purchaser' law that protects buyers from getting in trouble if they could not have known there was a problem with their purchase," says Jonas Jacobson, an attorney and principal with the Law Offices of Jonas Jacobson in Boston.

"For example, if you unknowingly bought a stolen car and had no reason to know it was stolen, you could not be prosecuted for buying that car. In addition, most states have a relatively short statute of limitations on real estate transactions."

Small chance of lawsuit

Steven Horne, an attorney and president of Wingspan Portfolio Advisors in Carrollton, Texas, agrees there is little danger of homeowners losing homes due to foreclosure paperwork mistakes.

However, there is a small chance a homeowner who bought a foreclosure could become involved in a lawsuit, he says.

"The previous owner or perhaps a second lien holder who was not paid off by the foreclosure sale could challenge the validity of the sale," Horne says. "But they would have to prove that the foreclosure was wrongful and that the previous owners could have afforded to keep the house."

Horne says the most likely outcome of mishandled foreclosures is financial compensation paid to the foreclosure victims by their lender or title insurance company.

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"It would be extremely unusual for a judge to unravel a deal," Jacobson says. "In addition, most foreclosure victims do not have the money to file a lawsuit or the money to make the house payments if the home was returned to them."

Horne says state laws dictate how potential foreclosure disputes unfold, with homeowners well-protected in most states.

Taking protective steps

Although most buyers have little to fear, the recent chaos surrounding sales of distressed properties highlights the importance of protecting yourself when purchasing a foreclosure.

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