Summer 2009 Advisor

Acquiring Property In A Down Market

BY KIRSTEN R. BOWMAN AND MARICELA E. MARROQUIN

The State of California is in an economic crisis. Cities and public agencies are scrambling to cut costs because of the economic uncertainty and the significant loss of revenue from property and sales taxes. Although many agencies are cutting back on public projects, the current real estate market actually presents an excellent opportunity for public agencies to acquire property needed for public projects at a bargain price through a foreclosure action. There is a certain element of risk because the agency must acquire the property "as is," which can include senior liens, environmental issues, and tenant occupancy. Nevertheless, the payoff often outweighs the risk because a public agency can acquire the property in a short time period at substantial savings. This article outlines the procedures an agency should follow if it seeks to acquire property through a foreclosure sale.

LOCATING THE PROPERTY

The first step in locating a foreclosure property is to review the planned future projects. These would include projects in designated redevelopment areas or public works projects such as improvements to existing infrastructure, widening of streets and highways, or construction of sewer and water facilities. Once the agency has identified a project, it can then investigate specific properties it needs to construct the project. A variety of services track foreclosure sales in specific cities. In addition, the agency can review the local newspaper for published trustee's sales, and check with local law enforcement agencies that require banks to register properties in foreclosure to ensure that they are secured and safe during the change of ownership.

INVESTIGATION PERIOD

Once an agency has identified suitable properties in foreclosure or pre-foreclosure, it should obtain a preliminary title report by a title company. It should also obtain the Schedule B documents, which include a copy of the Deed of Trust to Secure an Indebtedness, the amount of the indebtedness, any junior or subordinate agreements or liens, and copies of the Notice of Default, Substitution of Trustee and Notice of Trustee's Sale. The Schedule B documents will also identify the security interest holder (bank or financial institution) and Trustee, the amount of fees and costs associated with the foreclosure proceedings, the sum of money owed on the original Note, and the date and location of the Trustee's Sale. Code of Civil Procedure Section 2924(g) requires the sale to take place in the County where the property is located, between the hours of 9 a.m. and 5 p.m. on any business day, Monday through Friday.

CONTACTING THE TRUSTEE

Once the agency has reviewed the Schedule B documents, it should contact the Trustee to determine: 1) whether the security interest is a first deed of trust and is not subordinate to any other deeds of trusts or liens; 2) the date and time of the Trustee's Sale; and 3) how payment can be made. In addition and most importantly, the Trustee will confirm the lowest bid amount. The agency, as a bidder, must show that it can legally participate in the auction by demonstrating that it has the minimum bid for the auction.

ENVIRONMENTAL REVIEW

As part of the investigation process, an agency should conduct a Phase I Environmental Site Assessment to identify potential or existing environmental contamination liabilities. If the Phase I study identifies potential contaminates, the agency should conduct a Phase II Environmental Site Assessment to collect and analyze samples from the property. This will require contacting the property owner and requesting a right of entry onto the property to conduct more invasive testing.

In a foreclosure action, property is acquired "as is," meaning that if the property is contaminated, the agency will be responsible for any environmental cleanup. However, because the foreclosure sale will move forward as scheduled, there may not be enough time for Phase II testing if contamination is identified during the Phase I study. At this juncture, the agency will need to weigh the risks of acquiring the property without having conducted Phase II testing. The savings associated with a lower purchase price may offset the expense of any environmental cleanup of the property.

APPRAISAL AND BOARD APPROVAL

Prior to bidding, the agency must appraise the property. Typically, an appraisal takes approximately six to eight weeks so it is advisable to retain an appraiser as soon as possible. Once the appraisal is complete, the agency can determine whether it is economically advantageous to acquire the property through a foreclosure sale. The agency must then seek board approval to acquire the property for a price at or near the appraised value.

Once the agency has authority to purchase or bid on the property, the agency must obtain the funds for the auction. California Code of Civil Procedure Section 2924(h)(b) provides that a Trustee may require a party bidding at a foreclosure sale to demonstrate that it can pay the full amount of the bid by cash or a cashier's check(s). If the agency intends to pay by cashier's check, it should ensure that the bank will refund the cashier's check should the agency not acquire the property. The agency should obtain a cashier's check for the minimum bid amount and the remaining checks in increments of $50,000. The checks should total the amount the Board authorized to purchase the property.

PURCHASING THE PROPERTY

Trustee's Sales are frequently postponed so the agency should contact the Trustee the day before the sale to confirm the date and time of the auction. The day of the sale, the agency should advise the Trustee that it intends to bid on a particular property and show the Trustee the cashier's check for the minimum bid qualification. Once the bidding begins, it is permissible to simply bid one cent over the minimum bid price. The agency should be careful not to bid on the property for more than the appraised value.

It is likely that an agency will not have a cashier's check for the exact amount of the purchase price, in which case, the bidder should obtain the Trustee's agreement to reimburse the agency for any money paid over the purchase price. Code of Civil Procedure Section 2924 provides that a Trustee's Sale is deemed perfected as of 8 a.m. on the actual date of sale if the Trustee records the deed within 15 calendar days, or the next business day following the 15th day if the county recorder is closed on the 15th day. The agency must ensure that the Trustee's deed is recorded as soon as possible to confirm transfer of ownership right to the property.

CONCLUSION

Purchasing property through a foreclosure action is a complicated process that occurs within a relatively short period of time. An agency that is interested in acquiring foreclosure property should conduct its due diligence early in the process to determine whether it is economically advantageous to purchase property at a foreclosure sale and assess the risks. The mere fact that a property is in foreclosure does not necessarily mean acquiring it will be a "good deal," particularly if more money is owed on the property than it is worth.

The procedures outlined above are not all inclusive. Therefore, an agency should consult with an attorney or foreclosure specialist before embarking on a foreclosure acquisition. On the other hand, acquiring foreclosure property may enable an agency to buy property for needed public facilities at bargain prices.

FOR ADVICE FROM RW&G ON ACQUIRING FORECLOSURE PROPERTIES, PLEASE CONTACT KIRSTEN R. BOWMAN OR MARICELA E. MARROQUIN OR ANY OF THE LAWYERS IN THE FIRM'S EMINENT DOMAIN PRACTICE GROUP.

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