By: Julia M. Wei, Esq.
Whenever I speak on pre-foreclosure and foreclosure purchasing, I always warn that it is a high risk undertaking and that REOs are a far safer way of buying distressed property. The main reason is that even reasonable research cannot reveal hidden liens that will eat up the buyer’s equity. Here’s a horrific example:
In the recent case of Ribeiro v. County of El Dorado, Ribeiro was a seasoned real estate investor who bid on a parcel at tax sale. The deal was subject to tax liens (known as 1915 bond assessments), the amount of which were unknown at the time of the sale. The buyer thought he was buying a property for about $830k, and estimated that he would owe another $500k in backtaxes based on his preliminary research.
Turns out the backtaxes totaled $2.7M! Ribeiro refused to pay, sued the County and won at trial. The jury rescinded the purchase contract and Ribeiro got back his deposit of $83k too. The County appealed.
On appeal, the appellate court reversed finding that Ribeiro bought the property knowing there were tax liens and subject to those liens. It didn’t matter that there was evidence he asked county officials for the amount of the liens before the sale and that they failed to provide him with that information. In bidding, he took the risk and the sale is final. The Court went on to sale that this sale was not a normal sale that would allow Ribeiro the normal avenue of getting out the contract (rescission based on mistake, or fraud), but that the only remedies he was entitled to were those under the tax code—the technicalities of which I won’t get into here.
Takeaway ==> bidders at tax sales and foreclosure sales are stuck with the property regardless of what they find out after the gavel falls. Buyer beware.
[Ribeiro v. County of El Dorado, Third Appellate District of California, May 10, 2011]