There is a hidden risk in buying foreclosed property that nobody seems to be talking about. Many of the houses being foreclosed upon were subjected to liens securing sub-prime loans. Many of these loans were made by disreputable lenders, sometimes by now indicted loan officers.
In Washington, like many other states, the purchaser at a foreclosure sale takes the title that existed at the time that the loan was made and the deed of trust recorded. If the lender had nothing to do with any deceit on the owner and was not on notice of any irregularity, then the lender is deemed a “bona fide purchaser for value.” This is a legal term meaning that title cannot be recovered by the owner, even if there was fraud. When the lender was involved in the fraud or had reason to know of it, then the owner can clear title of the deed of trust and the ownership interest of the purchaser at the foreclosure sale.
Thus, a truly prudent buyer at a foreclosure sale or purchaser from a bank after foreclosure should check to see which lender made the loan originally. Only after finding out about that lender can the purchaser have comfort that title cannot be reclaimed by a defrauded or deceived owner.