In the Summer issue of the West Virginia Banker Magazine, we discussed certain factors that banks should consider before taking ownership of real estate collateral at a foreclosure sale. Once taken into a lender’s inventory, these “OREO” (Other Real Estate Owned) properties can pose challenges to lenders if they are not prepared. This article will provide some suggestions for lenders faced with managing OREO properties post-foreclosure.
Securing the Property
Upon becoming the owner of an OREO property through foreclosure, a lender’s first consideration should be to secure possession of the property as quickly as possible for a host of reasons. Unfortunately, vacant properties can often become subject to vandalism or theft. Further, it is important to take possession as soon as possible to assess and take care of any maintenance issues that could cause the property to deteriorate (such as fixing a leaking roof or winterizing pipelines).
Unfortunately, it is rare that a borrower turns possession of the property over to the bank voluntarily in broom-swept condition. For this reason, lenders often have to go through some extra legal steps to obtain possession of the property and prepare it for sale.
Eviction of Hold-Over Occupants
A Lender may be forced to delay obtaining possession of the OREO property if the property remains occupied. Lenders should not attempt to forcibly take possession of a property and/or change the locks to a property where someone continues to reside and fails or refuses to voluntarily turn over possession of the property.
In the event the prior owner remains in possession of the OREO property and will not voluntarily relinquish possession, a lender can initiate legal proceedings known as an unlawful detainer action1 or ejectment.2 The most common action used in West Virginia is an unlawful detainer action. Unlawful detainer actions normally can be completed on an expedited basis in Magistrate Court. Even if the action is contested by the occupant, the magistrate will set the matter for trial in short order, usually within 30 days. Then, assuming that the lender’s title to the OREO property is proper, an OREO property owner is typically granted an Order of Possession directing the occupant to vacate within a short time period.
Dealing with Tenants of the Former Owners
Special consideration needs to be given when dealing with tenants of the former owner. There are both State and Federal statutes which afford tenants of the former owner special protections. Specifically, the Federal Protecting Tenants at Foreclosure Act of 2009 (“PTFA”) and West Virginia Section 38-1-16 both provide certain rights to tenants remaining in foreclosed OREO properties.
In a nut shell, PTFA, which went into effect on May 20, 2009 and was extended through the end of 2014 by the 2010 Dodd-Frank Act, requires the purchaser at trustee’s sale to provide a tenant with at least a 90-day written notice to vacate prior to evicting the tenant. If the tenant has a “bona fide lease” (which is defined in the PTFC) which extends beyond 90 days, the tenant may get the benefit of the longer lease term.
West Virginia Code Section 38-1-16 also requires that a lender allow a tenant 90 days written notice if an unexpired written lease is the source of the tenancy. The statute also provides a lesser period in certain situations. However, given the 90 day requirement of the PTFA, it is advisable to take a more conservative approach and provide tenants 90 days notice prior to eviction in West Virginia to make sure that both statutes are complied with.
Because special notices need to be given to tenants of the former owner, it is important to assess whether tenants of the former owner reside in the property and to obtain a copy of the lease if possible, so you can determine what legal notices need to be provided.
Personal Property Left Behind
Often times, the former owner of an OREO property may leave behind personal property (such as furniture and appliances). West Virginia Code § 38-1-17 sets forth a procedure for dealing with such personal property. This statute provides that following a foreclosure on residential real property, the purchaser can send the former owner a notice stating that the personal property will be deemed abandoned if it is not removed from the real property before the end of the 30th day following the postmark date of the notice. The notice must state a phone number, a mailing address, and a physical address of a person that the previous owner can contact to obtain access to the personal property. The notice shall be sent to the former owner(s) of the real property at all the address(es) to which notice of foreclosure sale was sent as set forth in the trustee's report of sale, as well as the last known address, if different. The notice must be sent by both certified mail and regular mail. If the notice period passes and the personal property remains on the real property, then the personal property is deemed abandoned and the purchaser of the real property may dispose of the remaining personal property.
Real Estate Contracts/Deeds
Hopefully, a buyer will come along to acquire the OREO property soon after the sale. As a part of the closing on an OREO property, the bank should be careful to limit the warranties and representations that are made to a buyer since the bank acquired the property at a foreclosure sale. In typical real estate transactions, sellers will often make certain representations and warranties about a property and provide the buyer with a general warranty deed. However, a bank that has acquired an OREO property through a foreclosure sale should consider limiting and disclaiming warranties and representations in real estate sales agreements and using a special warranty deed so as not to expose the bank to claims down the road. This may require using a special real estate sales contract form that is different from what most realtors use.
Hopefully, this article has provided you with helpful tips for dealing with OREO properties post-foreclosure. Form letters and agreements for dealing with some of the post foreclosure issues identified in this article are available upon request by emailing the authors.