Buying a House in Bankruptcy Court

Bankruptcy listings are distressed sale that work a lot like foreclosures or probate with some key differences. For buyers with some patience and willingness to work they can be great deals!

Buying Bankruptcy Real Estate

tBankruptcy Court Sales are Distressed Sales. Bankruptcy Listings don’t come up nearly as often as foreclosures or probate sales in Los Angeles, so they are rarer and somewhat of a specialty. Out of say 100 distressed listings, 80% will be short sales, 10% will be probates, 8% will be foreclosures, and about just 1%-2% will be bankruptcies. Bankruptcies can be great deals. 

While there is Chapter 7, Chapter 11, and Chapter 13 bankruptcies- the ones that will lead to properties for sale are the Chapter 7 bankruptcies.

Bankruptcies can be any price and anywhere. Pricing from a few hundred thousand to multi millions.  

In general, real estate Bankruptcy Listings are in better condition than foreclosures or probates, and about equal condition to short sales. This might make Bankruptcy listings attractive to homebuyers who don’t want to have to do a lot of work to the property.

Bankruptcy homes for sale can occur in any market but are most common during recessions. Like other Distressed sales, buyers will receive limited seller disclosures, may have to pay some extra closing costs, and the sale is ‘AS IS’ sale terms and are subject to overbidding. 

Where do I find Bankruptcy listings?

There is no special place to go, they will appear mixed in with regular listings. You usually will see a line in the remarks notifying you that this is a bankruptcy court sale (some agents love to put BANKRUPTCY in ALL CAPS). Sometimes the listing will have the bankruptcy case number so you can look up more information, or if a sale date has already been set, then then you can ask the listing agent for the overbid information.

Can I get a loan for a Bankruptcy home?

Absolutely yes. The only time where you would not be able to get a loan is if the property is not habitable, otherwise, you have plenty of time to close the loan, and you get an appraisal and loan contingency. Some buyers ask if the courts favor cash over financed offers. While the answer is yes they favor cash many financed offer buyers are the winning bankruptcy bidder. Some conventional financed buyers will bid higher than cash offers in the initial round to entice the trustee to take their offers as the accepted offer. 

How long does buying a Bankruptcy take?

Bankruptcy real estate sales are slower than regular sales because you need the courts approval at various steps. They are not that much slower. While a normal escrow is 30 to 45 days, bankruptcies are usually 60 days or so. Once an offer has been accepted – a request for a Sale Hearing is made and it usually takes about 30 to 40 days to get that hearing. After the hearing – escrow closes in the next 15 days.

Are Bankruptcy Sales Safe?

Bankruptcy Sales are very safe. As a buyer, you are allowed to have inspections and the bankruptcy court will usually deliver title with a quitclaim deed instead of the normal grant deed, but the court order will extinguish any debts and title insurance will guarantee free and clear title. See Bankruptcy Code Section 363(f)

Differences Between a Bankruptcy Sale and a Standard Sale:

To write an offer for a house in Bankruptcy, there is no special offer form- you can write the offer on a Residential Purchase Agreement just like normal. Here are some sale terms that differ from a standard sale for a Bankruptcy Home sale:

As is sale terms means don’t expect the seller to fix anything. The seller is a court-appointed Bankruptcy trustee. In order for them to make any repairs they would need to get the court’s permission first and they are not going to do that. Even though it is AS-IS sale terms – you can still make a request for repairs if you find an undisclosed material defect. The fact that bankruptcy listings allow buyers to do inspections can make them less intimidating than probate sales.

The seller will push onto the buyer some things that sellers usually pay for like Termite Section 1, State Required retrofit, transfer taxes, they do not give home warranties. Since the seller is a court-appointed trustee who does not own and never lived in the property they are exempt from making some seller disclosures such as the TDS and SPQ. They will still provide a preliminary title report and Natural Hazard Disclosure. Like all distressed sales, it is buyer beware, and make sure to thoroughly check everything out for yourself. 

How Bankruptcy Overbidding Works

All Bankruptcy sales go to overbid.  

Bankruptcy Buyers often ask what is overbid. Bankruptcy is a court-supervised process and to get the courts permission to discharge the debts and sell there is a hearing (the “Sale Hearing”). Before the hearing date, the overbid rules may be released. There is no industry convention for the overbid rules. Each Bankruptcy judge makes their own rules.  

Making a Bankruptcy Overbid

If you are the accepted offer, you have already opened escrow and sent the earnest money deposit in – so you don’t need to bring any money to the Sale Hearing.

If you do not have the accepted offer then you will need a cashier check of  3% of the overbid made payable to the Bankruptcy Trustee or the escrow company depending on the overbid instructions.

With Covid-19 currently the courts have been having virtual hearings for overbids.

The judge preciding over the hearing will set the opening bid and bidding increments. Many times no one will show up to the Court Confirmation Hearing and the accepted offer will get the property. If you are the accepted offer, always go to the court hearing. If someone comes to the overbid hearing, it gives you a chance to bid, and its a very important hearing for you to go to for you to secure the property.

In Los Angeles, there are two places to go for a bankruptcy hearing:

San Fernando Valley Bankruptcy Court
Central District of California
21041 Burbank Boulevard
Woodland Hills, CA 91367

Los Angeles Bankruptcy Court
Central District of California
Edward R. Roybal Federal Building and U.S. Courthouse
255 East Temple Street
Los Angeles, CA 90012

You will need to know the court date, time, and room number.

What if I am the accepted offer and I get overbid?

Getting the accepted offer just to lose the overbid can be a real downer. If you have already done inspections and an appraisal you are out money. Sometimes the court will give the accepted offer money back. 

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