Buying A Home That's Been Recently Foreclosed? Title Insurance Rider Covering Appreciated Value May Help Protect In REO 'Crapshoot'

The New York Times columnist Ron Lieber writes:

• [A]ll of the sudden, the importance of title insurance is becoming crystal-clear. In recent weeks, big lenders like GMAC Mortgage, JPMorgan Chase and Bank of America have halted many or all of their foreclosure proceedings in the wake of allegations of sloppiness, shortcuts or worse. And a potential nightmare situation has emerged that has spooked not only homeowners but lawyers, title insurance companies and their investors.

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• While homeowners [...] may have title insurance, it generally covers them only for the purchase price of the home. When you buy a home out of foreclosure, however, it often needs a lot of work. “If I bought it at $200,000 and it’s a steal but I had to gut it and sink $100,000 more in, my recovery is limited if there is a problem,” said Matthew Weidner, a lawyer in St. Petersburg, Fla.

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• Still, for anyone considering buying a bargain home out of foreclosure anytime soon, consider asking your title insurer if any special riders are available that can cover appreciation on your home in the event of a total loss.(1) That said, if you can possibly help it, stay away from foreclosed homes until the scene shakes out a little bit.

• Some people will undoubtedly make a fortune investing in these properties in the next few months. But if your down payment represents most of what you have in the world, it’s hard to justify betting it all on a situation like this one.

For more, see After Foreclosure, a Focus on Title Insurance.

(1) Inasmuch as the "robosigner" racket has been going on for at least several years, I would extend this caution to the purchase of any property, bargain or not (even from private homeowners, investors, etc.), if it's been through the foreclosure process within the last five years (or possibly more). I don't know anyone buying real estate that doesn't expect some appreciation in their investment (By the way, would-be buyers should be on the look-out for those homeowners and investors who have bought bank-owned REOs in recent years that are now considering unloading them, given the recent publicity on potentially faulty foreclosures leading to potentially "crappy titles").