By Benny L. Kass
Saturday, November 15, 2008

Q: A person I know has been trying unsuccessfully to sell his condominium. He bought it for $260,000 and owes about $180,000 on his mortgage. He told a close mutual friend that he plans to "walk away" from it. I would like to buy it -- maybe for $160,000. What is the best way to do this? Do I inform the mortgage holder (a bank) that I have an interest in it at a certain price?

A: It is a sad state of affairs when people want to walk away from their home. Everyone loses. The walker's credit rating goes down even more than it already has, and the lender has one more property to dispose of from its ever-growing portfolio.

There are several things you have to do. First, you should contact the current owner to make sure he is willing to sell his unit. Until the property is actually foreclosed upon, it can't be sold without his consent.

Next, you have to find out exactly how much the lender is owed, even though you think you know. Normally, because of privacy concerns, the lender will provide this information only if specifically authorized by the borrower, so you should get a letter of authorization signed by the condo owner.

You also have to determine whether the owner has any other debts that would "cloud his title." For example, is there a second deed of trust? Has the IRS filed a tax lien against the property? Have the real estate taxes been paid? Is he delinquent on his condo fees? Most of this information can be obtained through a title search. Consult a real estate lawyer as early as possible.

Once you get the payoff information, you have two choices. If you are willing to pay the amount the lender is owed, you should enter into a real estate sales contract with the condo owner and arrange for settlement. Your contract must contain language that it is contingent upon the seller being able to convey free and clear title to you and that there are no other liens or encumbrances other than the first deed of trust.

You do not need the lender's approval if you plan to pay the outstanding loan in full. However, you have indicated that you would like to buy the condo for about $20,000 less than you think the seller owes the bank. To do so, you will need the lender's approval.

This is what is known as a "short sale." You will enter into a real estate contract with the seller, which is contingent upon the bank approving the sale. If there is a real estate agent involved, make sure the contract spells out the amount of the commission and who pays it.

Once you have a signed contract, it must be sent to the current lender with a letter requesting approval. Because lenders are swamped with short-sale requests and foreclosures, it could take a long time before you get a response.

I suspect that the lender will ultimately approve, especially if it's understood that the alternative is foreclosure. There are two main reasons why legitimate lenders do not want to foreclose on residential properties. First, in today's economy, they may end up owning the property. They would be stuck with having to pay the real estate taxes and the condo fees. In some places, including the District, if the condo owner is behind on his condo fees, the lender is legally obligated to pay up to six months of any delinquencies.

Second, at all levels of government, lenders are being told that they must work with their borrowers rather than take legal action against them.

Because you are considering buying into a condominium, you are entitled to receive what is known as a "resale package" from the association. This will include the current legal documents (declaration, bylaws and rules and regulations), as well as the current operating budget for the association and the most recent auditor's report.

Read these documents carefully. Make sure the condominium has adequate financial reserves, especially if it is an older building. Also ask the association's property manager about the level of delinquencies. If there are too many owners who are not paying their condo fees, you do not want to buy into this association.

One final thought. Ask yourself this question: "If this is such a good deal, why isn't someone else interested? Why is it coming my way?"

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed, stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site, http://www.kmklawyers.com.