Bargain foreclosed houses? Beware of pitfalls everywhere.
[2] Compiled from: Jufa, China Economic Net, The Beijing News
Nowadays, soaring housing prices deter many people. At this point, because judicial auction properties (i.e., “foreclosure properties”) offered by courts have a price advantage over ordinary commercial housing, some people turn their attention to foreclosure properties. However, some also say that although foreclosure properties may be cheaper to buy, they come with no shortage of troubles when one actually tries to live in them. So what hidden risks do foreclosure properties actually have? Are they worth buying?
Case review
A young man bought a foreclosed property as his marital home, but was delayed for over a year without transfer of ownership due to a "lease right."
Wang from Xinyi, Xuzhou, had been dating his girlfriend for many years, and for the past two years, he had been searching for a new home in the urban area of Xinyi to serve as their marital residence. In February of last year, he came across a foreclosure auction notice showing that a residential property in a certain community in the urban area of Xinyi would be listed for auction on March 21 of that year. Wang had previously visited the community where the property was located, and it perfectly matched his ideal living environment. The layout and floor indicated in the auction notice also met his family's needs. The foreclosure property was listed for auction by the Jiawang Court of Xuzhou, with a starting bid of 549,528 yuan, an appraised value of 981,300 yuan, a bidding period of one day, a bid increment of 2,000 yuan, and a deposit of 10,000 yuan. A total of 12 people registered for the auction, 87 people set reminders, and 5,484 people viewed it. The auction officially began at 10 a.m. on March 21. After more than 30 rounds of bidding, Wang ultimately won the auction with a bid of 801,528 yuan.
After Wang successfully won the auction, he paid the full purchase price and all related fees on schedule as required, and excitedly awaited notification to “collect the keys to the property.” The court soon called, not to inform him to proceed with the transfer procedures, but to notify him that there was an enforcement objection regarding the judicial auction property, and that the procedures could not be processed for the time being. During communications with the court’s enforcement bureau, Wang learned that an outside party had filed an enforcement objection on the grounds that a lease relationship existed over the judicial auction property. Under the principle of “sale does not break lease,” when the subject matter leased by a lessee is subject to court enforcement auction, the leasehold interest is not necessarily extinguished, and the lessee does not automatically have the right to file an enforcement objection lawsuit. Wang immediately raised doubts, pointing out that in the auction announcement for the judicial auction property, the lease relationship column clearly stated “none.” In response, the court replied that it had merely received a lawsuit filing an enforcement objection, and whether a lease relationship actually existed over the property required a court ruling; however, before the judgment was issued, enforcement against the subject matter could only be temporarily suspended.
On April 17, 2019, the court issued a ruling on enforcement, dismissing the objection request of the outsider to the case. Wang once again approached the court, preparing to complete the property procedures. This time, the court replied that the outsider to the enforcement had filed another lawsuit, seeking to suspend the enforcement of the subject matter property. On October 16, 2019, the court issued a judgment, again dismissing all claims of the outsider to the enforcement. However, Wang still did not receive a notice to complete the procedures. The court replied that the outsider to the enforcement had filed an appeal with the Xuzhou Intermediate People's Court.
This year-long wait has caused significant changes in Wang's life. His hometown house has been demolished, and his parents and he are now renting a place to live. Because he has been unable to move into the wedding house, his relationship with his girlfriend has hit a rough patch. Now, Wang has given up his job, traveling back and forth between Xinyi and Jiawang, just hoping for news that will allow him to move into the foreclosed property smoothly.
What is a foreclosed property?
A foreclosed property is short for a judicial auction property, referring to real estate subject to court enforcement. When a debtor is unable to fulfill a mortgage contract or repay debts, the creditor applies to the court for enforcement through various judicial procedures, auctioning the debtor's property to satisfy the debt with the proceeds.
What problems can arise with foreclosed properties?
In reality, foreclosure properties often come with numerous pitfalls. As the above case illustrates, because laws such as the Contract Law provide that “ownership transfer does not affect an existing lease,” many foreclosure properties, even after being successfully bid on, still face the issue of existing lease rights attached to the property. Moreover, sham litigation concerning lease relationships on foreclosure properties occurs from time to time.
Additionally, foreclosure properties may come with other issues. For example, there may be outstanding property management fees, land use fees, utility bills, and various late payment penalties. If bidders fail to investigate thoroughly, some of these costs may need to be borne by the buyer. As a result, a foreclosure property purchased by a bidder may turn out to be “not such a bargain.” Moreover, if the winning bidder breaches the contract, the deposit paid may be forfeited or even lost entirely. Furthermore, some “foreclosure properties” may involve issues such as the original owner having complicated social relationships, occupants refusing to move out, or the original owner fraudulently selling the same property to two different buyers. With respect to such disputes, some courts do not assume liability, and the buyer is required to file a separate lawsuit to resolve them.
[1] The author's perspective
In my opinion, regardless of whether it is a foreclosed property, buyers should thoroughly understand the property before purchasing. Regarding foreclosed properties, I have summarized the following four points for reference:
First, whether there is a lease relationship on the auctioned property.In particular, Chinese law provides for the principle that "sale does not break lease," meaning that if ownership of the leased property changes during the lease term, the validity of the lease contract is not affected. Therefore, if the auction announcement clearly states that a lease relationship exists and the bidder still participates in the bidding, the bidder is deemed to have understood this situation and accepted the risks arising from it. In general, the court is not responsible for subsequent coordination or resolution. Bidders must first understand the circumstances of the lessee and the performance of the lease contract to avoid harm to their own rights and interests.
On the other hand, according to Article 230 of the Contract Law, "where the lessor intends to sell the leased house, it shall notify the lessee within a reasonable period prior to the sale, and the lessee shall have the right of first refusal to purchase under equivalent conditions." In other words, the lessee also enjoys a right of first refusal, and when bidding at the same price, the lessee shall prevail.
Second, inspect the property in person to see if anyone is living there, and find out in advance whether it needs to be vacated.Before purchasing a property, it is absolutely necessary to apply for an in-person inspection. This allows you to directly see the current condition of the property and its surroundings, and also to determine whether anyone is living there, whether the occupants are tenants, the person subject to enforcement, or others, whether the property needs to be vacated, and whether the court will assist in vacating it, so you can be well-informed. This prevents the situation where you cannot move in after the transfer of ownership. If the occupant is a tenant, you can find out in advance the length of their remaining lease term and whether they are willing to move out.
Third, understand the local purchase restriction policies and the property's ownership status.Purchase restriction policies vary from city to city. It is advisable to familiarize yourself with the local purchase restriction policies in advance, assess your own qualifications, and confirm whether you are eligible to purchase before bidding, so as to avoid potential losses. In addition, some properties have unclear ownership, no title, are small property rights housing, or have co-owned titles, all of which may result in the risk of being unable to transfer the title after a successful bid. Given the high value of real estate, if a successful bid cannot be transferred due to your own reasons, you may also face the risk of a substantial deposit being forfeited. In practice, to circumvent purchase restriction policies, many people take the risk of “buying property under another person’s name,” a practice that is widespread. Buying property under another person’s name carries risks, and it is best to address them in advance to avoid ending up with “both the property and the money lost.”
Fourth, the issue of tax payment.When purchasing a foreclosure property, it is essential to understand the local tax policies in advance, as well as the allocation of fees specified in the auction announcement, to avoid issues such as “encountering high taxes and fees” due to information asymmetry. Additionally, it is important to clearly understand the nature of the property and land. If the land is state-allocated, a substantial land transfer fee must be paid upon secondary transaction.
