Be Careful with IRS Foreclosure Sales

Some of you purchase properties for your own investment portfolios.  Others  act as agents for investors.  Either way, you will likely come across foreclosed properties.  Traditionally, such properties were viewed as potentially good deals.

More often than you might think, however, the former owner of the property remains in possession of the property, even after it is foreclosed upon.  If the new owner gained possession of the property by foreclosing on a Deed of Trust, or at a sale in Lieu of Foreclosure on a real estate contract, the remedy is to evict the former owner.

But what happens when you buy at a Federal Income Tax Foreclosure Sale, and the former owner still remains in place?  Can you evict them?

Our Court of Appeals has just said NO.  In the case of Puget Sound Investment Group, inc., v. Bridges, 92 Wn. App. 523 (1998), the Court said the purchaser of the property at an IRS Foreclosure Sale cannot evict the former owner because our Legislature has not specifically authorized this action.  And when the investors tried to use the current language of the Unlawful Detainer (eviction) statute, the Court was not sympathetic.  The Court instead shot down one theory by saying the investors had failed to raise it prior to appeal.  It shot down the remaining theory by saying the investors would have to show title superior to the former owners, if the investors truly wanted to proceed under that prong of the eviction statute.  Establishing superior title can be a costly, time-consuming process, which involves an entirely separate legal proceeding.

In short, the Court has effectively made it very difficult for a purchaser of property at an IRS Foreclosure proceeding to evict the former owners.  Consequently, you will want to approach purchasing property at such sales very carefully.  If your investigation shows the owner is still in possession at the time of the foreclosure sale, you may want to avoid purchasing that property, or be prepared for the time and expense of a lengthy eviction process.

My sense is that the Washington State Supreme Court, or our Legislature, will address this issue further.  In any event, approach the situation with extra caution, and make sure you know what the latest rules are prior to making a purchasing decision.

Published January, 1999

This article contains information of general interest, and is not intended to be, nor should it be relied upon as a substitute for specific legal advice.