Housing Auctions: the real risks and pitfalls

The world of judicial real estate auctions attracts numerous investors and buyers because of the promising opportunities to acquire properties at reduced prices. While they appear to be an attractive option, it is essential that interested parties, whether they are professionals in the industry or casual buyers, go into this process with their eyes wide open. Beyond the allure of a "good deal," there are hidden risks that can turn a seemingly safe investment into a source of complications and unexpected expenses.

Beyond the attractive prospect of acquiring an asset at a lower cost, it is essential to understand the potential complications and liabilities that can arise. Considering that this is a very complex subject, even for an article where we want to show the tip of the iceberg, we wanted to divide this topic into 7 sections, each one focused on a type of risk, which we will develop in future articles.

Today we present these 7 risks, emphasizing the first of them. Let's get started!

The 7 most common risks when buying a property at public auction.

1. Ignorance of the real state of the property: It is possible that the information provided at the auction does not reflect the reality of the property. For example, an apartment that appears to be in perfect condition could have serious structural problems or require costly renovations that were not mentioned in the advertisement.
2. Surprise encumbrances: Beyond the obvious encumbrances, such as mortgages or debts with the community of owners, there are encumbrances that are not always reflected in the records. These "ghosts" can be materialized in previous debts, urbanistic sanctions or even restrictions to the use of the property.
3. The problem of hidden charges: Imagine buying a property only to discover that several years of municipal taxes or community fees are owed. These hidden charges can add a significant sum to the cost of the investment.
4. Third-party occupants: Nothing is more frustrating than purchasing a property and finding it occupied by tenants or even "squatters." Vacating can take time and money, as well as potential litigation.
5. Disputed property: Sometimes, the auctioned property did not rightfully belong to the supposed owner, which can lead to complicated legal proceedings and, in the worst case, to losing the acquired property.
6. Possible nullities: The possibility of having the auction or foreclosure process declared null and void can reverse the transaction, leaving the auctioneer without the property and facing recovery of his investment.
7. Stay of execution: Abusive clauses can stall post-auction foreclosure, indefinitely prolonging the delivery of the property and complicating the return of the investment.

The Importance of Physically Investigating the Property in Judicial Auctions: Risks and Consequences.

One of the biggest mistakes you can make is not to physically investigate the property before bidding. Here we explain why:

The property may not physically exist: Although it may sound surprising, there are cases where the real estate appears in the registry, but its physical existence is another story.

Example: Imagine bidding on what you think is a valuable parking space in a centrally located building. On the records, everything appears to be in order. However, when you go to the site, you discover that that parking space, registered years ago, was converted into a community storage room or machine room for the building. Your investment, in this case, would be a total failure.

Existing but uninhabitable dwellings: A property may appear in the registers as a fully functional dwelling, but the reality could be very different.

Example: A developer, in his eagerness to maximize profits, builds more homes than allowed by law. Although these dwellings have been registered, a judge may have ordered their sealing and denied their first occupancy license. Thus, what on paper looks like a ready-to-move-in home becomes a boarded-up structure, impossible to use and with a greatly diminished real value. *WARNING: in this case you have not only thrown away all the money invested but, in addition, it is possible that you have become the new owner and responsible for demolishing and returning that part of the land to its natural state.

Structural problems and construction defects: Without a physical inspection, it is impossible to know the real state of the property. You may be faced with serious infrastructure problems that require costly repairs.

Unregistered tenants or occupants: It is possible that a property is occupied illegally or that there are tenants with verbal contracts that do not appear in any official registry. Acquiring a property in this condition can lead to lengthy and costly legal proceedings to recover possession.

Mismatches in the description of the property: Sometimes, the description of the property in the registry does not match the reality. You may buy a piece of land thinking that it has permissions for a construction, and then find out that it is a protected area where you cannot build.

This is just a small introduction with examples of what you might find. The reality is much more complex and the risks are innumerable. Only experience and professional knowledge can really protect you in a public housing auction.

Delving into the Judicial Labyrinth

Entering the world of judicial auctions is, without a doubt, treading on complex ground. It requires a thorough knowledge of the law, a clear understanding of the processes and, above all, adequate preparation to face potential challenges. In this series of articles, we will not only identify the risks, but also provide detailed guidance on how to address them, based on case law and case studies.

Conclusion

While judicial auctions offer unique opportunities, they also come with their share of challenges. For those who are well informed and prepared, the benefits can be substantial. However, for the opportunistic and unsuspecting, the pitfalls can be costly. In our following articles, we will equip you with the knowledge and tools you need to learn a little more about this fascinating but intricate world of judicial auctions.