Forclosure And The Durrett Rule

It’s probably happened to you…

Folks learn that you know something about real estate investing and they eagerly ask you about buying foreclosure property.

The general assumption is that they can buy a beautiful home at a deep discount at a foreclosure auction.

Their smiles fade when you explain that they will have to pay cash on the spot and they must be able to research title to be sure they aren’t buying trouble.

But wait… there’s more… There is also a little something called the “Durrett Rule”.

Oh boy… can that be a like a knife in the back. For example: You spend the time and effort scouting out a nice home scheduled for foreclosure auction. You search title and scare up the cash to have in your pocket when you go to the sale.

Hurray… You have the winning bid at the foreclosure sale and buy the home at about a 40% discount to market value. After doing your happy dance you spend the next few weeks doing needed fix up. Then you find a renter and settle back to collect rents for the next few years.

But wait! Who’s that knocking on the door.

Why it’s a nice man who says he is taking the home away from you. Who is this pretentious devil? He is the dreaded… BANKRUPTCY TRUSTEE!

Shortly after the original homeowner lost his house he filed for bankruptcy. The wheels of the bankruptcy court grind slowly and the trustee just recently learned that the house had been sold at the auction.

And… The foreclosed upon owner had a nice hunk of equity in the home when he lost it. Uh oh.. get ready for this. It is trustee’s job to capture that equity so it can be distributed among the bankrupt home owner’s creditors.

Can he do that?

Yes! Under the power granted by The Durrett Rule the trustee can show you the door and claim the home in the name of the bankruptcy court.

You, see the bankruptcy court has more power than Edison Electric. It can do about anything it wants when it comes to assets and creditors.

Oh sure, months later, after a battle in the bankruptcy court, you should be able to recover the money you paid for the home. Of course… no interest is paid on the money for the time it is tied up in court and you will not be able to recover the attorney fees needed to get your money back.

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