FORECLOSURES ON MAUI: MY EXPERIENCE
Buying a foreclosure on Maui is not for the faint of heart. Its time consuming and risky. It only takes seconds for it all to fall apart even after months of planning. But with planning and lots due diligence, you could snag a really good property for a great price!
How to you find a foreclosure? The foreclosure process starts when the plaintiff (the lender) files a Suit to Foreclose. The Pacific Business News will publish a list of these suits every few weeks. Once that process has been completed, a commissioner is assigned. The commissioner publishes a Notice of Foreclosure in the Maui News. The Notice contains basic property identification info as well as open house dates, if any, and an auction date.
This Notice is what starts the process for me, even before the first open house. If I see a property that fits what I am looking for, I will look it up on mauipropertytax.com. Here I can find out more information about the property like previous sales, building permits, assessed value and property tax delinquencies. I can click on “view map” and see where it sits in relationship to its neighbors and nearby roads. If it’s too close to a busy road, I am far less interested. If I click on Google Earth or Pictometry, I can see an aerial view including neighbors, power lines and other things that help me get a better idea of the property – both its potential and its challenges. Then I will search the MLS to see if the property has been listed before. If it has, I look at the sale prices, dates and photos. The MLS will also show comparable sales in the neighborhood so I can get an idea of what the property might be worth if it were in a similar condition as those that sold. I also do at least one drive-by and check out the neighborhood.
All of this helps me to have an idea of the amount I might bid. When I go to the open house, my goal is to mentally calculate how much it would take to bring the property into salable or livable condition. Remember, it isn’t fun unless you make money on the future sale. It is also important to note if there are tenants on the property. Evicting a tenant with a lease can be complicated.
Let’s talk about money. If you are fortunate enough to have the cash to close and to improve the property that is HANDS DOWN the easiest way to go. Financing of the property may be possible but if you end up with the property and can’t close within the short window the law requires, you will most likely lose your 10% deposit. If the property fits what I want and I have the cash, what’s next?
The auction will literally be held on the courthouse steps. The commissioner will ask everyone present if they intend to bid. If they do, they will ask to see your cashier(s) checks in the amount of 10% of your planned bid. I suggest you have a larger check and a few smaller checks so that you don’t have to tie up any more of your cash than is needed. Have the cashier’s checks made out to you so that if you don’t use them, you can just redeposit them. If you have them written to an escrow company, you will need talk to your bank about cancelling the checks and that is a pain.
Commissioners will generally announce the opening bid from the lender. If the bank bids higher than what anyone else will bid, that is the END and all the bidders go home empty handed. If they bid less than what you are willing to pay, the bidding starts.
Remember that the Auction is just the first step in the process. I have bid at the auction before and was the high bidder, but then realized that it really didn’t mean I was going to get because the bidding can be re-opened at the Confirmation Hearing. It only meant my cash was tied up and I couldn’t chase any other properties because I needed to be prepared to close if no one outbid me at the Confirmation Hearing. This is the worst part of the foreclosure process. So many things can go wrong during this time but you are the one with your cash on the line.
Some of the things that can go wrong during the time between the Auction are bankruptcy filing of the current owner or title and lien issues. This can place a “stay” on the proceeding. I spoke to someone at an auction once and he said his cash was tied up for 2 years! It is for this reason I generally avoid bidding at the Auction but will instead wait for the Confirmation Hearing. The downside is that you must bid at least 5% more than the winning bid in order to reopen the bidding.
If the winning bid is low enough and I am prepared to pay at least 5% more, I will make sure I get on the Commissioner’s list of people who want to be notified when the Confirmation Hearing gets scheduled. The date of the Confirmation Hearing is NOT published so you won’t know unless the Commissioner tells you. It can easily take 60 days after the auction for it to be scheduled.
The next step is the most important of all. You need to do some more homework. I suggest you get a title report (ask the title company you plan to use if you win the bid). The title report will show you what liens are currently against the property. You need to understand which liens will get paid out of the proceeds of the sale and which you may need to pay in ADDITION to your bid amount. Make sure you understand this as it can be a very painful surprise.
If you are bidding on a condo or a property that has an AOAO, you can pretty much bet that you will pay the maximum amount of unpaid AOAO dues allowed by law (I think its $ 7000) in addition to your bid. Another thing the title report will show is if there are easements or other conditions that will affect the value of the property. You may decide that an hour of an attorney’s time is worth it to review the title report. Spend more time fine tuning your estimates of value and improvement costs. If the property is vacant and the Commissioner allows it, you may be able to spend some time at the property.
The Confirmation Hearing will be held in a court room at the Courthouse in Wailuku. You may want to let the Commissioner know that you plan to re-open the bidding. The judge may ask the commissioner to take everyone who wants to bid out into the hallway. Once the bidding is finished, the losers go home and the winner and the Commissioner go back into the Courtroom.
Once the hearing is over, the lender has to prepare some paperwork to send to the judge. Then the Judge has to issue the Order of Confirmation. I would expect the lender will take about 30 days and the judge will take another two weeks. If you are the highest bidder at the Confirmation Hearing, the Commissioner MAY give you written authorization to “secure” the property from trespassers and the elements. I highly suggest you do this if you can. You can change locks, board up doors and windows, fix a leaky roof etc. It is still going to be about 2 months before you can actually close on the property.
Once the Order of Confirmation gets to escrow, you have 35 days to close on the property. On my last foreclosure, escrow required I wait 30 days to close because they said there was an appeal period. This left my window to close at 5 days! This is where trying to do this with financing can be very tricky! But if all goes well, you will be the new owner!
During the height of the Covid pandemic, foreclosures were pretty much on hold. They are just now starting to show up in the Maui News. The ones showing up now have been in the foreclosure process prior to March of 2020. Since it takes several years for most large lenders to foreclosure on a property, we may not see what the pandemic’s effect was on our Maui market for quite some time.
If you have an experience you would like to share or a comment to add, please do so. I would love to hear about it.