Homeowner, Condominium and Property Owner Associations have become much more active in proceeding to foreclosure sales on unpaid assessments than in years past. The reason is the fierce competition for first mortgage foreclosures caused by the quantity of buyers and the relentless bidding by large real estate acquisition funds. This has forced smaller - usually individual want-to-be foreclosure buyers to the smaller stakes association foreclosure segment of foreclosures. The risk is typically only a few thousand to $50,000 and the rewards often look like 20 to 200 times the investment.
Many of these investors are self-taught or have "learned" by buying seminars and guidebooks on how to buy foreclosures. They look at the foreclosure process as something where the filed documents are supposed to "protect" the potential buyer at the foreclosure sale. So when an unexpected lien pops up they feel there was "fraudulent non-disclosure" by the plaintiff Association.
Typical is the knowledge imparted by the teachers that you need to do your homework. This means title searches. Unfortunately many of these investors think they can do the title search themselves, or that a careful review of the litigation itself - the court docket or the complaint or the lis pendens - will reveal all they need to know before bidding on the property.
BIG MISTAKE! UNDERSTAND THE FORECLOSURE PROCESS -
The most common statement from an investor that already bought a property is that this newly discovered mortgage was not disclosed in the complaint, and isn't that non-disclosure a fraud on those bidding at the foreclosure sale?
I have written extensively on the foreclosure process in the past. See: A LAWYERS EXPLANATION OF THE FORECLOSURE PROCESS.
In particular, an understanding of WHAT liens can be foreclosed is most important. In a foreclosure lawsuit you have a lien that establishes the right to file the foreclosure. The lien has a priority amongst other people or companies that have a lien on the property. In a first mortgage foreclosure action all other mortgages are inferior and thus have to be named as defendants in the foreclosure action.
But an association lien is almost always junior to a first mortgage lien and sometimes junior to 2nd mortgage liens as well. In such cases only inferior liens are defendants named in the lawsuit - so the first mortgage is not named. Therefore any review of the lawusit would not reveal the first mortgage and therefore anyone buying the property at the foreclosure sale of the association lien would still have to pay the first mortgage to get free and clear title.
There are situations where there is a mortgage that is actually junior to an association lien. In such cases, typically 2nd mortgage cases and sometimes reverse mortgages, the association lien is senior to the 2nd mortgage. But often in those cases the foreclosing attorney does not name the 2nd mortgage as a defendant. This almost always is because that attorney is merely assuming that the mortgage is senior to the association lien. Just as common in those situations, the foreclosing attorney has not bothered to read the Declaration of Covenants of the association to see who is junior and who is senior to the association lien - they just assume all mortgages are senior. So now just looking at the named parties in the lawsuit is giving you additional wrong information. In these missed defendant cases some real money may be available in the deal but a "re foreclosure" will be necessary.
Buying an association foreclosure is technically challenging and although big profits are possible - a complete loss of your investment is also a very real possibility. For a more thorough understanding of this process, see my follow up article ASSOCIATION LIENS AND MORTGAGE PRIORITY
Copyright 2018 Richard P. Zaretsky
Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.
Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1615 FORUM PLACE, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ@ZARETSKYLAW.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide www.ZARETSKYLAW.com.
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