BUYING FORECLOSURES - UNDERSTANDING DUE DILIGENCE !! !! !!

Wow! I just bought at a foreclosure sale and got a $400,000 house for $50,000!!!  We actually had TWO calls like this in the past week. Too good to be true? Listen and Learn of the heartache to come....

I have written about issue this twice this summer and every time another buyer comes in moaning that they were "duped" into buying at an inferior foreclosure auction my heart goes out to them.  For explanations of the lien priority see ASSOCIATION LIENS AND MORTGAGE PRIORITY and ASSOCIATION FORECLOSURES - FRAUDULENT NON-DISCLOSURE. 

The most common complaint is that the buyer was misinformed because of non-disclosure.  This all comes down to issues about "due diligence" and a lack of understanding and appreciation as to what "due diligence" is all about.

In the two instances I refer to, the first was the typical "to good to be true" scenario.  First mortgage filed for foreclosure but canceled its sale date in August.  Frustrated by the delay, the Association decided to move forward with its lien foreclosure and got to a foreclosure sale date prior to the lender getting to their sale date.  Our client purchased at the first to occur sale date and learned that in just six weeks the lender sale will be occurring, wiping out his deed!  The right due diligence would have tracked BOTH lawsuits so that the existence of the first mortgage lawsuit (for $500,000) will wipe out any sale benefit from bidding on the Association foreclosure auction (judgment of $15,000).  As it is the buyer got the short term ownership for $50,000.  This is essentially lost money unless we are successful in negotiating incentives for the Association to vacate sale - but we also need a sympathetic judge to agree to the deal.

The second event was much more complicated.  Owner got a first mortgage of $400,000 and a second mortgage of $50,000.  They then refinanced the first mortgage and should have gotten a subordination of the second mortgage - but there is none of record.  That means that the second mortgage became the first mortgage and the refinance which we would assume would be a first mortgage is actually by law, the second mortgage.  So the buyer bid on the foreclosure of the supposedly large first mortgage and now 3 years later the smaller mortgage is foreclosing. Here there may be an opportunity to invoke the concept of "equitable subrogation" which would put the refinance in the same position as the mortgage it paid off.  Then the owner can "re-foreclose" the smaller mortgage now properly relegated to 2nd position and eliminate its priority and lien on the property.

The bottom line is these buyers by failing to do proper due diligence have cost themselves tens of thousands of dollars in legal fees to try to save their investments and in the second case, to save their home.

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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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