After being the winning bidder at an association foreclosure sale, one of my clients recently complained to me that Condominium or Homeowner Association foreclosures of liens are a fraud upon the public. There is some truth to the statement and understanding his anguish on his own loss of $50,000 by being the "successful" bidder on one of them underscores his reasoning.
The foreclosure process of an association lien for non-payment of association assessments, is a straight forward process. The property owner becomes delinquent, then the association places a lien on the property, and then the association files a foreclosure lawsuit that eventually forces a sale of the property through a public auction - the foreclosure sale.
Foreclosure process unique to association lien:
In the foreclosure process there is a very important difference between a foreclosure of a first mortgage and the foreclosure of an association lien. That difference is the naming of defendants in the association foreclosure as opposed to a first mortgage foreclosure.
A first mortgage foreclosure names all inferior lien positions that may affect the property. This includes 2nd and 3rd mortgages, the association itself, and anyone having a judgment or other lien, like the IRS or the state taxing authorities. At the end of the litigation, ALL of the defendants have their liens eliminated from the title of the property.
But in an association foreclosure, the names of all inferior lien positions that may affect the property are also named, except for any lien positions that may be superior to the association lien. The superior position is usually the first mortgage.
Is looking at the pleadings of the foreclosure enough?
If the potential buyer at an association foreclosure sale looks at the pleadings and the complaint filed in that case, no first mortgage will be shown. Unfortunately plenty of buyers at association foreclosure sales stop in their due diligence after review of the complaint and the foreclosure file. What they are not doing is to look at the current owner public records for any judgments or liens that may affect the property and any first mortgage that could be on the property.
Buyers either have to learn how to do a thorough title search or they need to pay a title company to do it for them, and if the latter, they need to know how to interpret the title report.
This subject can be even more complicated by the rules and regulations that may affect the association foreclosure buyer (or any foreclosure buyer) if the property is also governed by a mandatory club membership, which the foreclosure buyer may have to pay even though the property is resold and the buyer never lives in the property.
As for my client that lost the $50,000, he did his research, missed the fact that the foreclosure of the first mortgage was not completed prior to the foreclosure sale of the association lien, and then lost the property when the first mortgage foreclosure was completed.
The association foreclosure buyer must be aware of all of the downside risks - or they are likely to have made what they think is the buy of the century only to find out they lost their entire investment. It may be possible for an association buyer to negotiate with the first lender to a payoff of that loan, however if there is equity in the property and a foreclosure of the first mortgage would yield a complete recovery for the lender, a negotiated settlement is usually wishful thinking.
Copyright 2019 Richard P. Zaretsky, Esq
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., ZARETSKY LAW GROUP. 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. www.AUTOLANDTITLE.com
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