Things to Look for When Buying Foreclosed Properties: Foreclosure Title Defects

Foreclosure sales can be a great find.  The mortgage holder, usually a bank, doesn’t want to take the time to go through the normal property sale process. And they will commonly accepts less than the property’s face value.  However, with these cost savings come potential headaches.  Another lender, the original borrower, or even the government can make the process of removing foreclosure title defects difficult.  With the right preparation, many of these hidden foreclosure title defects can be erased relatively easily or avoided all together.  But, many buyers of foreclosure properties fail to take the precautions necessary to avoid many of these common problems. As a result, what was originally a great deal turns into a stressful situation.

Brief Overview of the Foreclosure Process

A foreclosure is a legal process. Essentially, a party that has filed a lien against a property attempts to recover the balance owed to the party. They do this by forcing the sale of the property.  After a foreclosure complaint has been filed, the owner has 20 days to respond to the foreclosure. They must show why the property should not be foreclosed on.

Typically, after a summary judgment hearing, the court will either:

• force the sale of the property; or
• the issue will proceed to trial.

Once a judgment of foreclosure is rendered, the Court orders a sale of the property. After all the lien holders are paid, any remaining funds from the sale go to the property owner.  Fla. Stat. 45.032.  The Florida Legislature expedited this process in 2013, but Florida still has one of the longest foreclosure timelines in the country.

Third Party Purchaser’s Rights

As the old adage goes, time is money.  To fully take advantage of a foreclosure sale, the buyer needs to make sure the title is clear. Also, they need to be sure there are no unknown defects to title.

First, it is imperative that anyone purchasing a foreclosure property makes sure they are not purchasing an interest which is subordinate to another lien.  A foreclosure sale eliminates the foreclosing lien and any inferior liens. But it does not eliminate a superior lien.

For example, let’s say a homeowner’s association initiates a foreclosure proceeding.  However, there is still an outstanding mortgage from a bank. In this case, the buyer of the property is buying an interest which is subordinate to the bank’s mortgage on the property.  The new homeowner would not be personally liable for the mortgage debt. Nonetheless, the bank would still have the ability to foreclose on the property.

Important Decisions To Be Made

Almost inevitably, the third party buyer will then be brought in as a party to the banks own foreclosure proceeding.  At that point, under Fla. Stat. § 45.0315 the buyer can either pay the remaining debt on the property to prevent the bank’s own foreclosure sale (called “Right of Redemption”), or sue to get their money back.  Pealer v. Wilmington Trust Nat’l Association, 212 So.3d 1137 (Fla. 2d DCA, 2017).  In Pealer, a person purchased a property from a foreclosure sale after a homeowner’s association foreclosed on the property.

However, the buyer purchased the property before a bank could file their own foreclosure complaint.  The bank then foreclosed on the property. As the Pealer case demonstrates, third party purchasers do not have a strong leg to stand on if their foreclosure sale is subordinate to another lien.  However, even if the purchased property does not have a superior mortgage, there are other less common and unexpected title defects that can arise when a third party seeks to purchase a foreclosed property.

Deceased Owners

Many foreclosures are the result of the owner dying before a lien is paid off.  Unless probate proceedings are initiated, the deceased’s estate is classified as an indispensable party.  Essentially, unless the decedent transferred his interest in the property before death, failure to include the decedent’s estate in the foreclosure proceeding can result in a dismissal of the action.   Parker v. Parker, LLC, 185 So. 3d 616 (Fla. 4th DCA, 2016).

Even if all the proper parties are listed in the lender’s foreclosure suit, the purchaser must still make sure the plaintiff lender has used the procedures set out in Fla. Stat. §§ 49.08, 49.071, and 49.021 to supply notice to any unknown heirs or spouses of the pending foreclosure action while also ensuring an Administrator Ad litem has been appointed.  The Administrator Ad Litem is there to represent the interests of the unnamed parties. Without one, the lender must start the foreclosure process over again before the purchaser can officially buy the property.

The foreclosing plaintiff’s failure to appoint an Administrator Ad Litem or follow the proper notice procedures are common mistakes that can drag out the foreclosure process and thus prolong a purchaser’s receipt of title for the property.  Also, this process of representing the interests of unnamed parties would further assist in any quiet title action to further eliminate anyone else’s claim to the property

Federal Liens

What if the IRS or other Federal agencies hold a lien or judgment against a borrower? Then the plaintiff lender must name the relevant government lien holder in the foreclosure action.  Similar to failing to name the decedent’s estate, failure to name a government agency that has a lien against the property render the action dismissible or subject to the lien encumbrance. However, different from the previously mentioned indispensable party, the federal agencies have a longer time to exercise its right to redemption.  For example, the Internal Revenue Service has 120 days from the time of the Certificate of Title issued to exercise its right to Redemption.  Some federal liens have redemption rights for up to a year.

If the property has any of these liens, title for any purchaser in a foreclosure action cannot be secure until these time periods have elapsed.  A public records search using the borrower’s name (or preferably social security number if available to avoid any overlap with similar names) should show any outstanding federal liens and allow a purchaser to dodge a major headache.

Local Government Liens

Up until 2013, local municipalities could pass ordinances making liens based on municipal code violations superior to mortgages, regardless of the order they were filed.  This was important because the relevant city could record a lien on a property AFTER the Lis Pendens (the official document notifying the public that there is a claim against a certain property) has been recorded, but BEFORE the purchaser received the Certificate of Title.  Prior to 2013, a property could have a large amount of fees accumulated for code violations without the purchaser’s knowledge. And because of the priority given to these liens under the local ordinances, the foreclosure action would be delayed until the city was paid.

City Liens De-Prioritized

Now, per the Florida Supreme Court, local ordinances cannot give city liens priority.  City of Palm Bay v. Wells Fargo, 114 So. 3d 924 (Fla. 2013).  In City of Palm Bay, the city enacted local ordinances which would give their code enforcement liens priority over previously recorded mortgages.  The Florida Supreme Court held that these ordinances were invalid because they conflicted with state law. Under City of Palm Bay, a city cannot give code enforcement liens a priority over mortgages as long as they were recorded before the liens.  Furthermore, a city can no longer bring any surprise liens after the foreclosure process had already begun.  Instead of paying the fees accumulated by the borrower, all a purchaser has to do is fix any code violations and the liens against the lender would not be enforceable against the property purchaser.

A buyer should ask themselves whether the code liens were recorded before or after the Lis Pendens was recorded. If prior, the code must have been named as a defendant in order to have their interest eliminated. If the code lien was recorded after the Lis Pendens, the purchaser must:

• bring the property into compliance; and
• obtain an affidavit of compliance from the governing entity before the lien becomes unenforceable.

Problems with the Borrower

Probably the most likely reason for a delay in a foreclosure sale are problems initiated by the borrower.  Prior to the purchaser receiving the Certification of Title, the borrower can make all sorts of objections to the foreclosure sale, or worse, appeal a procedural or substantive invalidation of a valid defense.  The appeals process, even if frivolous, can take time and money that could defeat the purpose of purchasing the property.

Until the sale is complete, the borrower can also use bankruptcy as a way to delay the foreclosure process.  If a borrower were to declare bankruptcy, an automatic stay occurs which can freeze lawsuits filed against a foreclosed upon property.  11 U.S. Code § 362.  Although the foreclosure process will likely conclude eventually, bankruptcy can delay the foreclosure process almost indefinitely.  Similar to a borrower appealing a court’s decision to overrule an objection to a foreclosure sale, bankruptcy gives the borrower the ability to interfere with a foreclosure sale.  Although the purchaser would likely win the fight, the delay and costs may make the fight not worth having.

While the deck may be slightly stacked against a third party purchaser, all is not lost.  For example, if the borrower filed bankruptcy AFTER the sale of the foreclosed upon property, the automatic stay would not affect the sale of the property.  But, if bankruptcy was properly filed before the sale of the property was completed, the purchaser would only be entitled to receiving whatever funds were given prior to the declaration of bankruptcy.  Regardless, a person interested in purchasing a foreclosed upon property would be wise to include the possibility of prolonged litigation while doing their cost/benefit analysis of whether to invest in the property.

The Best Way To Expedite The Process Is To Do Research

Before purchasing a foreclosed property, make sure you have the full chain of title in front of you.  A simple public records request will show the current liens on the property. Also, it can help you know if the lender properly brought in all relevant parties in the foreclosure action. A purchaser should always confirm they are buying a marketable title to alleviate any issues with superiority from other liens.

Pesky homeowners and condo association liens need to be dealt with. All should be accounted for in their safe-harbor payouts due upon foreclosure. Pursuant to Florida Statutes, a third party purchaser is jointly and severally liable with the prior owner for all past due assessments. However, should the Declaration of Covenants, Conditions and Restrictions of a Homeowner’s or Condominium Association provide that a purchaser of a property by virtue of a judicial sale is not liable for past due assessments, the governing documents of the Association control. This issue is one that seems to be in a grey area for the present time as there has been a lot of litigation on this subject in recent years.

Conclusions On Foreclosure Title Defects

Always check to see if there are any delinquent taxes on the property. That’s because as the new owner, you would be responsible for them.  Make sure that the proper borrowers are named defendants. And confirm any “unknown spouse” is served to eliminate their interest, due to Florida’s strict homestead protection laws. Lastly, contact the local utility company to find out if anything is owed. Utilities are unrecorded liens that survive foreclosures and can impair your title. After doing the relevant research and diligence, purchasers can make informed decisions based on proper cost/benefit analysis rather than hoping for the best. There is money to be made in buying foreclosures, but only if you do it the right way.

Florida’s foreclosure process is one of the longest in the country. Therefore, having knowledgeable legal counsel on your side who knows the ins and outs of the foreclosure process is invaluable.  Granted, preliminary research of the property can be done by the purchaser. However, the guidance of experienced legal counsel helps expedite the foreclosure purchasing process and ensure you receives clear title as soon as possible.  Foreclosed upon properties can be a great value and proper preparation can insure that your investment is not squandered.