Bidding at the Courthouse Steps

Winter Park Home, Volume 7/ Issue 4, 2009

Due to the number of active foreclosures in today’s marketplace, I frequently receive calls from individuals looking to get a “deal” at the courthouse steps. The callers are asking for advice on how to determine the various pitfalls that can occur when bidding for a property.

I always recommend that the client have our office obtain a complete title search on the property to confirm that there are no problems in the back chain of title, and to provide a review of the foreclosure file. I determine whether all necessary parties to the suit have been named and properly served, and whether there are any superior mortgages or liens that would not be eliminated by the foreclosure. In addition, I also explain that being the successful bidder at a foreclosure sale does not guarantee the bidder has clear title to the property. For that reason, I always recommend that the client obtain a title insurance policy to ensure that he or she is acquiring title to the property free of any significant issues.

The bidder first needs to be certain that there are no issues that predate the recording of the mortgage that is being foreclosed. For example: In 1980, John X and Mary Y purchased property as joint tenants with right of survivorship. Mary Y sold the property to Phil Byer in 1994, and signed an affidavit that John X died in a motorcycle accident in California, without producing an actual death certificate. Phil Byer then executes a mortgage in favor of a Lender. In 2009, the Lender forecloses on the mortgage, and Jack Jones is the successful bidder at the foreclosure sale. Every interest subsequent to the recording of the original mortgage is properly foreclosed. Jack Jones goes to sell the property, and then John X shows up and declares that he is the rightful owner of a one-half interest in the property. Obviously if Jack Jones had obtained title insurance when he bought the property, he would have recourse under his title insurance policy. Now, it is too late - Jack will have to deal with the fact that he only owns a half interest in the property.

There are many examples of defective foreclosures, the consequences of which could have been avoided if the prospective bidder had obtained the necessary title work and foreclosure analysis in advance. Even if the foreclosure is done correctly, there may also be hidden expenses that a bidder at a foreclosure sale can incur. For example, real property taxes are never eliminated by foreclosure. And many city and county code enforcement liens have the same rights of priority as property tax liens, and are not eliminated by foreclosure.

A prospective bidder also needs to be aware of the rights of homeowners associations (HOAs) and condominium owners associations (COAs) in relation to platted land and condominium developed land. The consequences of not knowing the status of outstanding association dues, which may not be apparent from a review of the foreclosure file or from the title search, can be financially significant.

A purchaser of a lot in a platted subdivision in which there is an HOA is liable for all prior unpaid assessments up to the time of purchase, unless paid for by the seller. If Jack Jones in the example above is the successful bidder and the prior owner has not paid dues for the last five (5) years, then Jack Jones will be automatically responsible for all outstanding HOA dues. This is true even if the Lender named the HOA in the foreclosure action. If the amount of outstanding dues is significant, Jack might be better off not bidding at the sale. He could then attempt to purchase the property from the Lender, who under a standard purchase contract would pay all outstanding dues up to the time of closing.

There is one scenario in which Florida law does limit the amount that the association may recover in a foreclosure action. This occurs only if the foreclosing Lender holds a first mortgage, the Lender joins the HOA in the foreclosure action, and the Lender purchases the property at the foreclosure sale. In this one scenario only, the maximum amount of HOA dues that will be owed is the lesser of one percent of the original mortgage debt, OR the amount of the HOA dues that became due and are outstanding 12 months prior to the issuance of the Certificate of Title. Only the first mortgage holder gets the benefit of this reduction– any other purchaser at the foreclosure sale will be responsible for paying all outstanding HOA dues.

The condominium statutes are similar to the HOA provisions, except that the first mortgage holder/bidder that names the association will be responsible for the lesser of 6 months of outstanding dues obligations prior to the issuance of the Certificate of Title (vs. 12 months for the HOA), or one percent of the original mortgage debt.

In addition to the pitfalls listed in this article, there are numerous other traps which could surprise the unprepared bidder at a foreclosure sale. Prospective bidders at a foreclosure sale should always consult with an attorney to obtain a title insurance commitment and an analysis of the foreclosure action before completing a “purchase” of real property at the courthouse steps.

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Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank has been involved in the Central Florida community for more than twenty-five years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M.) from New York University School of Law in 1980. Frank is a member of The Florida Bar, the California Bar, and the District of Columbia Court of Appeals. He is also admitted to the U.S. Supreme Court. He has served on the Orange County Bar Association Real Estate Committee and is a member of the The Florida Bar’s Real Property and Corporation and Business Law Section. He has also served on the Florida Bar Grievance Committee.