A foreclosure surge is coming. The recession, unemployment, continuing pandemic crisis, and end of government foreclosure moratoriums and lender forbearance plans will lead to the next housing crisis.
During the previous foreclosure wave, most homes were “upside down,” as values sank below the mortgage debt and created a short sale market. This time, foreclosure properties will have more equity. Distressed homeowners unable to pay the mortgage are motivated to save that equity by selling before it evaporates at a court auction.
Investors should prepare for this win-win buying opportunity. When seeking to purchase properties out of foreclosure, buyers who understand the legal process will have an edge on the competition. This article is an overview of the judicial foreclosure system in Florida and how investors can use this knowledge to their advantage.
This discussion is more relevant to buying directly from the distressed homeowner rather than bidding at a court sale. The court sale buyer only needs to be certain that the lien being foreclosed is in first position. Many inexperienced investors have learned hard lessons and paid a steep tuition for bidding on a second mortgage or HOA foreclosure, unaware of a superior lien, usually a first mortgage, remaining intact and entitled to payment. Avoiding such pitfalls is a subject for another article.
The advantage of a court sale is that it extinguishes all legal claims inferior to the foreclosing lender’s lien, resulting in the winning bidder receiving clear title without paying them off. One notable exception is potential liability for outstanding HOA debt. The disadvantages to the court sale are excessive competition from other bidders, especially with virtual auctions, and the requirement to pay cash and deposit funds immediately with the clerk of court.
Buying directly from a homeowner is a better opportunity for most investors, especially those without large cash reserves to spend. The private sale buyer may secure institutional or private, hard money financing. More advanced investors can also reinstate the mortgage arrears and take over the payments in a “subject-to mortgage” deal. At a private sale, other liens and clouds on the title, including junior mortgages and judgments, must be paid off, unlike the court auction process.
For a private foreclosure purchase, the first thing to know is the stage of the court case. The case record is available through each Florida county’s clerk of court website. Investors should learn to understand the online court docket for valuable information.
The destination of every foreclosure is a court sale, unless diverted by an intervening force, such as a lender payoff. As such, it’s critical to understand the stage of the case and distance to the finish line.
The first milestone is when the homeowner is served with court papers, known as the summons and complaint. Once served, they have twenty days to answer in writing. If they fail to respond, the court may enter a default order causing them to lose the case without defending it.
Most borrowers without an attorney won’t respond. They should know, however, that filing any response to the complaint, even a hand-written letter, will avoid default, create a speed bump, and give them a better fighting chance to sell the home.
Because buying the home is a race against the court sale, working with homeowners actively defending and delaying the case will improve the odds for a win-win result for the buyer and seller. No ethical foreclosure defense attorney should raise defenses or file papers only for delay purposes. Fortunately, borrowers have legal rights to exercise and legitimate defenses to raise. They may also make the plaintiff produce evidence and answer questions under oath, known as discovery. These proper actions create the byproduct of delaying the case to help sell the home.
Most cases work their way through stages until decided at a hearing on the lender’s motion for final judgment, or a judge trial. The judge almost always rules in the lender’s favor and sets a court sale date, usually about thirty days following the hearing or trial.
If the case is approaching a scheduled court sale, the owner will have peak selling motivation, growing each day closer to sale. The corresponding challenge is that there may not be enough time to complete the closing.
Court sales may be cancelled by various means, but the only legally guaranteed stop comes from the owner filing bankruptcy. Investors should avoid giving legal advice and steer clear of getting involved in their bankruptcy process. I’ve seen federal criminal prosecutions against investors for fraud and abuse of the court system involving bad faith bankruptcies filed for homeowners solely to stop a court sale. Investors should only suggest the homeowner seek legal counsel.
The court record helps a buyer identify other facts relevant to the deal. First among them is to identify the property’s title owner, which is described in the complaint. Every title owner must sign the purchase and sale agreement and deed transferring title to the buyer.
The title owner is usually also the borrower, but often not. The complaint describes all parties in the case and why they’re being sued as “defendants.” The investor should be certain they’re dealing with the legal title owner. If the title owner is an entity, such as an LLC or a trust, you need to know who is authorized to sign for the owner.
If the property is the primary residence of a married couple, it’s common for only one spouse to be the borrower owing the mortgage debt, but with the other as joint title-owner. Sometimes, a spouse lives in the marital home without being either a title-owner or borrower. Under Florida homestead law, that non-owner spouse needs to sign the deed to transfer clear title.
Another common issue involves deceased homeowners. Often, the reason the mortgage isn’t being paid is because someone died. There may be family members living in the property unable to pay. In these situations, the complaint will describe the decedent and their heirs (“the estate”) as parties to the case. These cases will usually require a separate probate action to be filed for the estate to get a court order authorizing the sale of the home.
Other essential information found in a complaint includes the existence of junior lien holders, who the plaintiff sues to extinguish their claims on the property. As discussed above, the private sale buyer has to pay them off to release those liens.
Fortunately, they are usually motivated to accept discounted payoffs to get something instead of nothing and avoid a court auction wiping out their liens. This process may take time, which reinforces the importance of knowing the stage of the litigation and defending the case to help win the race.
If you intend to take advantage of purchase opportunities from the next foreclosure surge, you should ensure you are prepared and understand all aspects of the process. If you have questions about the information in this article or need assistance with the legal issues related to buying a foreclosure property, please contact me.
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