The Real Estate and Business Blog

Q:  I purchased a Florida property at a foreclosure auction where the condominium association (not the lender) had foreclosed on its lien for monthly maintenance.  I am aware that that I purchased the property subject to the first mortgage, but am I responsible for paying the mortgage?  What about the condominium maintenance and property taxes?  Finally, am I able to rent the unit out to a tenant?

A: According to the scenario you describe, the mortgage lien is superior to your ownership interest and therefore you are responsible for paying off that lien if you want to keep the property.  Your responsibility, however, is limited to that ownership interest.  In other words, your failure to satisfy the mortgage by not making payments or paying it off entirely will not affect your credit (obviously – you did not sign the note) and the mortgage lender will not be able to pursue any deficiencies against you – but you will eventually lose your ownership interest in the property.

Property taxes, or ad valorem taxes, are very similar to mortgage liens in that your interest is inferior to any tax lien as well.  Your failure to pay property taxes will not render you liable for the tax bill in the future either except to the extent that you may lose your ownership interest.  Tax Certificates are sold and the purchaser can foreclosure on the property through a tax deed sale (similar to a mortgage foreclosure, but a lot easier and faster).

As the new property owner, you are liable for the condominium maintenance.  By failing to pay your maintenance, the condo association has the right to collect maintenance from you.  Although they rarely pursue personal money judgments, they can foreclosure on the property (isn’t this the way you ended up with the property in the first place?).  Also be aware that recent Florida legislation (effective as of July 1, 2010), condominium associations have the right to collect rent from tenants occupying units that are behind on monthly maintenance payments.  This is done through a simple and inexpensive process provided by this new law.  Arguably, they can even find a tenant and rent out your unit if it is empty.

Your right to collect (and keep) rental income, however, will greatly depend on the rights of the lender per the terms of the loan agreement.  Some mortgage agreements assign rental income to the lenders or allow them to place the property in receivership.  In order for the lender to exercise these rights, though, they must do so through the courts.  And they often do not.  Also bear in mind that, just as described above, the condominium association can always step in to collect the rent if the maintenance is not being paid.

As always, every situation is different.  It is highly recommended that anyone in a similar situation consult with an experienced real estate attorney to learn more about your legal rights and duties.

It's not yet time to relax.

Real Estate Agents must always remain in control of their real estate closings, beginning with the listing agreement and right on through to the closing.  Unfortunately, some Agents still believe that upon the signing of the Purchase and Sale Agreement, the only thing they need to do is sit back and wait for the commission check to arrive.  They couldn’t be more wrong.

Real Estate Agents who have been in the business for a while know that their work begins when the purchase and sale contract is signed.  If the following ten steps are taken, an Agent will find that the work that leads up to closing is much smoother and the chances of having issues preventing a successful sale are diminished considerably.

1.  Establishing the Effective Date.
If there is a fully executed contract and everyone has initialed every page and every handwritten change, an “effective date” of the contract can be determined.  When things are required to be done by the Buyer or Seller under the contract is first determined by the effective date.  Make sure both sides agree on the effective date and get out your date planner. It would be good practice to write a note to your clients outlining the dates.  It will help you remember all the important dates.  Be aware that every contract contains the phrase “Time is of the essence”, which means that ‘Almost’ only counts in horseshoes, hand grenades and nuclear war.  If you miss the date you’ve breached the contract.  Stick to the dates!

2.  The Mortgage Application.
The first deadline is usually the mortgage application.  Make sure the Buyer does it within the timeframe specified, usually five (5) days.  Ensure that the Buyer has documentation verifying the date of the application.

3.  Additional Deposits.
Sometimes, contracts call for additional deposits to be made.  I hate to play lawyer (that’s not true) but failure to meet this date, or any other date, is a breach of contract!  Make sure you send or receive confirmation in writing.  Escrow letters should be made part of your file – ask for them.

4.  Title Documentation.
Get the title information (prior title policy) to the closing agent (me, I hope) or confirm that the Seller has none to give.  This should have been done upon listing the property.

5.  Existing Mortgage Payoff Information.
Get the mortgage payoff information (company, loan number and telephone number) to the closing agent so that the payoff can be requested early on.  It also doesn’t hurt to get a written authorization from the Seller (lenders sometimes require one before providing this information).

6. Condominium or Homeowner Associations.
If it is a condominium or homeowner association, obtain the necessary payoff information.  The association documents hopefully have been delivered to the Buyer, triggering the rescission period time clock.  If it is a condo, start the approval process immediately.

7.  Home Inspections, Municipal Code Violations and Buyer’s Right to Cancel.
Make sure inspections are done and the written reports delivered to the Buyer.  If the Buyer disapproves of the report, make sure a report is delivered to the Seller if the contract calls for it, and send notice of intent to cancel within the contract deadline.  Recommend to the Buyer that a municipal lien search (also referred to as “lien letters”) be obtained through the closing agent early on.  Some contracts require that municipal issues, such as code enforcement violations or citations and open permits, be raised and objected to during the inspection period, otherwise they are waived.

8.  Homeowner’s Insurance.
Make sure the Buyer has selected an insurance agent to obtain Hazard Insurance.  Insurance agents must take pictures of the property, which takes some time.  Even if it is a condo (where a homeowner’s policy is not necessary), suggest that the buyer obtain contents/liability insurance anyway.

9.  Boundary Survey.
Although the title agent orders the survey, don’t assume that it will automatically happen.  When the  Buyer is purchasing the property without financing (i.e., an all-cash deal), title agents often assume that the buyer does not want to obtain a survey or simply neglect to obtain one.  This is can turn out to be a terrible mistake for the Buyer.  There’s a reason why lenders demand that a survey be obtained: an encroachment can affect the use of the property, the value of the property and can affect the owner’s ability to later obtain financing.  It can also lead to litigation.  Worse yet, it can lead to a very upset client.  Make certain that the Buyer is aware of the importance of obtaining a survey.  If a survey will be performed, make the Sellers aware that a surveyor will come by to inspect the property boundary lines so that there are no confusion or delays.  Sometimes it may take some arranging to get the surveyor on the property, so make sure that the title agent doesn’t delay in ordering one.

10.  Following Up With Lender.
Follow up with the Lender to ensure that the Buyer has done everything required.  You want to make sure that the file gets submitted to underwriting!  If has not been submitted, something is incomplete and the Buyer may need some help.

Real Estate Agents should get to know an experienced Real Estate Attorney that is hands-on and should begin by asking other agents of known law firms that handle real estate closings.  By doing so, they may find that the deals close a bit easier and with less involvement on their part.  Getting an attorney title agent involved in the deal from the beginning, as opposed to just a title agent, will also allow title defects and other legal matters to be resolved quickly without resorting to a last minute search for an attorney to rescue the deal on an emergency basis!  After all, real estate attorneys do not charge any more for their closing services than title agents do.  And yet you get all the added benefits should the need arise.

Once the deal is closed, then you can start relaxing on your hammock.

It happens more often than not: a homeowner wanting to modify his home mortgage loan despite the many reasons not to.  The fact that  most find themselves owing more to the lender than the home is worth is lost among the few reasons they find to save it.  Due to the decline in market value, the single most crucial element of a mortgage loan modification is a principal reduction – yet it is rarely offered.  Despite this, the homeowner usually jumps at the chance to temporarily reduce his mortgage payment.  And temporary it is.

The initial interest rate provided under the HAMP program, as well as in-house modification programs, gradually rises after the modification is finalized until they reach a predetermined ceiling.  Every case is different, but for the most part, that initial interest rate of, say, 2½% simply won’t stay there for long.  Inevitably, the interest rate will continue to rise and that initial monthly payment will rise right along with it.  Albeit, the overall terms may end up being better than the original, but homeowners can not ignore the fact that they remain underwater (the loan amount far exceeding the current value of the home).  A short-term reduction in the monthly payment, without a substantial reduction in principal, will not provide enough of an economic benefit to offset the negative equity in the home.

A recent article in CNNMoney.com found that lenders have come to the realization that, just like with short sales, modifying a mortgage loan is a less costly option for them than going through the foreclosure process and taking title to the property.  The government’s HAMP guidelines, however, are not flexible – leaving many homeowners out in the cold.  Lenders, though, are now more amenable to approving in-house modifications where guidelines are less rigid and even allow for principal reductions (though don’t bank on a sizable reduction) which are not permitted under HAMP.  In fact, as CNNMoney.com reported, far more in-house modifications have been approved by lenders than those under the HAMP program.

“Banks are doing nearly twice as many modifications under their own foreclosure prevention initiatives than under the Obama administration’s signature Home Affordable Modification Program, known as HAMP.”  Surprise! Banks help more homeowners than Obama, CNNMoney.com, By Tami Luhby, August 30, 2010.

Data released months ago shows that lenders lose 20-30% less money when they approve a short sale as opposed to foreclosing on the property owner.  And 10-20% less money is lost when they modify a loan.  A short sale, though, is not always appealing to a homeowner that wants to stay in his or her home.  Owners are far more likely to choose the short sale option when it concerns second homes and investment properties (which, by the way, do not qualify for modifications under HAMP, no matter what cousin Ed tells you).  Unfortunately, everything learned in Economics 101 goes out the window when it comes to a principal residence.  This leaves a large number of homeowners wanting a loan modification even though they shouldn’t.

Because homeowners are not as rational when evaluating the investment aspect of primary residences, they seem to be less concerned about owing more to the bank than what the home is worth.  While most will acknowledge that they are underwater (indeed, sometimes more than twice the value is owed), they dread the loss of the home even more.

Ignoring the hard facts masks the most sensible option: a short sale.  With far smaller rental payments for homes equal in size – if not larger – and in the same neighborhood, homeowners are nonetheless compelled to save their current homes despite the cost.  The old mindset that everyone should  own their home is difficult to shake.  Since the homeowner does not have to face the music for a few years, they cling on to the hope that their financial situation will improve and quite possibly find that that their home’s value has increased enough to have made the saving of the home worthwhile.

The future is unpredictable, but the numbers do not lie.  Saving a home worth far less than what is owed, is not always the answer.  Unless there is equity in the home or some other compelling reason, the homeowner should seriously consider a short sale and forget about a temporary modification.

Rental property owners often find themselves in the unfortunate predicament of having to evict a tenant.  More often than not, they learn expensive lessons that could have been avoided in the first place.  Giving little value to a lawyer, they proceed to rent to tenants without the advantage of having one draft and review the lease and provide other valuable advice or, worse yet, try to evict a tenant by themselves.  By the time landlords are able to remove bad tenants, they often lose considerable time and months of rent plus the costs of the eviction.  Further, should the landlord want to pursue the tenant for the money owed, more money in legal fees must be spent.

While there are no fool-proof ways of avoiding bad tenants, certainly there are steps that can and should be taken to minimize the risk.  Below are some steps to take and things to consider when renting your property.

1.  Perform a credit and criminal background check on potential tenants.
Potential tenants will never tell you about their financial difficulties.  Nor will they tell you that they recently were evicted from another unit for failure to pay rent or any other reason (e.g., noisy or destructive pets, more occupants than they originally let on).  Criminal activity may also cause you trouble with the county or municipality, not to mention a homeowner’s association or neighbors.  Once a tenant moves in, it could take many months to remove them – so be sure there are no obvious red-flags by checking their financial and criminal background thoroughly. A search in your county’s public records or civil dockets may reveal whether or not evictions were previously filed against the tenant.  It is also a good idea to perform the same background checks on spouses and other occupants.  While this does not guarantee that you will be getting a good tenant, it will certainly avoid the bad ones that could have easily been detected.

2.  Start the eviction process early and swiftly.

Bad tenants always have, it seems, a good reason for not being able to make the payment on time.  In fact, there are books written that provide them with a slew of good reasons to give.  Tenants frequently assure landlords that payments will soon be made and landlords have a tendency to believe them, rarely questioning them.  Before long, bad tenants are several months behind and landlords are then forced to dip into their own savings to make mortgage payments due on the property.  Many times, landlords are hesitant to start eviction proceedings against tenants early on, hoping that they eventually pay and fearing that the posting of a demand notice for rent is too adversarial and may cause the situation to worsen.

3.  Allowing a tenant to fall too far behind in rent will inevitably result in an eviction.
Once the Tenant falls a few months behind, the financial burden of bringing the rent up to date is too burdensome and they often make the strategic decision not to pay at all.   When having financial difficulties, people naturally make the conscious decision to pay bills that will result in service interruptions if otherwise not paid.  In other words, the squeaky wheel gets the oil.  If the tenant can string the landlord along, but not other essential services, it is an easy decision for them to make.  And  before long, past-due rent becomes so high that it becomes almost impossible for the tenant to ever catch up.  Soon, the tenant decides to simply stay as long as the eviction process allows – all at the expense of the landlord.

4.  Use Properly Drafted Notices.
Each jurisdiction has its own notice requirements.  Thorough research must be conducted to determine whether or not your notice complies with your specific jurisdiction.   It is highly recommended that you hire a lawyer to draft your notice.  Our law firm, for example will draft the notice at no additional cost if we are hired to file the eviction.  If a deficient or improperly drafted notice is used, you might later find that the judge dismissed your eviction complaint even though the tenant did not respond to the eviction complaint (this is particularly common in Broward County).  Even if the judge does not unilaterally dismiss the case, should the tenant hire a lawyer, the eviction will easily be defended and the case dismissed when the notice is defective.  Also be aware that there are serial bad tenants – referred to as “professional tenants” – that know the law well and go from unit to unit anticipating an improperly filed notice or eviction and use it to their advantage.   Be very leery of forms found on the internet – there is an abundance of inaccurate forms and information on evictions.  For a complimentary FLORIDA Three-Day Notice click here.  Although this form is statutorily adequate in Florida, it may not comply with other state jurisdictions.  And calculating dates and rents due without the assistance of an lawyer can be extremely risky.

5.  Hire a Lawyer.
Why go it alone?  An attorney can draft and review air-tight leases and, should the need arise,  file the eviction compliant – all at affordable prices with the expertise to gain quick results.  A landlord can unknowingly prolong the eviction process by entering into a badly worded lease agreement, improperly filing an eviction or filing court paperwork (pleadings) at the wrong time.  Although a seemingly self-serving statement, the hiring of a lawyer can not be stressed enough.  Case in point, I once went down to my local courthouse and asked the clerk to provide me with the last 30 evictions filed that day.  After looking through them all, I found that only four of them were properly filed.  And those four were all filed by lawyers!  Had a tenant in any of the other cases hired an attorney, the case would have be dismissed.  To add insult to injury, the landlord would have also been required to pay the tenant any attorney’s fees spent – before refiling the eviction again.  When all is said and done, an experienced eviction attorney can be relatively inexpensive considering the potential for losing a considerable amount of time and money.

Being a landlord can be profitable and hassle-free.  To ensure that it is, however, these are all necessary steps to take.