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.

There have been recent reports about property owners in foreclosure that are stripping down or vandalizing their homes just before the sheriff’s sale.  Appliances, including air conditioning units and pool pumps, are being sold for pennies on the Dollar.  A television news reporter recently interviewed a woman that was actually selling her toilets.  She felt that she should get every penny out of her home before losing it to the lender.  Whether the housed is stripped for profit or otherwise intentionally vandalized, the wrong-doer might just later learn to regret it.

When the lender forecloses on real property, it obtains a final judgment for the total amount due on the mortgage, including interest, costs and attorney’s fees.  When the property is worth less than the judgment, it is very unlikely that an investor third party will bid on and buy the property at the public auction.  When there are no bidders, the lender then takes title to it.

Lender owned property (also known as “Real Estate Owned” or “REO’s”) will later be listed with a real estate agent and sold at market value which, during these times, will most likely be less than the final foreclosure judgment.   In addition to the real estate agent’s commission, the lender will also incur closing costs which will reduce the amount of money they will receive at closing.  The difference between the final judgment and the amount of money the lender recovers when it sells the property is referred to as the “deficiency.”  And the lender is then free to seek a “deficiency judgment” against the borrower (the party that lost the property in foreclosure). 

Should the lender be required to remodel, repair or purchase appliances in order to sell the property, the deficiency will only grow and therefore the deficiency judgment will be greater.  The same is true when the selling price reflects the property’s poor condition.

Aside from the ethical issues raised when one destroys or strips the home before losing the property at public auction, it is, or can be, financially detrimental to do so.  Currently, it seems, most lenders are so inundated with foreclosures that they have yet to pursue deficiency judgments against those they have foreclosed upon.  It is only a matter of time, however, before the number of foreclosures is reduced to the point where the lenders can then focus on collecting on these deficiency judgments. 

As an attorney, I have yet to see lenders pursue these judgments.  Indeed, no one has come to me for help for protection under these circumstances.  But I believe that it is all a matter of time before it happens.  Obviously, there are other alternatives to allowing the property to be sold at public auction.  In previous posts, I have discussed other options such as short sales and deed-in-lieu as possible alternatives to foreclosure.  Albeit, the lenders are not always agreeable to forgiving the deficiency when accepting a short sale or deed-in-lieu, but when they do, this is the best course of action for the property owner to take when in foreclosure. 

Property owners that ignore or neglect a foreclosure will only face deficiency judgments later on, when they incorrectly assume that the public auction is the end of the road for the lender.  There could be no bigger mistake for the property owner assuming that stripping or vandalizing the home is a way to get the last “jab” in against the lender.  They could, more likely than not, be faced with a judgment that includes amounts for the items stripped or damaged – much more than what they were able to get during the fire sale or the short-lived and misguided satisfaction they received in damaging the home in the first place.

Our country’s real estate market has been in a state of stagnancy, if not decline. It is no secret that the current economy has been the cause of frequent unemployment and the reduction of income; consequently, property is being sold at lower prices to a seemingly empty lot of buyers. Although property today is being sold at such exceptionally low prices, lenders maintain their usual mortgage rates, while homeowners begin to recognize that their mortgage balances are actually higher than their property value. Thus, homeowners now face foreclosure more often than not – since 2007, millions of foreclosure filings have flooded courthouses throughout the country, particularly here in Florida.  In response to the real estate market’s current state, homeowners facing foreclosure have turned to a simpler, more beneficial solution to their property dilemmas: modifications or short sales.  If would be great to hear the foreclosure issues being faced by my readers, so feel free to post your personal experiences in the comments section below.

In addition to defending the foreclosure lawsuit, property owners should seek a modification of the mortgage or, when a modification is not viable, short sale of the property before the foreclosure sale takes place.  A short sale, also called a short payoff, occurs when a mortgage lender, usually a nationally chartered bank, accepts less than the actual mortgage balance due in order to avoid taking title to the property through foreclosure – essentially taking on the responsibility of selling the property along with the negative affect it has on their balance sheets.  Through a short sale, lenders avoid carrying costs and maintenance fees while receiving a substantial portion of their money.

Although the procedure to complete a short sale is complicated and time-consuming, a short sale benefits the property owner as well. The property owner is not allowed to receive any money at closing, but they do escape, in most cases, the remaining loan payments (in other words, the deficiency, which a deed-in-lieu of foreclosure or a foreclosure judgment does not avoid) and also reduce the extent of the damage made to their credit (although a short sale still harms one’s credit score).  While the lender will issue a 1099-S to the property owner for the portion of the loan that has been forgiven, the Internal Revenue Service considers this a non-taxable event when the property is homestead.  This is not necessarily the case with investment or commercial property.  The property owner may still avoid taxation when a 1099-S is issued on non-homestead property by being deemed “insolvent.”  Regardless of the circumstances, it is highly recommended that one seek the advice of a Certified Public Accountant regarding tax liability before commencing with a short sale.

The process of completing a short sale requires much communication with the mortgage lender detailing the reasons the mortgage cannot be completely paid off, for example; therefore seeking a professional may be beneficial. During the short sale process, an experienced attorney has the ability to provide the lender with a proper and legal explanation for the hardship and provide the necessary documentation to prove it – while still protecting the interest of the property owner. And at NO COST to the property owner as the lender picks up the tab.  An attorney will also have the capacity to find a suitable real estate agent to manage the marketing of the property in a way that is acceptable to the lender. The presence of an attorney throughout the short sale will provide legal guidance and security, resultantly making the short sale transaction as smooth and as simple as possible for the property owner at no expense.  While I see no disadvantage in hiring an attorney to assist you in a short sale (after all, an attorney has a duty to protect his or her client’s best interests, while real estate agents and other professionals do not), I welcome feedback should you feel any apprehension in hiring one.   

Finally, the homeowner should consider the fact that a short sale transaction will come at little, if no, cost to them.  At a time when cash flow is scarce, and a modification of the loan is not viable, this option is best.  Avoiding the foreclosure sale and any deficiency judgment is tantamount.  The short sale accomplishes this and more.