Foreclosure Mistakes for FL Community Associations

In my practice of representing community associations (“CAs”) in Florida, I am often approached by a client or potential client and asked, “Should we foreclose on the home?” Well, like any good, annoying attorney answer…it depends. It depends on your main concern. Are you wanting to generate income for the CA, or do you just want to gain control of the unit? No two situations are the same, even within the same CA. Perhaps a home is occupied by a squatter or other “undesirable” person who is disrupting the peace of the community. In that case, gaining control of the unit might be the goal, regardless of the financial stakes. If, however, the CA is simply trying to increase its revenue, then it would be more interested in recovering the maximum amount of funds. This article will focus on the financial decisions of foreclosure.
TO FORECLOSE OR NOT TO FORECLOSE?
The first mistake many CAs make is to allow the owner to become hugely behind in the assessments before taking any action. I have clients who have not collected assessments on some homes for 2 or 3 years! Now, the past due amounts are up to $15,000, $20,000, even $30,000! Obviously, a struggling homeowner is not going to be able to pay that amount in a lump sum, and even a reasonable payment plan might be impossible. You might think of settling for a smaller amount and writing off the rest of the debt — not so fast! For condominiums, FL. Stat. 718.116(9)(a) provides, in part, “[a] unit owner may not be excused from payment of the unit owner’s share of common expenses unless all other unit owners are likewise proportionately excluded from payment…”
So, what are you to do, Board Members? Fist, you must implement AND ENFORCE a uniform collections procedure. It must be automatic with no variations (to avoid claims of selective prosecution), and it must address the situation while the amount owed is still low enough to make options other than foreclosure feasible. Past Due letters must be sent, and the matter turned over to the Association Attorney at the proper time. I recommend notifying the attorney when the account becomes 30 days past due and beginning the notice steps for filing a foreclosure action.
If the home is being leased, Florida law provides CAs the right to collect the rent directly from the Tenant when the Owner is past due on his/her assessments. The amount collected would go to offset the debt. This is the easiest way to collect the funds owed, but of course, it only works if the home is rented…and the Tenant cooperates. I have seen Tenants and Owners conspire to claim that they are just “friends” or “family members” staying in the home as guests and not paying rent. In that case, or if the home is vacant or owner-occupied, the best option may very well be foreclosure.
TO TAKE TITLE OR NOT TO TAKE TITLE?
So, you have decided that foreclosing is the only way you can feasibly get the funds owed. You have obtained the Judgment and a Foreclosure Sale has been scheduled. Nothing more to worry about, right? Wrong! Now, you must consider what to do at the Foreclosure Sale. Does the CA want to take title to the property and become the New Owner, or does it want to let someone else become the New Owner?
Your first instinct might be to think, “Take title!” However, this is where your good collections practices comes back into play. Keep in mind that the title at the CA Foreclosure Sale will still be subject to the Mortgage Lien. All the bid-winner is really getting is the right to collect rent until the Lender gets around to foreclosing the Mortgage and taking the property. Theoretically, you could sell the property, but how much is someone going to pay for the right to collect rent for an indefinite period of time? Yes, there is a market for that, so everything I am saying here will vary case-to-case, based on the amount owed by the Foreclosed Owner. If, like some of my cases, the Foreclosed Owner owes $15,000+, it is unlikely that any investor will be willing to pay that much. If the amount owed is only $2,000, then perhaps the CA can even make a profit (either from rental income or selling the right to collect rent).
There is pitfall, however, to the CA taking title to the unit. As you may be aware, the Safe Harbor Provision of the Florida Statutes limit the liability of foreclosing Mortgagees. That is, if the Foreclosing Lender takes title at the Mortgage Foreclosure Sale, it only has to pay the last 12 months of assessments OR 1% of the original mortgage principle, whichever is LESS! If the amount owed by your Foreclosed Owner is MORE than that limited amount, what happens to the rest of the money? Who has to pay it? That, my friends, is the hidden pitfall.
Florida Statutes provide that ALL owners are liable for ALL the assessments that come due before and after taking title to the property. The only exception is for Lenders (as mentioned above). Let’s say that the amount owed is $5,000 and the original mortgage was $200,000. We know that, ultimately, when the Lender forecloses it will have to pay, AT MOST, $2,000 of that $5,000. This leaves a shortfall of $3,000. The CA does have a right to collect that $3,000 from somebody, but from whom? One source is the Foreclosed Owner. The CA can sue the old owner for the deficiency, but given that he/she couldn’t pay the bills, what is the likelihood of ever recovering the amount owed? Remember that the statutes say ALL owners are responsible for the payments…even those who buy the property later. Because of this law, when the Lender sells the property on to a new buyer, that new buyer must pay the remaining $3,000 owed.
The same holds true even after an Association Lien Foreclosure, as long as the CA does NOT take title to the property at the Foreclosure Sale. Once the CA takes title, it becomes an Owner of the property. Remember, I said ALL Owners are responsible for paying ALL dues. By taking title, the CA takes on the responsibility of paying the past due assessments. It does not actually have to pay them, but it loses the right to demand the funds from the New Owner after the Mortgage Foreclosure Sale. To make things clearer, let’s look at that $3,000 deficiency. The CA can either sue the Foreclosed Owner for the money OR wait and charge it to the New Owner. BUT…because the CA is also an Owner, the New Owner can turn right around and sue the CA for the $3,000 it should have paid. This effectively wipes out any liability of the New Owner and leaves only the Foreclosed Owner and a lengthy and expensive procedure, likely to include garnishment of wages, attachment of assets, liens on other property, etc. Even if there are other assets to pay the deficiency, it could take years to collect the $3,000.
The best strategy when faced with a possible deficiency from foreclosure, therefore, may be to NOT take title. Instead, let someone, anyone, else win the auction, even if at the minimum $200 bid, and protect the CAs right to demand the deficiency from the New Owner. In each case, you should review whether the property is currently rented or could quickly be rented, as well as the amount owed versus the amount an investor would likely pay either at the Foreclosure Sale or on the market. You should also consider your level of comfort with being a landlord and the management company’s experience as one.
There are many issues and variables that can and will arise, but hopefully, this article has given you some food for thought when discussing what to do about your aging receivables.

Help! My Landlord is Getting Foreclosed!

So, you have rented the perfect home. You finally got that last box unpacked. Time for a glass of wine, dock the iPhone, and play your favorite Schubert, or maybe you kick back on the couch, pop open a brewski, and watch the game live in 1080HD. Life is good, right? Just then, the doorbell rings. It is a process server handing you legal papers. Your new home has just gone into foreclosure! WTH!? Don’t panic! It is not as bad as you think, but it is serious, so pay attention. Before reading this article, you might want to take a quick look at my last article, which gives a basic intro to Foreclosure.

First of all, you are wondering, “Can the landlord even rent to me if the property is in foreclosure?” Yes, he can. There is no Florida law that prevents him from it, and no; he is not required to tell you that the property is in foreclosure (I will tell you how to deal with that below). Since the landlord has no obligation to advertise to everyone that the property is in foreclosure, you might have even signed the lease the day before the foreclosure sale and have a new landlord the next day! Before we get into what happens after the foreclosure sale, let’s talk about your rights and obligations as a tenant BEFORE the foreclosure sale. If your landlord is not paying his mortgage, he probably isn’t paying the fees to the homeowners’ or condo association. If he is not, that can affect you, the tenant.

ASSOCIATION ISSUES

If the landlord is not paying the association fees, Florida law grants certain powers to the association. The association can deny you the use of the facilities (like swimming pool, club house, gym, etc.). It can also demand that you pay your rent directly to the association and not to the landlord (to pay the landlord’s debt). Of course, the landlord doesn’t want you to do this, so he will scream and shout, threatening to evict you if you do not pay him. Although that puts you in an awkward situation, you are required by Florida law to pay the association if the association makes a proper Demand in writing. While the landlord cannot evict you for paying the association after a proper Demand has been made, the association can evict you if you do not pay rent to the association. That Demand has to have specific language that is printed in the governing statute, so if you get such a Demand from an association to pay rent directly to it, compare the Demand to Fl.Stat. 718.116(a)(1). If there is any discrepancy, or if the Demand is missing the language in 718.116(a)(1), then contact an attorney to seek advice before making another rent payment. If the Demand is valid, future payments should go to the association. If it is not, future payments should go to the landlord until a proper Demand is made. You do not have to pay again for any months already paid (for example, if you paid last month in advance), and you are NEVER obligated to pay the association fees of the landlord, unless your lease requires you to do so.

FORECLOSURE

It is important to note that the landlord’s mortgage lender is not the only party that can foreclose on the property. The association can foreclose for those unpaid assessments, and there are several others who can foreclose, as well. In today’s market, you are most likely going to be facing a mortgage foreclosure, an association lien foreclosure, or both. You will be named as a defendant in the foreclosure lawsuit, by name if it is known or as an “Unknown Tenant” if it is not. Do not worry about this. They cannot go after you personally; it will not affect your credit. You must be named in the foreclosure because you have an interest in the property. By your lease, you have the right to possess the property, so you must be named. Sometimes, the Plaintiff in the case might not list the tenant as a defendant. If the tenant is not listed, then the tenant’s interest is not extinguished by the foreclosure, and there is no issue whatsoever about the new owner. The new owner must follow the lease as if he were the original landlord.

While the foreclosure case is proceeding, the landlord is still the owner. Unless you receive a Demand as described above, you must keep paying the rent to the landlord – nothing about the lease changes. The landlord is still the landlord…until he is not. That day comes when the foreclosure sale is held and somebody else wins the auction. Although there is a waiting period before the new owner is issued the Certificate of Title (to give the foreclosed owner one last shot to pay the debt), assuming the property is not “redeemed” by the foreclosed owner during that waiting period, the new owner has the right to collect the rent as of the date of the foreclosure sale. If you are scheduled to pay rent around the date of the foreclosure sale, you should wait to be sure to whom you need to pay it. You don’t want to pay the wrong person and have to pay again, right? You can check the status of the case online by entering the case number (which will be on the documents you get).

STOP PAYING RENT TO THE OLD LANDLORD/ASSOCIATION AS OF THE DATE OF THE FORECLOSURE SALE!

In the case of a mortgage foreclosure, it is almost a certainty that the lender will be the one who becomes the new owner, at least until it is able to sell it on to someone else. The lender will not likely bother you. It may contact you and ask you to pay rent to the lender, but it might not. Knowing your rights under the Protecting Tenants at Foreclosure Act of 2009, discussed below, the lender may offer you cash to move out early. Knowing your rights under the PTFA will help you negotiate a stronger deal with the lender. It will also arm you against those new owners who either do not know the law or are trying to take advantage of your lack of knowledge to force you out early.

PROTECTING TENANTS AT FORECLOSURE ACT OF 2009

Prior to the PTFA, if the tenant was named in the foreclosure, the lease was also extinguished when the Certificate of Title was issued to the new owner. Tenants were forced to move out upon 24-hour’s notice. Seeing the chaos created by the huge number of foreclosures and tenants being put out with almost no notice, Congress passed the PFTA to slow down the transition and to allow tenants time to find new homes. The key parts of this law revolve around 1) your relationship to the landlord, 2) amount of rent you are paying, 3) how much time is remaining on your lease, and 4) who is the new owner.

  1. To be protected by the PFTA, you must be a bona fide tenant. That means that you are not the spouse, child, or parent of the former owner…and u are not the former owner leasing the property to himself. It must be an “arm’s-length” transaction; not some secret, back-room deal to somehow take advantage of the situation.
  2. To be a bona fide tenant, you also have to be paying a fair market rent. Your rent can be less than “fair market,” but it cannot be substantially less. There is no real test to determine what is substantial; it is a subjective test. A 10% discount would not likely be substantial, but a 40% discount would almost certainly be. A substantial discount is allowed if the rent is discounted because of a federal, state, or local subsidy.
  3. Even after the Certificate of Title is issued to the new owner, you are permitted to stay in your home until the end of the lease. For example, if you signed a 12-month lease the day before the foreclosure sale, you cannot be forced to move or pay an increased rent until that lease expires in 12 months. Of course, every rule has exceptions.
  4. There are two exceptions to #3. The first exception is when the property is sold (either at the foreclosure sale or later) to a purchaser who will occupy the property as a primary residence. This usually comes about when the lender, who won the bid and took title, sells the property to a 3rd party. The 3rd party might want to make the property his/her primary residence. They cannot say it is for a primary residence just to get you out early and then rent it to somebody else. The second exception is when your lease has already expired and you are on a month to month lease. For both exceptions, the new owner must give you 90 days written notice to move out.

In other words, the minimum amount of time you have in the home, if you are a bona fide tenant, is 90 days (remember, the 90 days only starts to run after the notice to vacate has been given, and they cannot send the notice until they own the property). If the lender has a buyer lined up who wants to move in right away, the lender will be very motivated to move you out sooner. Since they cannot force you out, you have the power to negotiate a good deal. It is common for the lender to pay all moving expenses plus a month’s rent or more to encourage you to leave sooner. Remember, the lender does not want to own the property, and it does not want to lose a potential buyer.

WHAT ELSE?

What else can you do to protect yourself as a tenant? When we are talking about leases, you have to protect yourself from the beginning – PUT IT IN THE LEASE! Before signing a lease, make sure that the lease includes a clause indicating the landlord agrees that there is no foreclosure action currently pending. This will not stop a foreclosure from being filed and will not give you any special rights to get out of the lease unless you write those into the lease, too; however, this will do one of two things. It will let you know if there is a foreclosure already filed, or if the landlord lies, it will be grounds for getting out of the lease if you want. Knowing if a foreclosure action has already been filed will help you determine how soon you might have to deal with the issues we discussed above with the PTFA. If the case is in the early stages and you only intend to stay a year or so, you might not ever have to deal with the issue. So…sit back, armed with the knowledge you now have, and dock that iPod or pop that brew and have a great day!

The Dirt Lawyer Talks Foreclosure

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Welcome to The Dirt Lawyer. Why The Dirt Lawyer, you ask? Well, this blog is all about the millions of questions and issues that arise related to real estate. I have been practicing real estate law almost exclusively for over 13 years. Those of us in the biz affectionately call it “Dirt Law” because, let’s face it, that’s what we are talking about — dirt and what you can do with it.

I was going to call this Blog The Dirty Lawyer, but then, I thought maybe people would think it is about a lawyer who did not play by the rules…or who one did not bathe quite as often as he should. Ok, so maybe I am guilty of not always taking a shower after swimming, but I can say that right now I smell very good. I just sprayed on some Axe Excite (the store was out of Playboy Miami, so I guess we all have to make sacrifices). And since I am such a nice-smelling lawyer who regularly bathes (with soap) and always plays by the rules, The Dirt Lawyer seemed more appropriate. As this is the first article for the new blog, I thought the best way to get started is with the biggest issue in real estate today: FORECLOSURE. What is it exactly? How long does it take? What are my rights as a tenant in a foreclosed home? What should I do if I get served papers? Do I have to keep paying my mortgage? If the bank forecloses, can it still sue me for the amount I owe? These questions are just the tip of the iceberg in a Titanic-sinking mountain of issues related to foreclosure. I will address as many as I can in future articles, but for now, let’s just start with what exactly it is and what happens during a foreclosure…in Florida.

It is important to remember that since property law is regulated (mostly) by STATE law and there are 50 states plus districts, territories, protectorates, and whatever those Federated States of Micronesia are, then there are more than 50 different ways foreclosures are handled. I am a FLORIDA attorney, so I will always talk about the laws in FLORIDA. I REPEAT: THIS INFORMATION IS SPECIFICALLY FOR FLORIDA. A lot of what I say will be the same in your area, but some of the details may differ, particularly on procedure and notice periods and whatnot.

WHAT IS FORECLOSURE?

First, let’s review the documents that you signed when you bought your property. You remember, right? When your hand was hurting from having to sign your name more times than you did in four years of high school? In all those papers, there was a Promissory Note (“the Note”) and there was a Mortgage (surprisingly called “the Mortgage”).  We talk about “paying my mortgage,” but in truth, we are really paying the Note. The Note is your promise to pay back the loan that the bank is giving you to buy the property. The Mortgage is what happens if you do not pay it back. By signing the Mortgage, you agree that if you do not repay the loan, the bank can take your property. This is called granting the bank a Lien on the property. When you do not pay the Note, the bank files a lawsuit to enforce its rights under the Mortgage and to take the property from you. This is called Foreclosing the Lien, or Foreclosure.

WHAT ARE THE STEPS OF FORECLOSURE?

You will often hear complaints from people who say they (or more likely their sister’s friend’s, aunt’s, boyfriend’s, 2nd cousin once removed) never knew that the property was being foreclosed until the sheriff showed up with a Writ of Possession to give the 24-hour notice to move out. While that does sometimes happen to tenants (don’t worry tenants, we will talk in another article about your rights as a tenant), it is virtually impossible for an owner living in the home to go through the entire foreclosure process and not know something is up. You certainly know that you are not paying  the Mortgage (yea, I know, the Note, but I will stick with the common language) and that foreclosure is coming sooner or later. Oftentimes, the person is hiding and trying to avoid service of the Complaint, thinking that the lien on the property cannot be foreclosed if he is not served. HE IS WRONG!

There is a specific process of Demand and Notice in the filing of a foreclosure action, and after the lawsuit is filed, there are many more times the owner is notified of the proceedings (or at least attempted notification). If you are hiding in a different location, refusing to accept certified mail, and hanging up every time the bank calls, then you can’t really complain about the system you have been ignoring, right?

Now, so far, I have been talking about the bank and foreclosing the Mortgage. You should know that a lien can be placed against your property by others, as well. One of the most common is a Condo or Homeowner’s Association. What I am about to say regarding the process is the same for those liens. For ease of reference, I will just collectively refer to all the lien holders as the bank. Ok?

  • Fist, you will get a letter demanding that you pay within 30 days or a lien will be filed against you in the Public Records. If you do not pay what is owed within 30 days, you will get another letter saying that a Claim of Lien will be recorded and that you have 30 more days to pay, or they will foreclose the lien. If you still don’t pay, then the bank can now start with the foreclosure.
  • The bank will then file a Complaint and serve you a copy. This is what you see in movies when the process server chases the guy down the street, finally catches him, and says, “You’ve been served!” Great action in the movies, but it doesn’t really happen that way in Florida. The process server does not have to touch you with the papers. He doesn’t even have to serve you; he could serve someone else that lives with you…OR he could even publish a notice in some obscure local newspaper you probably have never heard of (if you cannot be found).
  • After you are served, by whatever means, you have 20 days to file an ANSWER. BTW…this is something that should definitely NOT be done without an attorney. There are some things that you have to say in the Answer. If you do not say them, you can never say them. It could be the difference between winning and losing. If you don’t Answer within 20 days, you are basically telling the court that you give up. You forfeit. The bank asks the court for a Default, and it wins automatically, even if it had a very bad case.
  • After you file your Answer, there will be several months that go by with nothing happening while the bank gets all its documents together. See? If you did not Answer, the bank would not have had to do that, so by answering, you immediately gained several months in the property.
  • Eventually, unless you work out a deal with the bank or somehow come up with all the money to pay all of the outstanding amount, the court will grant a Final Order/Judgment of Foreclosure. When you receive the Final Order/Judgment in the mail, that does not mean you have to move out immediately. The property is still your property.
  • After getting a Final Order/Judgment, the bank will ask for a date to be set for the Foreclosure Sale. The sale will be at least a few weeks after the Final Order/Judgment because a notice of the sale must be published for two consecutive weeks in that local paper nobody reads. Banks do not want your property (although COAs and HOAs might). They want to find a buyer for your property before they get it at the Foreclosure Sale. Oftentimes the bank will cancel the sale if there is no buyer already lined up. When the Foreclosure Sale is held, someone (most likely the bank unless you have equity in the property) will be the winning bidder and be issued a Certificate of Sale. Still, you have a little more time.
  • Once the Certificate of Sale is issued, you now have 10 days to “redeem” the property. That means that if you can somehow come up with all the money that is now owed, you can buy back the property. Yes, I know what you’re thinking, “If I could pay all the money that is now owed, there never would have been a Foreclosure Sale!!” I didn’t say the law makes sense. And what the heck! Here is one last chance. Maybe the townsfolk will all chip in and help save the farm.
  • After the 10 days are up and there are no townspeople to be found chipping, then a Certificate of Title will be issued in the name of the winning bidder (like I said, most likely the bank). NOW, you no longer own the property and better be prepared to move soon. The new owner might be willing to rent the property to you, but if they don’t, you will need to move. You can buy a few more days by refusing to leave right away and forcing the new owner to seek a Writ of Possession from the court. It won’t really be 24 hours, but it will likely be as quick as a week. Time is really up now.

So, there you have it. You will be getting several notices throughout the proceedings if you are living in the home or if you have provided the bank (and the COA/HOA) with your current address. You can also check the status online at the website for the Clerk of Courts of the county where your property is located. As you see from the steps above, the absolute minimum time from the first demand to the Certificate of Title, assuming the owner is easily found and served, the owner does not answer, and the bank works as fast as possible, is about 5 or 6 months. Association lien foreclosures tend to be short, but 9 months is considered fast for a mortgage foreclosure. It is typical for them to last for longer than a year, and quite possibly 2 or 3 years.

In the next article, we will discuss what happens to tenants when the landlord is not paying the Mortgage and association dues. Thanks for reading. If you have any questions or suggestions for a future topic, please contact me at cooperlaw@ymail.com or through our Facebook page: http://www.facebook.com/CooperLawFlorida.