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.
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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.