About Foreclosures                                                                             

Foreclosures of real estate are a daily occurrence in Florida. Get rich schemes are hyped in television, informercials as well as classified ads and other advertisement mediums. A real estate investor who is seeking to obtain property under the distressed conditions presented by foreclosure must be keenly aware of the different types of foreclosure actions, as well as the foreclosure process, and the potential for loss as well as gain. The purpose of this information is set out to provide you with an overview of the foreclosure process and enlighten the real estate investor to both the pros and cons surrounding this avenue of investment. It should be carefully understood that foreclosure is a complicated legal procedure presenting many economic and legal concerns. An investor is cautioned to seek the assistance of attorneys, accountants, appraisers, bankers, Realtors and other professionals who can offer guidance and answer questions regarding foreclosure properties. At the very least, one should look very carefully before leaping into the often murky waters of foreclosures. Watch out for sites that require a fee for service you can obtain for free here on my site.

Many Faces of Foreclosures

Foreclosure actions come about from a variety of circumstances. Most People think of foreclosures in the terms of a bank, or other types of institutional lender, or investor foreclosing on a mortgage loan which was used to purchase either vacant land, a home or commercial property. While this is one of the most frequent types of foreclosure encountered, an investor should recognize that a mortgage loan is not the only type of transaction which can result in foreclosure. For example, an individual who purchases property using what is known as an installment land sales contract could also face foreclosure if that person fails to make regular payments under the installment contract. Rather than a bank or type of lender the regular foreclosing and seeking ownership of the property, its actually the true legal owner who is foreclosing on the property.

Condominium Associations

Condo association is another often encountered type of foreclosure action is that brought by a condominium association who is seeking to foreclosure a claim of lien. South Florida has a vast number of condominium residences. The condo association will run overall operations of the property, typically collecting monthly or quarterly maintenance fees from the unit owners. Also, there may be occasions when a condominium needs to impose a special assessment for a large project or improvement to the property and similarly passes along the cost to all unit owners. If a unit owner fails to pay either the regular maintenance assessment or a special assessment the association has legal rights. The condo association can place a lien upon the unit and if the owner continues to fail to pay, the association can proceed to foreclose its claim of lien. Often times an investor will hear about these foreclosure actions, either through published legal notices in newspapers, appearance at the foreclosure sale conducted at the courthouse, word of month, etc. and think that there is a tremendous bargain to be obtained, because typically the amount of the lien being foreclosed is less than $10,000.00. What the investor may not realize is that the claim of lien which is being foreclosed does not extinguish or wipe out any mortgage which might have been given to a bank or other type of institutional lender where the mortgage was recorded at a point in time earlier than when the claim of the lien was recorded. In other words, frequently a condominium unit owner takes out a mortgage loan to purchase the unit the bank records its lien. After some time, the unit owner might get into financial difficulty, stop paying the maintenance fees and the association will place a lien on the unit. The association's lien is junior, or subordinate, to the mortgage loan. Therefore, if you purchased a property at the foreclosure sale, while it is true that you will be the owner of the property, it will then be your responsibility to pay off the mortgage in favor of the bank or institutional lender or ultimately they will in turn start foreclosure and whip out your ownership interest.

Mechanic's Lien

Individuals or companies who furnish labor, material or supplies in connection with repairs or improvements to the property might be entitled to what is known as " mechanics liens " upon the real property. This when a property licensed general contractor, subcontractor or supplier of materials furnishes labor or goods to the property at the request of either an owner or general contractor, and then the bill for the labor or materials remains unpaid. Under these circumstances, the general contractor, subcontractor and/or material man con proceed to file a lien representing the amount of money they are owed. If the lien remains unsatisfied or unpaid, then they can proceed to start a foreclosure based upon the lien. If the lien is placed upon the property in a proper manner ( a very detailed procedure is set out in Florida law for this to occur ) and the foreclosure process is properly conducted (equally complex ) then the owner of the property could be foreclosed with title passing to either the party who has placed the lien on the property, or some third-party investor who makes a successful bid at the foreclosure sale. Once again it is important to note in these insistences the liens claimed by the general contractor, subcontractor or material men is junior or subordinate to that of a mortgage loan given by a bank or institutional lender. Once again, an investor thinks she or he is getting a barging by picking up the property for a relatively small amount compared to the tax assessed value or appraised value of the property, when in fact all they are inheriting is a property with mortgage indebtedness and possibly other liens which ultimately will be foreclosed - thereby wiping their investment.

Equitable Lien

Additional circumstances may give rise to foreclosure actions which present concerns for an  investor. For example, equitable liens placed upon property might be capable of being foreclosed, statutory liens in favor of  governmental or taxing units, liens in connection with business loans or other creative financial arrangements. Florida law is quite broad in defining what type of instrument would be considered a mortgage. Florida stature 697.01 Instruments Deemed Mortgages, All Conveyances, obligations conditioned or defensible, bills of sale or other instruments of writing conveying or selling property, either real or personal for the purpose or with the intention of securing the payment of money, whether such instrument be from the debtor to the creditor or from the debtor to some third person in trust for the creditor, shall be deemed and held mortgages, and shall be subject to the same rules of foreclosure and to the same regulations, restraints and forms as are prescribed in relation to mortgages.  The above demonstrates that an investor must be keenly aware of the type of foreclosure  action which  has been filed so that the investor can make an informed decision as to whether or not be will be purchasing the property at foreclosure sale without fear of ultimately being foreclosed or otherwise losing the property to another party who claims an interest superior to the matter that resulted in the foreclosure investment.

FORECLOSURE PROCESS

Generally speaking, a foreclosure lawsuit is started by a person or corporation who either holds a mortgage or has some other type of lien which has been unpaid resulting in default. Foreclosure lawsuits used to be exclusively filed in the Circuit Court of the County in which the real estate is located in 1996 the legislature expanded the jurisdiction of the County Courts in the State of Florida and now allow County Courts to exercise "equitable" jurisdiction. Therefore, foreclosure actions can also be bought in the County Court, provided the amount  of money forming the bases for the foreclosure action does not exceed the sum of $15,000.00. Typically banks and intuitional lenders who are foreclosing home loans will bring this action in Circuit Court because the unpaid balance on a home loan is usually in excess of $15,000.00. There may be instance in which a foreclosure action is filed in County Court, but most often those type of foreclosure actions are related to either liens held by contractors, subcontractors to material men (mechanics lien foreclosure action) or foreclosure action brought by Condominium Association for maintenance with special assessment liens. Regardless of the Court in which the foreclosure is filed, most foreclosure follow a similar pattern. The steps that a foreclosing party would take are: 

1.    Have a title search performed to find out all of the junior liens who must be named as codefendant in the foreclosure action;

2.    File a Foreclosure Complaint naming the borrowers/owners of property and all juniors lienor;

3.    Record a notice of Lis Pendens in the Public records of the County in which the real property is located;

4.    Serve all of the defendants with Summons;

5.    Attempt to obtain a Summary Judgment against all fendants, or if defenses are raised preventing a summary disposal of the lawsuit;

6.    Trial of the foreclosure case;

7.    Obtain a Final Judgment of Foreclosure;

8.    Obtain a foreclosure sale date.

The above steps are mearly an outline of a foreclosure lawsuit. This process can run anywhere from three months (if new foreclosure procedures entitling a lender to obtain an order to show cause on commercial property) to one to two years depending on whether the defendants vigorously contest the foreclosure action. A foreclosure party wants to get the property back as fast as possible, while the owner who is being foreclosed might wish to stay in the property without making any types of payments for as long as possible. This can set up quite a legal tag-of-war in which all sorts of legal games and maneuvers might be employed by the property owner. The problem, from the investors point of view, is that the longer the foreclosure process might take, the less equity will be remaining in the property when the process is complete because the lender or foreclosing party is entitle to interest on its loan or debt, additional court costs and the legal fees. Sometimes a spiteful owner will simply bleed all of the equity out of the property.

HOW TO MAKE AN INFORMED DECISION AS AN INVESTOR

Once a decision has been made to attempt to  purchase a property which is being offered at a foreclosure sale an investor must a minimum take several steps. First and foremost is strongly urge that the investor view the property. A drive by the property should be done and if at all possible every step should be taken to gain access to the property-legally. Sometimes an investor is lucky and the property is being listed for sale while it lays in the foreclosure process and an investor can see the inside of the house or condominium via a Realtor. If this is not the case and it is impossible to view the property without committing an act of trespass, an investor should be keenly aware that when they purchase a property at a foreclosure sale, the property is being bought in "as is"  condition. There are many horror stories of investors purchasing foreclosed property only to find out that the inside has been completely gutted, (expensive items such as appliance, electrical wiring, copper, tubing and plumbing, bathroom fixtures, wall coverings, draperies or blinds and almost everything else of value). Therefore what you see from the outside is not what you might be getting on the inside. After viewing the property a market study, appraisal and /or tax assess value should be obtained for the property. In short, you should be fairly certain as to what the fair market value of the property is and compare this amount to the Final Judgment of Foreclosure. Understand that the party who has initiated the lawsuit (bank, institutional lender, mechanics lien, condo association, etc) will have what is know as a "credit bid" equal to the amount of the Final Judgment. Expect that at the foreclosure sale the plaintiff will bid in the amount of its judgment. Therefore, an investor should target properties only the fair market value significantly exceeds the amount of the final judgment. This is what the author considers "a positive spread". The next step which should be taken is that a title search be performed on the property. This is imperative so that the investor can determine whether the mortgage or lien being foreclosed is a first mortgage or senior lien, or if the investor is purchasing a property which may later be re-foreclosed by senior lien holder. Another purpose served by the title search is that when reviewed in conjunction with the court file an investor can determine whether all junior mortgagees, lien holders, etc. were properly named as defendants in the foreclosure action. if all person/entities who are junior to the foreclosing party are not named as defendants in the foreclosure lawsuit, then the investor who purchases the property will have to file another foreclosure suit to effectively clear title. Purchasing a property which will ultimately have a clear title is of primary importance. Following the above steps, an investor should go thought every document in the court case (contained in the court file). This will inform the investor of all of the allegations leveled in the foreclosure lawsuit, the defenses raised by the owner, the amount of the final judgment and whether the case was handled properly. Attend the foreclosure sale, and pay attention. Do not get caught up in " auction fever". Establish a price that you are prepared to pay for the property and do not exceed that amount. Also, realize that a percentage of the purchase price (whichever is less) is immediately due at the time of the sale, with the balance due by  the same day. You must pay the full amount, in cash, cashiers check, or certified check the day of sale. Finally, beware of the bankruptcy wild card. Many owners of property with equity file bankruptcy on the eve of the foreclosure sale. The filing of a petition  for bankruptcy relief immediately stop the sale.  In addition, there is a ten day period following the sale during which objection to the foreclosure sale can be filed-possibly setting aside the take.

CONCLUSION  

As you can see, the foreclosure process is deceptively complicated. That is not to say that terrific investment properties are not purchased at foreclosure. The above information is subject to change without notice. The smart investor should appreciate the time and effort that must go into searching for foreclosures and only bid on properties when all of the above inquiries and steps have been taken. Remember-in foreclosures it is 
"BUYER BEWARE"!