Buying real estate at foreclosure sale can be much more complicated than you might think. Purchasers often assume that they are acquiring property with clear title merely because they are buying through the foreclosure sale process. In reality, this may not be the case for a variety of reasons. The quick explanation is that a purchaser at foreclosure sale takes title to the property with no warranties of any type and subject to any deficiencies in the foreclosure process. In order to avoid unpleasant surprises after the fact, any foreclosure buyer should, as a part of their due diligence, conduct a thorough review of the court file for the foreclosure. Better yet, the buyer is well advised to have counsel review the foreclosure file and also perform a current title search for the property prior to bidding at the foreclosure sale.
So, what types of issues can be discovered and therefore avoided with careful due diligence? There are many but here are a few of the more common problem areas:
(1) Failing to name a party who has an interest in the property subordinate to the mortgage. In order to foreclose a subordinate interest, the party holding the interest must be included in the foreclosure as a defendant, served with process and have the opportunity to defend. Comparing the title search report to the named defendants in the foreclosure case can highlight instances where a necessary defendant was not named. The result of this omission is that the subordinate interest is not foreclosed and the purchaser’s title is now subordinate to that interest. If, for example, the omitted interest was a money judgment, the purchaser may ultimately have to pay the judgment in order to obtain a release and clear title. Florida law allows a buyer at foreclosure sale to “reforeclose” the mortgage, but that means that the purchaser has to pay legal fees and go through the foreclosure process again to correct the omission. Curing this problem will take time and money.
(2) Failure to name a spouse in the foreclosure of homestead property. Even if the property was owned in the name of only one spouse, Florida law provides that the other spouse has a legal interest in the property if it is their homestead. While not an issue in commercial property foreclosures, it is an area to be scrutinized in residential foreclosures.
(3) Failing to realize that the mortgage being foreclosed was a second mortgage. In Florida, it is not proper to name as a defendant in a foreclosure action a party whose interest in the land is superior to the mortgage being foreclosed. Thus, when a second mortgage is foreclosed, the first mortgage will not be referenced in the foreclosure case, and the property will be sold at foreclosure sale subject to that first mortgage. To minimize the risk of being caught in this trap, the potential buyer should obtain a title search as of the date that the property was acquired by the prior owner, not just as of the date of the mortgage being foreclosed. A careful review of the foreclosed mortgage document from public records may disclose whether it was subordinate to a prior mortgage.
These are but a few of the pitfalls of purchasing property at foreclosure sale, and there are many others. Let the buyer beware!
To learn more about buying property at foreclosure sale, call 239-514-1000.