Foreclosure Sales are an attractive option for many buyers and investors seeking to purchase Real Property “at a discount”. However, in the absence of due diligence the deal of a lifetime can turn into a nightmare. If you are considering purchasing property at a Florida foreclosure auction, here are some items for your consideration:
Clear (maybe not) Title:
A common misconception regarding Foreclosures, is that the foreclosing of the Property clears all encumbrances (mortgages, liens, etc.) of that Property. While this may be true in some cases, this is not true in all cases.
A critical factor in Foreclosure cases is to determine what priority the foreclosing party is in, meaning, are they the oldest encumbrance on the property. Priority is typically determined as “first in line, first in right”. For example: Susie owns Greenacre. When she bought Greenacre, she received a Mortgage from Company A. However, a few years later, Susie also received a Mortgage from Company B. As the Company A Mortgage was entered prior to the Company B Mortgage, Company A has a higher “priority” than Company B.
Priority is important, as the foreclosure of a Mortgage or Lien will extinguish any junior liens in priority. However, the foreclosure of a Mortgage or Lien will not extinguish any senior liens in priority. Continuing with Greenacre, if Susie falls behind on both Mortgages, and Company B successfully receives a Final Judgment of Foreclosure – the purchaser at auction will purchase Greenacre with Company A’s Mortgage still being active.
Accordingly, when purchasing a property at a Foreclosure Auction, it is of the upmost importance to ensure that there are no encumbrances that will remain after your purchase.
What Inspection?
When purchasing a Property at a foreclosure auction, there is no available option for a potential purchaser to inspect the same prior to purchase. While many properties are sold “as-is” the prospective purchaser still has the ability to inspect the property in question, however, foreclosures are the true “as-is” sight unseen purchase.
Just as you may purchase a property with remaining encumbrances, you also may be purchasing a property with other not so easily identifiable issues, such as existing code violations or unpermitted work. While a purchaser will not have a physical inspection, a diligent purchaser will still be able to perform some basic “inspections”, including: (i) confirming with the local permitting agency that there are no open permits on the property and (ii) confirming with local code enforcement agencies to determine if there are any open code compliance cases.
What if the Property is not Empty?
Another point for consideration to any potential purchaser of a foreclosed property, is that the property may potentially have current Tenants. Upon purchasing a foreclosed property, Lease agreements are not automatically terminated like junior mortgages. Instead, any active Tenant will be able to remain at the Property for a period of time.
Fla. Stat. §83.5615 is the “Protecting Tenants at Foreclosure Act” and provides that upon purchasing foreclosed property, the new owner is not able to immediately remove existing Tenants. Instead, the new purchaser must provide the Tenants a Notice to Vacate, providing them at least 90 days to leave the property.
However, in the event the Tenant does not leave come day 91, the new purchaser will be required to secure their removal just like any other landowner, via an action for possession.
Conclusion
While Foreclosure Auctions can be an investment opportunity, or an opportunity to secure a discounted property, there are certainly plenty of danger to potential purchasers. However, upon performing some basic due diligence, prospective purchasers are able to navigate some of the underlying intricacies.
