Foreclosure Auction Hazards

207321 CBB Newsletter Q3 2022 v2 CMYK - apartments

For savvy investors, acquiring property at a foreclosure auction can result in handsome profits. However, a lack of adequate due diligence can result in handsome losses.

Consider the sad story of Sam Flipem. Sam reviewed foreclosure notices and discovered a lien foreclosure sale taking place in two weeks involving a unit located in a desirable condominium building in his area. The condo association had foreclosed on the unit owner for failing to pay assessments totaling $5000. Sam thought he could snap up this property cheaply. He figured the condo unit was worth at least $300,000. When the day of the foreclosure sale arrived, Sam got online and submitted his bid of $10,000. The bidding continued, and Sam won the bid at $50,000. After paying the money, Sam received a Certificate of Title from the Court Clerk, took possession, and celebrated his good fortune. The clerk paid off the condominium association.

A week later, Sam received some depressing news. Franklin Bank was currently foreclosing a first mortgage against the condo unit for $275,000 plus interest, fees, and costs. Sam filed a motion in the condo lien foreclosure, contending that the surplus held by the Clerk should be applied to reduce Franklin Bank’s mortgage balance. The court declined, citing Florida statutory law, which dictates that surplus is payable to the owner subject only to claims of subordinate lien holders. Franklin Bank was not a subordinate lien holder. Sam paid $50,000 and had nothing to show for it.

Here’s the takeaway for those looking for bargains at foreclosure sales. Do what Sam failed to do. Conduct some due diligence and determine the priority of the lien being foreclosed. Suppose it’s a condo/homeowner’s association assessment or construction lien. In that case, there’s a high chance that the foreclosed title will be subject to one or more superior liens which survive and continue to encumber the property. Have the title reviewed by a real estate attorney before the foreclosure sale to ensure that there are no superior liens that will turn your investment into a loss.

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