This blog post is part II in a series of posts discussing why community associations cannot afford to ignore lender foreclosure actions. The underlying theme of this series is that associations have a financial interest and lien rights in their properties and by ignoring lender foreclosure actions, associations are ignoring their own financial interests and main sources of revenue. Part I explained that associations have the power, under the Florida Statutes, to expedite the foreclosure process when lenders are delaying. Part I also illustrated that by implementing a consistent policy for appearing in lender foreclosure actions and expediting the legal proceedings, associations can save tens of thousands of dollars over the years. This blog post addresses the unclaimed revenue in the form of foreclosure sale proceeds that associations fail to capitalize on due to not appearing in lender foreclosure actions and asserting their priority lien rights.
The conclusion of the lender foreclosure action is the eventual foreclosure sale and transfer of title. Florida has a judicial foreclosure process in which foreclosure sales are held at designated times by the clerk of court either at county courthouses or online. Professional and amateur real estate investors routinely attend these foreclosure sales, looking to purchase properties at a discounted price. If no investor bids on a property at its foreclosure sale then the lender will gain title to that property via its foreclosure judgment credit bid. Alternatively, if investors do bid on a property then that property will be sold to the highest bidder and, often times, a bidding war between multiple investors takes place. While winning bids are usually at reduced prices (i.e., under current market values), they will be significantly above the foreclosure judgment amounts.
The investor with the winning bid must deposit his or her funds with the clerk of court. A portion of those funds go to the foreclosing lender in an amount that satisfies the judgment balance, making the lender whole. Stated another way, the foreclosing lender is only entitled to an amount equal to its judgment balance but no more. What happens to the difference between the winning bid and the foreclosure judgment? Those surplus funds remain in the court’s registry for other interested parties to claim.
The Florida Statutes provide subordinate lienholders with 60-days in which to make a claim for those surplus funds. Fla. Stat. § 45.032(3). If no claim is made the clerk will deliver those surplus funds to the homeowner who got foreclosed. Most associations, pursuant to their governing documents, will hold the superior claim among all other subordinate lienholders after the first mortgagee has been satisfied. However, if an association never appears in the foreclosure action, ignores the subsequent foreclosure proceedings, and is unaware of when the foreclosure sale occurs or if there is even a third-party purchaser, how can it make a timely claim for the surplus funds to which it is rightfully entitled? It cannot.
There are countless examples of associations missing out on surplus funds from foreclosure sales simply because they failed to appear in lender foreclosure actions and failed to assert their rights. In some instances the surplus funds are enough to pay all past-due assessments owed to the association, but even if the surplus funds don’t cover the entire amount, a partial satisfaction is better than nothing. Moreover, what can be more frustrating for an association then having a delinquent property owner—someone who may not have paid his or her assessments for years—receive the surplus funds from the foreclosure sale when those funds could have been claimed by the association. That is called a windfall for the prior owner, and a missed opportunity for the association. Stay tuned for Part III in this series, which concerns the safe harbor protection and its application to foreclosing lenders.