Purchase an HOA Lien?(On purpose this time)
Involved In Real Estate · Jacksonville, FL · Member since 2012 · 217 posts · 42 votes
I had someone bring up an interesting business plan after my recent trouble with purchasing a HOA lien that was thought to be a first mortgage. The idea would be to purchase HOA Liens and then rent the property out till the first mortgage is foreclosed. As long as the first mortgage foreclosure process was not started there should be about a 2-3 year window to cover the cost of the lien and make a profit. The tenant would be protected by having a long term lease in case the bank foreclosed earlier than expected. I thought it was a creative way of making money with the foreclosure mess. What are the problems with it?
Tim Czarkowski You are in a judicial foreclosure state which is totally different from my experiences in CA. I'm curious that the attorneys are saying that you won't be noticed of a pending foreclosure. I thought everyone was named and served in a judicial foreclosure suit: jr lenders, lienholders, borrowers and any owners of record. In fact, how could it be otherwise? I'd check further into that. Maybe you mean something different by noticing. Indeed, the senior lenders don't have to communicate with you as the new owner via a foreclosure. You haven't yet checked for a lis pendens? Or is this for property to be purchased in the future?
I find it hard to believe that lenders in FL have no recourse to recover collateral other than a 3 year foreclosure process. Is that because of a backlogged court system? So does that mean borrowers in FL are just taking a 3 year break from paying for housing?
Ned Carey This thread is about renting out properties that one has taken title to via foreclosure on a jr. HOA lien or, in my case, getting a deed and taking title to the property subject-to. For the purpose of this discussion, Tim C. and I are deeded owners. In FL, HOA liens are foreclosed via public auction and the winning bidder takes title to the property subject to any senior liens.
Eddie P. You may want to read up on the Tenants in Foreclosure Act of 2009 and the Dodd Frank Act and amendments that updated the definition of "foreclosure action" per the original act. The original act was mondo vague and said that a lease, as long as the tenant was paying fair market rates, had to be honored after foreclosure. However, it said the lease had to be executed prior to "notice of foreclosure." No one could agree on what "notice of foreclosure" meant as all states have different procedures and noticing. The Dodd Frank Act and amendments in 2010 went on to define this "notice of foreclosure" as actual transfer by a trustee's deed (non-judicial states) or court order after foreclosure (judicial states). Hence, a lease executed before a property becomes an REO or sold to a third party at sale is a valid, per the act.
You'll be seeing more of this in the future, as indeed, IMO, lots of leases will be executed prior to "notice of foreclosure".
Even if they aren't served, the property is usually posted conspicuously with a "handbill" or with a poster by the sheriff. Hard to miss seeing one of those (unless somebody else sees it first and removes it). Here is a handbill sample from a county in PA:
http://pasheriffsales.com/pdf/ADM_4505__ALLEN.pdf
Of course, the law requires publication in newspapers as well - but as we all know, many people do not read printed news these days. But before the internet became so popular, the newspaper was probably the most likely way to get info on a pending foreclosure.
Steve Babiak Not every state has judicial foreclosure. Of the states that are judicial, only 15 utilize "sheriff sales". I'd say sheriff sales are in the minority. There are noticing requirements in every state, but there are no handbills or posters referring to sheriff's sale dates in CA and many other states.
You'll be seeing more of this in the future, as indeed, IMO, lots of leases will be executed prior to "notice of foreclosure".
Marie,
Kudos to you for thoroughly understand The Tenant in Foreclosure Act. The key things that Marie mentioned above was that the tenant must be paying fair market rent.
I watched a judge threw out a case of a lady claimed she signed a 5 year lease for $500/month when the fair market rent is $2,500. This was back in November 2010. In CA, we don't have "notice of foreclosure." We have notice of default and notice of trustee sale. It's a shame that the Dodd Frank Act screwed up our definition. In my opinion, any lease entered after NOD filing should not be honored. Fair market rent in the SFBA can vary $500-$700/month so it is open for interpretation again on what fair market rent is.
Second, what is to prevent the disgruntled owner to sign a stipulation for summary judgement speeding up the banks sale? They have no reason to delay the process any further. Of course as owner of title, you can hire a lawyer to delay the process, but that cost money.
I am glad it's working out for other investors on here, just didn't seem feasible to me.
Eddie,
I'm in agreement with you here. I don't think it's fair for the tenant, but to each his own.
I would obviously want to rent at FMV, my goal would clearly be to maximize cash flow during my holding period not set a tenant up with some sweetheart deal. I think that type of arrangement is more likely from non-arms-length leases I don't see how it isn't fair to the tenant as long as they are aware of the situation. I could understand if they were going to be thrown out on the street when the bank takes possession but that is not the case. Honestly I think the bank gets the short end of the stick on this because after waiting three years to foreclose they may have to wait another year or so to finally have it vacant. That is an unbelievable long and ridiculous process. Although most banks don't know there *** from a hole in the ground.
Tim,
Put yourself in the tenant's shoes. Would you sign a lease and pay fair market rent when the landlord just disclosed to you that the house will get foreclosed, but don't know when? Although you're protected by the Tenant in Foreclosure Act, do you mind seeing the notice of foreclosure posted on the door when you come home from work? do you mind flippers/investors knocking on your door weeks before the sale date? Do you mind moving again in 1 or 2 years when you're not ready? Do you mind losing your deposit because the house got foreclosed? How about the last month rent?
Making money is all good, but I believe in karma. As I was taught, there's always a better way.
Best of luck with your new adventure.
Tim Czarkowski - I am looking into doing the same thing and ran across your thread. I am also in Florida. A couple questions for you...
1. Have you moved forward with your plan, and if so, how is it working out?
2. Do you have any concerns about the following FL Statute?
"697.08?Equity skimming.—
(1)?It is unlawful for any person, with intent to defraud the owner of real property, to engage in equity skimming, which is, to:
(a)?Purchase, within a 3-year period, two or more single-family dwellings, two-family dwellings, three-family dwellings, or four-family dwellings, or a combination thereof, that are subject to a loan that is in default at the time of purchase or within 1 year after the time of purchase, which loan is secured by a mortgage or deed of trust;
(b)?Fail to make payments under the mortgage or deed of trust as the payments become due, regardless of whether the purchaser is obligated on the loan; and
(c)?Apply, or authorize the application of, rents from such dwellings for the person s own use.
(2)?A violation of subsection (1) constitutes a felony of the third degree, punishable as provided in s. 775.082, s. 775.083, or s. 775.084.
History.—s. 1, ch. 94-288; s. 775, ch. 97-102."
I know people are making some serious cash doing this, but I have to wonder if this statute is applicable, and if it may just come back and bite someone like you or me in the ***.
Looking forward to any input.
Thx
@Robert Per
1. No I haven't purchased any more. I am waiting to finish a flip before I get started.
2. No that law would not apply in this case. It would apply to original owners of the property, however.
Tim Czarkowski I would read that statute again. It says you are committing equity skimming in FL if the you buy the property "subject-to", collect rents and don't pay the mortgage. It even states that it doesn't matter if you were the original borrower or not. It also says equity skimming is a felony. I like the part that says it's equity skimming if you do this with two or more properties within 3 years. So 1 property every 3 years is no problem. :)
The language of this appears to be directed at buyers taking title to properties via jr. liens (which includes HOA liens). I wonder how recently it was updated. Honestly, it's so specific as to collecting rents on purchases made subject-to, I wouldn't ignore it. The CA equity skimming law isn't nearly as strict. If I were in FL, I'd look at how recently this was updated and what the real consequences might be.
@K. Marie Poe
I have spoken with two real estate attorneys here in Florida. Both agreed that it does not apply in this case. HOAs are also renting in these case to recoup the dues that were owed to them. I am not ignoring it, it is just not applicable.
I'm in Florida and I've been tempted to try this, but not brave enough.
Back during the worst of the recession my condo complex had about a 30% HOA nonpayment rate. Our HOA repossessed 4 or 5 condos and rented them out until they were repossessed. We usually got 12-15 months rent before we lost the property. Things have gotten better and we only own 1 now.
One thing to make sure of. When we looked into this the HOA lawyer said that the HOA has special status in FL foreclosure law.
The fear was that there are circumstances where the bank can foreclose and come after you for the deficit (between judgement and auction price). I don't know that this is true, and what the circumstances would be, but the warning was given. Find that out before you get your name involved.
Michael Buckland
The special status relates to the HOA lien not being wiped out in a foreclosure case like most subordinate liens are. A third party bidder has to pay the full amount after the auction. I understand that banks get some type of discount. According to my title agent they can only be charged up to one year of back dues plus attorney's fees. I wish it was the same for third party bidders as the late fees, attorney's fees, etc. can be two or three times the amount of the original lien. This all applies in the case of a bank foreclosing.
I haven't heard anything like that. I can't imagine how they could come after your for a deficit on someone else's mortgage.
The only way I can see the law not applying is in the first section where it says: "It is unlawful for any person, with intent to defraud the owner of real property, ....." If you are an owner of a property, rent skimming isn't intended to defraud yourself. On further reading it looks like that law might have been written to protect homeowners from investor buyers taking the property subject-2, collecting rents from tenants or l/o buyers and then not paying the owner's loan.
Does FL have no other law that addresses rent skimming, one that protects lenders?
One other thought (wife reminded me of this):
This is a strategy used by some less than ethical purchasers and was once done in our condo complex. Get control of the house fairly cheaply by this method, then strip it. Take the appliances if present, take the AC, take the copper pipes and wires, plumbing fixtures and counters. In a fairly up to date house with good appliances it's pretty easy to take $30,000 worth of stuff pretty quickly. And reduce the value by six figures.
There's a thread referenced above that got into the ethics of this type of purchase. This could be part of the reason that people to bid these, especially the investors that aren't burdened by ethical considerations. And the fact is that a bank holding a mortgage probably doesn't have a good idea of what's supposed to be in the house makes it pretty easy to do.
Wow that never occurred to me. NOW THAT IS UNETHICAL. It doesn't seem like it would be illegal however. I mean they own they own the place at the time and you can strip your own property if you feel the need. Did anyone try to go after them, file criminal charges, etc?
That is in no way what I am looking to do. I want to rent them out and I plan to treat them like any of my other rentals. I stay on top of maintenance and if there is a problem my contractor is out the next day.
I just can't believe that, some people are so creative but use it in the wrong manner.
Who ever is doing this in Miami-Dade County is going to start losing money. Attorneys will be allowed to do 20 summary judgments a hearing. You will need to have to pay someone consistently to go to court to prolong your cases but eventually that will not be enough.
This is a strategy used by some less than ethical purchasers and was once done in our condo complex. Get control of the house fairly cheaply by this method, then strip it. Take the appliances if present, take the AC, take the copper pipes and wires, plumbing fixtures and counters. In a fairly up to date house with good appliances it's pretty easy to take $30,000 worth of stuff pretty quickly. And reduce the value by six figures.
...
That owner was just doing what many other foreclosed homeowners end up doing ...
If this sort of behavior is noticed by the legislators in the state of FL, don't be surprised if they don't extend the basic concepts of that equity skimming provision to this sort of investing. K. Marie Poe - the buyer of the HOA lien is not out to defraud the original owner, and I guess that is the loophole in that equity skimming statute.
If this sort of behavior is noticed by the legislators in the state of FL, don't be surprised if they don't extend the basic concepts of that equity skimming provision to this sort of investing. K. Marie Poe - the buyer of the HOA lien is not out to defraud the original owner, and I guess that is the loophole in that equity skimming statute.
I can see now that this particular equity skimming law was written to protect homeowners from sub2 investor buyers. But where's rent skimming law that protects lenders? Is it possible that FL doesn't have one?
Tim,
I'm in south S Florida and thisstrategy is very common here, and I assume in Jax. as well. These days it's too competitive and they bid too much for "the right to rent til the bank comes knocking". A couple of clarifications:
--If the mortgage contains an "assignment of rents" (most don't) it WILL apply to you as it applies to the subject proiperty, not the note guarantor. But, I've never seen the bank bother to come after it.
--The back log of foreclosures is not what it used to be. This was due in part to Robo signing, David Stern implosion, etc. Foreclosure cases in Palm Beach county are getting to a Summary Judgement hearing in 8 to 9 months now.
--research recent HOA foreclosure sales there and see the prices. Also, you need look at the underlying mortgage foreclosure case activity. This will give you an idea at what stage the bank foreclosure is in.
--The bank foreclosing does NOT have to notify you, if the foreclosure is already initiated, since there was a Lis Pendin filed, putting you and everyone else on notice, before you bought at HOA foreclosure auction.
Hope this helps
Wayne Brooks
Yes I have noticed that some of them are getting bid up rather high but the are still deals to be had, as with anything. I have pretty consistently seen people bid over $10,000 and one for a beach front penthouse where they bid $30,000. Here in Jacksonville I can go online and look at the foreclosure case. Right now it doesn't seem like they picked up any speed but you never know when it might change. I'm really surprised they are moving that quickly down there. That should help get the market in better shape much more quickly.
Yep,
I do short sales as a realtor and as a 3rd party negotiator. I have one client that had an LP in DEC 2011 and has a summary jud. hearing scheduled. Also, there are quite a few 2012 cases going to auction daily, that are not HOA's.
Been a while since someone posted on here. Was wondering if you guys know where to go to purchase these HOA Liens. Do you have to go to a realtor, Is it a website where you bid, Live auction? Any info would be appreciated.