Two recent decisions in the Florida 2nd and 5th District Courts of Appeal seem to indicate that the third party purchasers may have little or no right to participate in foreclosure proceedings related to the property in which they have an interest. This means that third party purchasers wishing to contest a foreclosure face a potentially major stumbling block in doing so. This introduces new risks to any decision to buy property which is being foreclosed on. Thankfully, Gary Handin, experienced loan modification attorney, is here to explain the consequences of these decisions for third party purchasers.
The broader context: Foreclosure
Foreclosure is a legal process which occurs when a creditor (usually the bank) claims the property of a debtor because they have consistently defaulted on mortgage repayments. If foreclosure is granted, the creditor may evict the homeowner, sell the house, and recover the outstanding balance of the mortgage from the sale. Although banks usually initiate foreclosure, recently, Home Owners’ Associations (HOAs) have begun to foreclose on homes when members consistently fail to pay their HOA fees.
The Pealer Decision
In the Pealer case, (Pealer v. Wilmington Trust, N.A., as Trustee for the MFRA Trust 2D15-2822, 2017 WL 104075 (Fla. 2d DCA March 171, 2017)), a third party had purchased a property at a Home Owners’ Association foreclosure sale, with actual knowledge that the bank had a mortgage over the property. However, she did not assume the mortgage of this property. When the bank initiated foreclosure proceedings on the home, both the mortgagors (the original homeowners) and the third party purchaser challenged the foreclosure proceeding. On the question of the third party’s rights to participate in the case (that is, her legal standing to join the case and make representations to the court), it was held that her interest in the foreclosure proceedings was merely speculative and therefore insufficient to establish her standing. The court’s basis for this decision was that since the purchaser had acquired the property whilst aware of the bank’s superior interest in the property, and since she had never assumed the mortgage, her interest in the property could only have been possessory (in other words, her interest was in possessing the property in the interim, perhaps making profits by renting it out, but not in actually acquiring the property). This finding was supported by the fact that there was no evidence she intended to redeem the property and protect her ownership of it. Thus, the court found that unless a third party purchaser is exercising her right of redemption and is genuinely intending to prevent the forced sale of the property, she has no basis for participating in foreclosure proceedings.
Investor Trustee Services case
A short while later, the 5th District Court of Appeal, in Investor Trustee Svcs, LLC v. DLJ Mortg. Capital, Inc. No. 5D15-3082, 2017 WL 1290010 (Fla. 5th DCA 2017), made further pronouncements on the rights of third party purchasers in relation to foreclosure proceedings. In that case, it was held that a third party who acquires rights to a property after a notice of foreclosure proceedings (a lis pendens) is recorded, is not entitled to participate in the foreclosure proceedings and has no legal standing to try to prevent the foreclosure. This means that if you, as a third party purchaser, purchase a property knowing that foreclosure proceedings have commenced, you will not be able to contest the foreclosure later on.
The advice of a loan modification attorney
Clearly, these cases have significant bearing on the rights of third party purchasers. If you are considering purchasing a home which has been foreclosed on in order to gain interim benefits – such making a return on your investment by renting it out, after having purchased it for a nominal bid – then you need to be aware that your ability to challenge the foreclosure proceedings later on, for whatever reason, has been severely limited by these decisions. Thus, it is always wise to consult a real estate legal practitioner in order to evaluate all the risks associated with these purchases.