Disclosure obligations imposed on sellers of foreclosed homes are not exactly the same as owner-occupied properties. If the seller that bought a foreclosed home never lived in or repaired it, then that seller will likely not be held to the same standard as a seller who occupied the property. That is not to say that foreclosed properties are riskier or less advantageous. It is only to highlight that buyers of these foreclosed homes should be sure to perform substantial due diligence to understand the condition of the property.
Florida case law has established that a seller can only be liable for failure to disclose a material defect of which the seller was actually and not constructively aware. Buyers of foreclosed property should anticipate that the seller is likely to assert their lack of actual knowledge as a defense. In that situation a buyer is smart to perform an independent due diligence survey of the physical property and structure to uncover any material defects prior to closing.
The process of a foreclosure is essentially the cleansing of the title to real estate. The legal effect of the lawsuit is to foreclose all named and identified interests in the property that are subordinate to the foreclosing party. The important point is that only named and identified parties are foreclosed by the lawsuit.
If a party with a proper and valid lien like a roofing company is not named in a foreclosure, then that lien is not foreclosed and may continue against the property. While that lien can potentially be foreclosed later the process becomes complicated by issues like whether the superior mortgage lien was extinguished thereby elevating the junior lien to a position of priority. Naturally, these situations should be avoided before closing which highlights the importance of obtaining and verifying title search reports before closing.
After the real estate market collapse around 2010, the number of foreclosures in Florida dramatically increased. From my experience that was a rapid change. At first buyers with lower contract prices wanted to sue for specific performance to force sellers to sell them the property. During the construction phase the value of the property had often doubled and the sellers wanted to get out of the contract to sell the home for more. In a very short period of time the situation became reversed with sellers wanting to force buyers to close on the property that was rapidly depreciating. Those who purchased often with the intent of quickly reselling or flipping the houses also found themselves subject to foreclosure suits.
Following that foreclosure crisis there was a period where the purchase of foreclosed homes dropped. That was attributed to perceptions that lenders had not properly foreclosed the homes. Buyers became concerned about latent defects or a new round of foreclosures. While those problems were largely resolved by our courts, a prudent approach learned from the lessons of the past is for a buyer to hire an experienced real estate attorney to examine the title and uncover potential defects in the foreclosure.
We have over 20 years of experience on complex real estate issues, and can help you with due diligence research if you are purchasing a foreclosure. Give us a call at 561-838-9595 or email us at [email protected].