Florida's housing market was one of the most brutalized by the housing bubble's pop. The state's economy was very dependent on its real estate industry. In 2009 alone it recorded over a half-million foreclosures, according to RealtyTrac. In Florida 26% of all mortgages are at least one payment past due, reports the Mortgage Bankers Association. So you can see why the state needs to do something to whittle down its growing inventory of foreclosed properties.
The state government is trying to do just that through its new online auction system, administered through realauction.com. First rolled out late last year, counties across the state are slowly adopting these online auction systems accessed through their Clerk of Court's webites. Miami-Dade's site went live in January.
The Problem: Confused Consumers
Sounds great, right? Now you don't have to be a seasoned professional investor to capitalize on all the great real estate deals out there. You just need an Internet connection and a bank account to wire funds to your auction account for the required 5% deposit. This means lots of novices are getting involved, but that's a problem. Even though disclosures exist to warn bidders that they should thoroughly research the properties they're bidding on, confused consumers who think they're getting a great deal are sometimes bidding on what might as well be toxic waste.
In fact, the auction websites contain listings for all kinds of foreclosed property. That means not all the listings are first mortgages: some are second liens. In some cases, bidders think they're getting an ownership interest on a condominium, when they're actually getting a worthless second lien that the condo association has levied on the foreclosed occupant for unpaid maintenance fees.
The best way to understand what's going on is through considering an actual example. Last Thursday, February 18th, a bidding war went on for a listing on the auction web site for Miami-Dade's Clerk of Court. Here's a screen shot of the listing (click for larger image):
As you can see, it shows the assessed value of this property as $213,969. Yet, the judgment amount is only $5,210. To an unsuspecting consumer, it sounds like you could get a great deal. Bidding started at $8,600 at 10:28am. The auction ended at 1:24pm with the winning bid of $20,500.
But this winner was actually a loser. If you perform a records search, you find out that the defendant (foreclosed occupant) has another foreclosure lawsuit pending on the same property by Chase Home Finance, LLC. Yet, the plaintiff in the lawsuit for the auction listing above is Walnut Park Homeowners Assn Inc -- not Chase Home Finance. And you can find that separate lawsuit pending through the records search too.
This implies that a title search will almost certainly show that Chase Home Finance has the 1st mortgage on the property, while Walnut Park Homeowners Assn has a 2nd lien for $5,210 on the occupant's unpaid maintenance fees. Remember, when someone stops paying his mortgage on a condo, he often also stops paying his fees.
So what happens to the "winner" of a second lien? Well, they've purchased garbage. Now, they may be able to move into that condo for a few days, weeks or months. But the bank that holds the mortgage will still ultimately foreclose, wiping out that second lien. She never had an authentic ownership interest. Then, the winner must then vacate the premises, unless she wants to pay whatever the bank demands to wipe out its first mortgage, often hundreds of thousands of dollars.
Think about the insanity of what's going on here. Bidders are paying a premium for a second lien. And it's worthless: a first lien foreclosure will automatically extinguish that second lien anyway. In the example above, the bidder agreed to pay approximately four times the debt incurred by the former occupant's unpaid maintenance fees. Why? Obviously because she thought she was getting an ownership interest in the condo for a steal. Unfortunately, she didn't do her homework.
And now what happens? Well, the best-case scenario is that she only forfeits her 5% deposit fee of about $1,000. But if she pays in full before she realizes the mistake she's made, then she'll be in for a very unpleasant surprise: she will likely lose most or all of her money.
I spoke to a few Florida lawyers about what happens to the bidder's money. Once she's paid the balance, the condo association will get the amount it's owed, possibly more if it can argue that it deserves the premium. Any excess cash will then go to whoever qualifies according to the lien priority. After paying, the bidder has no claim on that excess. Her only hope is a very sympathetic judge.
The clear solution to this problem would be for buyers to be better informed about what they're bidding on. But it's easy to see from the screenshot above how someone could be easily led astray. The listing shows a sizable assessed value for the property. It includes links to the property appraisal, Google satellite and street views, and Zillow.com's value analysis. All indications imply that this listing exists to auction a property that's valued at around $200,000. Yet, it doesn't.
One such burned bidder, Erika Ginsberg-Klemmt, has chosen to do what she can to help create awareness surrounding this problem and contact unsuspecting winning bidders before they've paid-in-full. She says she's seen this happen to dozens of people statewide, some of whom she got to in time to prevent some of their losses. Some of the people she has contacted aren't completely ignorant about real estate and investing either: they include a foreclosure attorney and an investor from Morgan Stanley. She says that, often, those she contacts are initially paranoid she's trying to steal their mega-deal, but ultimately they end up thanking her.
Solution #1: Differentiate Between First and Second Liens
But clearly, the efforts of Ginsberg-Klemmt and other concerned consumers aren't enough to prevent this problem from continuing to occur. Shouldn't the Clerks of Court do more to provide bidders better information about listings? After all, they do facilitate the process. For example, bidders would find it extremely helpful if listings explained whether or not the property in question is a first or second lien. Then, anything listed as a second lien would be ignored by anyone with even an utterly basic knowledge of real estate.
I spoke to Esther Jones from the Miami-Dade County Clerk of Court about this problem. She informed me that the Clerk doesn't actually have any knowledge of whether a listing is a first or second lien. They just take all foreclosed properties and schedule them for auction on the website. They do, however, have a disclaimer in place warning bidders to be sure to understand what they're buying.
That may technically absolve them of liability, but doesn't the government have an ethical obligation to offer a little additional consumer protection? The state's websites have opened up these auctions to a wide population without real estate expertise and made it very easy to participate. Shouldn't the state also provide additional basic information about the property for sale, so to protect consumers that are new to the process and could be misled?
Solution #2: Disallow the Second Liens
Another possible solution might be for the Clerks of Court to forbid second liens from being listed on the website. This should be completely uncontroversial. There's no legitimate reason that anyone (other than maybe a professional collections agency) would ever want to purchase a second lien. It's always wiped out when the first lien holder forecloses.
Solution #3: Legislation
Unfortunately, neither of these solutions is likely to happen, because the Clerk of Court appears relatively content with the disclosure language and doesn't appear to be very concerned with the minority of consumers who get ripped off by purchasing second liens. It doesn't even know whether these properties are first or second liens. It just puts them up for auction and hopes for the best.
As a result, perhaps the only solution is for state lawmakers to take notice. Currently, Florida statute XL-718.116, section (6)(a) allows condo associations to foreclose their maintenance fee liens "in the manner a mortgage of real property is foreclosed." New legislation could forbid second liens from being posted on these web sites or force greater disclosure of lien priority for online listings.
Do Your Research
Anyone who plans to use this website should exercise prudence. It goes back to the old adage: if a deal seems too good to be true, then it probably is. One dead giveaway that a listing might be a second lien for unpaid maintenance fees is if a condo association is the plaintiff. But a completing a title search is the best way to make sure that you're getting a legitimate ownership interest. Purchasing real estate is an investment decision that should not be taken lightly. It's well-worth taking the time to do the research.