State Approved Real Estate Contracts – Scrutinize Every Detail

A rage that has been going on for some time is the purchase of Homeowners Association (HOA) liens at the foreclosure auction.  Up until the last five years HOAs seldom used the foreclosure process to collect back fees and assessments.   Because most units continued to pay these expenses the HOAs managed to make ends meet and simply sat out the consequences.

I was asked to be an expert witness and to appear before the presidents of a group of condo associations with almost 1,000 units.  Their attorneys asked me to relate to these presidents how to overcome the issue of homeowner defaults.  These defaults had become financially burdensome on the other unit owners.  What was happening was these homeowners were also in pre-foreclosure with their mortgage lender.  In most cases the homeowners had simply abandoned their property.

I have to say that there was a lot of squabbling between everyone at the conference.  The attorneys were especially trying to justify why they talked the presidents into foreclosing and taking title to the abandoned condos.   In the “good old days” condo HOAs often had a “right of first refusal” to purchase units that were being sold.   The concept was that for sales that were too low in price the HOA would purchase the property.  That was if they could find a buyer for a higher price.  This process worked in a rising market.  When the market declined it was a free-for-all.

Here is the rest of the story – unwitting investors bid at foreclosure auctions on HOA liens thinking the foreclosure action “extinguishes” the mortgage on the property.  This is true in tax deed sales.  However, in foreclosure sales the mortgage is a senior lien that remains in place.  So an unsuspecting buyer can win a condo, townhouse or villa at the foreclosure auction and get on title in the public record.  Most unfortunately though the mortgage holder will move to foreclose him out at some unknown time in the future.

In the past three or so years some savvy investors have been scarfing up HOA foreclosures.  The investors are then renting these properties out to unsuspecting tenants.  Eventually the party ends with the tenant getting notice he is being evicted and he has to move asap.  The newest strategy of these investors is to advertise the property for sale at ½ the price of a similar FMV unit.  Again, unknowing investors rush in.  In some cases it is disclosed that the mortgage foreclosure is pending, but not in all cases.  The tipoff is the seller will only transfer title using a Quitclaim Deed.  This type of deed transfers all the liability to the new investor buyer.

But here is why I wrote this article – a Student sent me a contract that looks “out of the ordinary” compared to a normal Board of Realtor’s® Contract.  It appeared that the font was slightly different.  As I reviewed it, the Student was correct.  The listing agent had taken a PDF Editor program and carefully edited certain clauses that were very onerous to the buyer.  These contract changes were so onerous that the buyer would have no recourse for non-disclosure of material defects of the property (specifically the chain of title defects that were present).

It’s not a criminal matter to make alterations to a contract.  These are done all the time between buyers and sellers by striking through and then writing in new parameters that both parties initial.  But I am very uncomfortable with agents or investors taking the giant step of editing a contract that was approved by the state BAR and Board of Realtors®.  These changes include subtracting and then adding language that is very onerous to either a buyer or seller.

In summary, unfortunately the editing will possibly hold up in court as it is in black and white.  This brings me back to having an attorney shadow your closings or make certain you read whatever you sign.  By the way, if a buyer or seller explains to you what a clause means and it’s not very clear in the contract, expect the unexpected.  That may mean a grievous financial loss.  Make no assumptions.

To your limitless success,

Dave Dinkel

Real Estate Mentor Program Founder