Beware that great deal at foreclosure auction


Article Courtesy of The Orlando Sentinel

By Mary Shanklin

Published September 22, 2012 


Some bidders who have purchased foreclosed houses at public auction are complaining about a "poison pill" embedded in the sale.

If the auctioned house was foreclosed on by a homeowners association, some buyers end up paying for the house only to have it later foreclosed on by one or more banks.

"We're seeing a ton of this in Orange County," said Orlando lawyer Justin Clark, who currently represents several buyers of homeowner-association foreclosures. "The banks can foreclose on these people, and they can foreclose very quickly."

Of 187 Orange County properties hit with new foreclosure filings during the first week of September, records show that 27 of them, or about 14 percent, were being foreclosed on by homeowner associations owed dues and fees not by banks or finance companies owed mortgage payments.

Clark said HOA foreclosures are a growing part of the house-repossession mix in the courts these days.

An Orlando woman said she and her husband recently purchased a house for $16,000 in cash, only to learn that they were responsible for the $250,000 mortgage plus overdue homeowner-association fees.

That buyer, Theresa Edgerton, said government-run foreclosure auctions should separate bank-owned properties from those "owned" by homeowner associations as a way to better protect buyers. Otherwise, people mistakenly think they are buying the property from the principal owner, when the HOA's position is secondary to that of the company that continues to hold the property's mortgage.

"I don't quite understand how they can sell us nothing," she said recently of the house she and husband thought they had bought at auction, not realizing a bank was still hovering in the background, waiting to foreclose on the same property because of an overdue mortgage. "What's so heartbreaking: We just felt like we won the bid. Several people are bidding on these we're not the only ones going through this."

But Leesa Bainbridge, a spokeswoman for the Orange County Clerk of Courts, which hires a company to handle its foreclosure auctions, said it is the bidder's responsibility to make sure the property has no other liens on it, mortgages included.

"We put something up for sale when a judge tells us to," Bainbridge said. "There are warnings on the site: Do your research."

Like foreclosure-auction websites operated by other counties, Orange County's site does advise bidders to research the properties' value, ownership, liens and mortgages. But Clark, the lawyer, said the websites fail to make it clear that homes foreclosed on by homeowner associations are going to be foreclosed upon again next time by the banks.

Selling off homeowner-association debt under the guise of a foreclosure auction is particularly unfair, according to one critic of the process, when you consider that the Legislature allows banks to skip out on paying the full tab for a property's homeowner-association debt. 

"We have serious problems, not only for the HOA but also for the people buying into it," said Jan Bergemann, president of the nonprofit homeowner-association watchdog group Cyber Citizens for Justice. "Our legislators have more or less protected the banks against any liability, and they hold owners in the association responsible for any unpaid dues."

The banking industry has argued that homeowner-association debt on foreclosed houses should be capped to better ensure that the properties can be priced for resale near market value.

Bergemann warned that government-run foreclosure auctions can be perilous and that novice investors should probably avoid them.

Edgerton is already out of luck, however. She said she thought she had landed her dream home for a sweet deal. Now she's out $16,000.

"The system is very misleading," she said.