United States: Selling/Acquiring Distressed Real Estate In Florida (Continued)

UNPAID REAL ESTATE TAXES AND CDD ASSESSMENTS

Unpaid real estate taxes and Community Development District (CDD) assessments can frequently be issues with distressed property. By state law they constitute a first lien on the property and will, therefore, survive a mortgage foreclosure (meaning that the purchaser will have to pay them after acquiring the property if they want to keep it). A title insurance commitment will disclose these unpaid taxes and assessments if they exist. High amounts of past due taxes or CDD assessments obviously affect what a purchaser will be willing to pay for the property. However, title insurance commitments may not disclose municipal or county liens (for utilities and other such services to the property) that are not recorded in the public records, but are granted by city or county code. These are typically the subject of separate searches that the title company can perform or obtain for an extra fee and should be considered.

In Florida, real estate taxes for each calendar year become delinquent if not paid by April 1st of the following calendar year. Once delinquent, a process begins by which the County Tax Collector can issue a Tax Certificate, which will entitle the holder who buys it (by paying the taxes) to apply in the future for a Tax Deed giving the holder title to the property if the property owner does not reimburse them for the taxes, plus interest. Generally speaking, the holder of a Tax Certificate can apply for a Tax Deed after two years have elapsed from the date the taxes became delinquent. A Tax Deed will transfer ownership of the property to the grantee named in the Tax Deed, so it is important for a prospective purchaser to investigate the status of real estate taxes, including whether and when a Tax Certificate was issued, to make sure that there is sufficient time to redeem the Tax Certificate by paying the past due taxes (plus accrued interest and administrative costs) before the issuance of a Tax Deed.

Past due CDD assessments pose a similar problem. A CDD has a lien on the assessed property to secure the payment of its assessments, and this lien can be enforced in two different ways at the election of the CDD. The CDD can choose to have the County Tax Collector bill and collect CDD assessments along with the County's real estate taxes. If this is done, the property is subject to the issuance of a Tax Certificate, followed by a Tax Deed, as with past due county real estate taxes. A CDD can also elect at any time to institute judicial foreclosure proceedings to recover its assessments. If it does so, the CDD assessment lien is foreclosed like a mortgage, and the property is sold at a foreclosure sale. If a property is subject to high amounts of past due CDD assessments, it may be possible to negotiate a settlement with the CDD, whereby the CDD's bondholders (who funded the CDD's improvements by purchasing its bonds, in exchange for which they became entitled to the assessments payable to the CDD as the return on their investment) accept less than what they are owed. The bondholders may do this if they are offered more than they could reasonably expect to receive from a tax sale or foreclosure sale. Additionally, it may be possible for a prospective purchaser of the property to buy all of the CDD bonds from the bond-holder(s) at a discount and then direct the CDD to institute a foreclosure proceeding at which the property can be acquired by the purchaser bidding the amount owed under the bonds. Given that a CDD foreclosure will extinguish a first mortgage, this may be a valid option to acquire distressed property under the right circumstances. However, a CDD foreclosure will not extinguish county real estate taxes, since they have equal priority of lien as the CDD assessments. Properties within CDDs can present potentially significant complications, so any investor proposing to acquire property which is subject to high amounts of past due CDD assessments should seek legal advice on the issues presented by the particular property involved.

PAST-DUE CONDOMINIUM OR HOMEOWNERS' ASSOSICATION ASSESSMENTS

As mentioned above, if the property is subject to a condominium or homeowners' association, a purchaser should determine whether and to what extent there are outstanding assessments, since a purchaser may be liable for some or all of them. It is also possible that there are other violations of a Declaration of Condominium or a Declaration of Covenants affecting the property. It is not unusual for a condominium association to have a right of approval over purchasers or a right of first refusal to purchase. Inquiries to the applicable association can provide comfort on these matters. If the inquiries disclose issues, they will need to be addressed or the purchase price adjusted to account for them. Additionally, it may be possible for the purchaser to obtain title insurance coverage (for an additional premium) against potential violations of covenants and restrictions affecting the property as part of the owner's title insurance policy that the purchaser obtains at closing.

CONCLUSION

While understanding the alternatives to acquiring distressed real estate in Florida can be complex, it is crucial to ensuring a successful investment. Since each scenario discussed in this article will have varying risks and rewards depending on the particular facts, parties and circumstances involved, an in-depth analysis of each possible option, and the corresponding advantages and disadvantages to acquiring the property at that particular stage of the foreclosure proceeding, is essential to ensuring the best purchase possible.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.