MD Trustee foreclosure and Title Insurance -Dilemma

[Jacob Beg]

Hi All-

Generally, I stay away from purchasing condos at trustee auctions. I purchased one recently and it appears to have 25K worth of past due condo fee. There was a junior condo lien recorded against the property for a much smaller amount but I figured it will be wiped out. MD statute indicates that if the foreclosing deed was recorded after Oct, 2011 condo assoc can collect no more $1200 as a superior lien-this is not applicable here as the foreclosing trust was recorded prior to 2011. 

The settlement company is suggesting that I have to pay 25K. I am getting a mortgage on the property and required to get Title insurance. It's been suggested that unless that amount is paid, I cannot get title insurance. Does that sound right?

And is it worth purchasing it in cash without title insurance as I plan to flip it in two months? Will this cause issues down the line for the prospecting purchaser relying on a mortgage as he/she might struggle to get Title insurance for the same reason?

Any suggestions?

Thanks!

[Jay Hinrichs]

@Tom Gimer   might be able to shed some light on this..  

[Wayne Brooks]

It sounds like that debt does stay with the property. If it does, buying cash now doesn’t make that go away, it’ll have to be paid when you sell it anyway. 

[Jacob Beg]

Trustee's auction contract states, "The property will besold subject to all conditions, liens, restrictions and agreements of record affecting same including any condominium and ofHOA assessments pursuant to Md Real Property Article 11-110." 

The Article being referred to is:

2015 Maryland Code
REAL PROPERTY
Title 11 - MARYLAND CONDOMINIUM ACT
§ 11-110 - Common expenses and profits; assessments; liens

(2) In the case of a foreclosure of a mortgage or deed of trust on a unit in a condominium, a portion of the condominium's liens on the unit, as prescribed in paragraph (3) of this subsection, shall have priority over a claim of the holder of a first mortgage or a first deed of trust that is recorded against the unit on or after October 1, 2011.

(3) The portion of the condominium's liens that has priority under paragraph (2) of this subsection:

(i) Shall consist solely of not more than 4 months, or the equivalent of 4 months, of unpaid regular assessments for common expenses that are levied by the condominium in accordance with the requirements of the declaration or bylaws of the condominium;
(ii) May not include:

1. Interest;
2. Costs of collection;
3. Late charges;
4. Fines;
5. Attorney's fees;
6. Special assessments; or
7. Any other costs or sums due under the declaration or bylaws of the condominium or as provided under any contract, law, or court order; and

(iii) May not exceed a maximum of $1,200.

Reading the statue, it appears I am off the hook as the foreclosed trust was pre Oct 2011. I am not sure if the said debt attaches to the property as any junior lien will be wiped out due to foreclosure. In MD, the highest bidder is responsible for condo/HOA dues from the date of the sale so I am responsible for that.

I am not sure if it is right to say that the property's title is uninsurable due to this. Effectively, that renders this property non-mortgageable unless that balance is paid off. I wonder what are the caveats if I buy it cash and just keep renting it for the long term versus flipping because cashflow is quite good. 

[Wayne Brooks]

@Jacob Beg Any local title company should know the applicable laws and limitations….and not be afraid to make the Appropriate payoff (even if the HOA attorney is trying to get more than is legally due, as they often do here) and issue title insurance.

Here, a third party bidder is responsible for the entire HOA debt but if the foreclosing lender takes it back there set limits to what they owe.

[Jana Christo]

If you are holding this for a short time and you are paying cash, why pay for title insurance. I have bought condos without paying for title insurance or even paying the overdue condo fees. I flip the condos in one or two months. The title company pays off the overdue fees and issues a clear title to my buyer. 

[Russell Brazil]

Originally posted by @Jana Christo:

If you are holding this for a short time and you are paying cash, why pay for title insurance. I have bought condos without paying for title insurance or even paying the overdue condo fees. I flip the condos in one or two months. The title company pays off the overdue fees and issues a clear title to my buyer. 

@Tom Gimer will be the expert here.

But my understanding is if the lien was not cleared by the foreclosure, then the HOA would still be able to foreclose on the unit. You need to see if that HOA lien was cleared/released when the title work was done when you purchased it, or even if they wrote the original title insurance policy to have an exception for the HOA lien. (Assuming you got title insurance on the original purchase)

[Wayne Brooks]

@Tom Gimer ??

[Jacob Beg]

@Jana-  I have flipped properties without title insurance. However, I ran into a serious issue once where title insurance saved the day and I have newfound appreciation for it. It was supposed to be a quick flip of a property we purchased at the trustee foreclosure auction. Previous homeowner brought a suit after we settled on the property claiming that the foreclosed trust should have never been foreclosed upon as it was paid off already (it was a lie). His reasoning stemmed from the fact that an erroneous release of lien certificate was filed with the court and somehow the settlement company missed it as well. Long story short, the suit was thrown out at an early stage but the title insurance picked up the litigation costs and it took over 8 months. What was supposed to be a profitable deal turned out to be a loser as we were reluctant to spend money to renovate the place without a disposal. 

Russell- I have not acquired legal title yet, only have an equitable title by virtue of a the trustee sale. I would love to hear informed opinions. It appears Wayne may be right that the HOA attorney is attempting to maximize recovery for the HOA, however, MD law appears pretty straightforward. I am alarmed because the settlement attorney handling the sale suggested that I negotiate this amount with HOA and that he has seen others negotiate this amount. This indicates to me that either I am entirely wrong in reading the law or hopefully the settlement attorney is completely wrong meaning he was misadvising others about their liability.

[Tom Gimer]

The condo association allowed dues to go $25k in arrears? It should have recorded several liens, or amended and restated the original lien... and perhaps either foreclosed it or participated in the subject auction sale in order to protect its interests.

A super priority max $1200 lien (which apparently doesn't apply here) would be paid by the seller Trustee anyway.

So the question is... is the first mortgage actually in first priority? Pull the full title search. Is there is a ~$25k condo lien (or a portion of it) recorded in front of the first mortgage? If yes, that's on the buyer. If not, no dues/assessments transfer to the new owner except for those that have accrued since the day the auctioneer said "SOLD".

[Jacob Beg]

@Tom Gimer Thanks for the input. I checked and you are right that the association recorded several liens but all of them are outranked by the 1st Trust which is in first priority. I am not even sure why the settlement company suggested a payment to begin with. I forwarded the aforesaid statue to the settlement company and their response is, "You should be able to, push on the HOA to get them to release the backdues by showing them the statute. But, you definitely need to pull the foreclosure attorney's docs first, to make sure that the HOA was given notice."

Isn't this the sort of thing that the settlement company does? I have never had a settlement agent ask that I carry out the due diligence to ensure that the foreclosure process was followed correctly. Is there even a need to engage with HOA here? From Title Insurance perspective, do you think this can put a cloud in some way.

Thanks again!

[Tom Gimer]

Yes, one of the tasks of the settlement agent is to confirm that all interested parties (including junior lienholders) were given notice of the foreclosure sale. The notice is part of the case docket and it can be pulled and reviewed... simply match up the lienholders with the notices. If everyone necessary was notified, from a title insurance perspective the buyer is clear.

I would be wary of listening to anyone telling me to "push on the HOA" when the buyer doesn't typically do the pushing and there isn't even an HOA involved here... it's a condo. And sometimes you just have to ignore people. Sure, someone can send a statement of account that shows $25k is open but that certainly doesn't mean it needs to be paid at settlement... especially not by the buyer. Good luck.

[Trent Harrison]

@Tom Gimer

I agree with Tom. In MD the condo fees are normally secondary to any mortgage, the bank won’t lend money in a second position. The condo fees should have been wiped out in the foreclose and the bank should have paid the 4 months only.

[Jacob Beg]

Thank you all for the insight. This is perhaps a cautionary tale of using a competent attorney led settlement firm. All of this should have been dealt with the settlement attorney or could have alleviated  my concerns versus using vague or misleading language suggesting that the balance is payable by because the COA says there is a balance owed. I take Tom's point on board about what a settlement firm is supposed to do versus asking me to carry out the tasks that they will be paid for.  

[Chad U.]

Originally posted by @Jacob Beg:

Thank you all for the insight. This is perhaps a cautionary tale of using a competent attorney led settlement firm. All of this should have been dealt with the settlement attorney or could have alleviated  my concerns versus using vague or misleading language suggesting that the balance is payable by because the COA says there is a balance owed. I take Tom's point on board about what a settlement firm is supposed to do versus asking me to carry out the tasks that they will be paid for.  

In the half dozen or so foreclosures I've carried out in various states with a COA/HOA, every single one of them has tried to saddle us with the entire COA assessment arrears. In each case, I've had to contact the attorney representing the association and point out the obvious statutes to them. On a couple occasions have had to get a local attorney to write them a letter. Each time time they have backed off. The last one was a bit of a grey area within the statue, so had to get our attorney to issue a demand for the HOA to revise their estoppel. We ended up settling on about 15% of their original claim.

Although have yet to do an FC in MD with an HOA, a quick glance indicates that this, fortunately for you, is very black and white. You owe nothing, nor should it affect title. I would contact the HOA attorney and show them the relevant statute and particularly the new court of appeals decision that @Tom Gimer shared. Sometimes it's easier just to do these things yourself to save time and needlessly drag things out. No one cares about your investments more than you do.

You might want to consider switching title closing company too

[Peter Walther]

It needs to be understood that title insurance is based on risk avoidance, not risk assumption.  Therefore, if there is any question a third party, in this case a COA, might claim an interest in the property, the commitment should require a confirmation the COA does not have an interest, probably either by a release signed by the COA or a declaratory judgment action where a court affirms the lack of interest.  This is particularly true in non judicial foreclosure (NJF) state since there are no legal proceedings.  Yes, a NJF is faster than a judicial foreclosure but there are drawbacks and this is one of them.  I assume the settlement agent (SA) has already contacted the COA's rep who has declined to sign a release.  Despite common perceptions, a settlement agent's job does not extend to forcing anyone to do anything.  If the COA declines to sign a release the SA is not going to argue the law with the COA rep but is going to advise the buyer and seller what is required to issue a policy w/o exception for the matter.

I purchased a condo in FL at a HOA foreclosure once, Fl is a JF state. The condo is in a PUD with a Master HOA. Since the property is a condo, there is also a COA. The condo owner has an obligation to pay both an HOA assessment and a COA assessment but the then owner failed to pay either. The HOA filed a Notice of Lien (NOL) as required by Fl statute prior to foreclosing and then the COA filed a NOL of its own. The COA was named and served in the HOA's foreclosure and filed an Answer, pleading it didn't know anything about the HOA's allegations but if the court granted the foreclosure the COA wanted any excess funds. I purchased the unit at the foreclosure sale and received a Certificate of Title. Shortly after, the COA's rep contacted me and explained their reading of the Fl statutes led them to conclude their interest was not extinguished by foreclosure and demanded $25k to satisfy their CL. My research couldn't find any cases similar to theses unusual facts so I retained counsel who also couldn't find anything on point. He advised me I had a good argument but the cost of litigation to prove me right might cost as much as the $25k and if I lost I would then get to pay the COA's legal expense. I opted to pay. Fortunately my purchase price was low enough and the the value of the property was high enough I still made a profit when I sold.

[Chris Seveney]

@Jacob Beg - Talk to an attorney. If you need one let me know