I came across an article by Lora Shinn entitled “5 Buyer Mistakes in a Short Sale.” Number 3 on Shinn’s list is “ignoring legal and insurance information.” Although I agree with the author’s list, the list focuses more on the physical attributes of a short sale property than legal issues (specifically title issues) that are often overlooked until they become a problem — either just before closing when such problems can cause further delay, or worse yet, after closing when they can become a legal and financial nightmare. I would like to expand on the buyer’s mistake of “ignoring legal information” while being blinded by the seemingly “good deal” they are getting.

I recently represented a colleague in the purchase of her home via a short sale. Her family had been renting the home for well over a year while awaiting approval from the short sale lender. The title company had pulled a title commitment, which had not been provided to the buyers. The buyers were informed there were title issues involving liens that also delayed the closing. When it appeared the bank had finally approved the short sale at terms everyone agreed upon, and the title issues were supposedly addressed, I was retained to assist the buyers with the closing. At about the same time, the buyers were informed that while they were awaiting the short sale approval (and living in the house), a default final money judgment was ordered against the seller in an unrelated foreclosure case. A certified copy of the judgment had been recorded in the public records of the county where the short sale property is located, and therefore the judgment attached to all real property owned by the seller in that county, including the property my clients were purchasing. As the money judgment was quite a significant amount unlikely to be fully satisfied prior to this closing, the title company attempted to rely on the filing of a Notice of Homestead to exempt the property from the judgment lien.

One of the benefits of Florida homestead law is protection from liens, except those for the payment of taxes and assessments on the homestead property, obligations contracted for the purchase, improvement or repair thereof, or obligations contracted for house, field or other labor performed on the realty. To exempt homestead property from a judgment lien, the debtor must either obtain a judicial determination that the property has homestead status or follow the Notice of Homestead procedure set forth in Section 222.01, Florida Statutes to address liens against homestead property to be sold or mortgaged. The procedure requires a statutory notice to be given to the judgment creditor, who then has 45 days to file a declaratory action to challenge the homestead status of the property. If no action is made during that time, the lien is deemed not to attach and the sale or mortgage must take place within 180 days after filing of the Notice of Homestead.

In my colleague’s situation, the seller followed the Notice of Homestead procedure, which the title company intended to rely on in closing the transaction. However, as I mentioned above, the buyers were already living in the property, so it was no longer the seller’s homestead. Accordingly, relying on the Notice of Homestead would have left the buyers open to a potential claim by the judgment creditor, whose lien likely did attach to the property they were buying.

Without the homestead protection, the only option was for the seller, who obviously was without the financial means to satisfy the judgment, to negotiate with the judgment creditor to try to obtain a release of the property from the judgment lien. And this had to occur within the tight closing window required the short sale lender approval, which had already been extended several times. The judgment creditor asked for money, which the seller refused to pay, and ultimately, when the realtors agreed to reduce their commission to cover it, the creditor initially refused to provide an appropriate form of release that could be relied on by the buyers. Ultimately, I provided a form release that the judgment creditor’s counsel approved and the deal closed.

The moral of the story is that, the financial situation of short sale sellers, which led them to have to negotiate a short sale in the first place, frequently results in other legal issues affecting the property being sold. Many of these issues can be addressed if they are discovered early enough. It is advisable that a buyer of short sale property engage qualified legal counsel to assist with contract and title review as well as due diligence as soon in the process as possible.

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  • Feeling Chen

    I’m having the exactly the same issue right now trying to purchase a house that has a personal lien on the property. My situation is we cannot find the creditor. The title company and court have sent out letter to the creditor, but get no response so far. What can I do? If we cannot find the creditor, we cannot close since he/she can come back anytime in the future and ask us for repayment once we became the owner of the property. Do you have any good suggestions?

  • Thank you for your comment! The answer to your question depends on a number of factors, such as the nature of the judgment lien, the timing and form of the judgment, the amount of the title insurance policy (which is based on the purchase price of the property) and whether or not the subject property is the homestead of the seller. If you would like to discuss options in your particular situation, please don’t hesitate to contact me or another Florida real estate attorney to assist you. I can be reached directly at 239.344.1108.