The Homeowner’s Rights to Surplus Funds Following a Foreclosure Sale

The Homeowner’s Rights to Surplus Funds Following a Foreclosure Sale

By Charles P. Castellon, Esq.

CPC Law

© All Rights Reserved, 2015

There has been a lot of media coverage about banks foreclosing on homeowners in recent years.  Another type of foreclosure that hasn’t received as much attention involves homeowner associations (“HOA”) suing property owners for failing to pay their dues. Homeowners can lose their homes, which is clearly a terrible outcome.  Unless they know their legal rights, they can also miss out on the chance to recover money through the legal system to soften the blow.

In Florida, HOAs have great legal power.  Their powers include the ability to file foreclosure cases against homeowners very much like lenders may take borrowers to court for failing to pay the mortgage.  During the hard times of a bad economy and unemployment, many homeowners have struggled to pay their HOA dues.  This has resulted in HOAs foreclosing in great numbers.  In recent years, HOAs have struggled financially as more homeowners have failed to pay their dues.  This has caused associations to pursue foreclosures more aggressively.

When an HOA wins a foreclosure case, the judge signs a judgment declaring   the total amount the homeowner owes the association.  This amount usually includes the back dues, interest, penalties and attorney fees.  Next, a court sale is scheduled.  At the court sale, anyone may bid on the property.   Often, the foreclosing HOA itself is the winning bidder and ends up with title to the home.  The HOA goes into the court auction with a credit for its judgment amount.  Thus, if the judgment is ten thousand dollars, the HOA may bid that amount without actually putting up any money.  Quite often, an investor will make the highest bid on the property and become the owner.  This is where a surplus bid will often come into play.

The judgment in an HOA foreclosure case is almost always a much smaller amount than a judgment a foreclosing lender gets in a foreclosure the lender may file.  This is because the amount of money owed on mortgages in foreclosure are usually well over a hundred thousand dollars, if not hundreds of thousands.  The amount typically owed to an HOA is less than ten thousand dollars. 

When an investor comes to bid at an HOA foreclosure sale, that person will often gladly bid above the judgment amount.  For example, if a home is worth two hundred thousand dollars and the HOA foreclosure judgment is ten thousand dollars, it can be a smart move to bid above the judgment amount but below the property value.  If there are competing bidders, the winner may get title for twenty thousand dollars and buy a home for a bargain because although that’s more than the judgment, it’s far less than the property value. 

If the homeowner who loses title to the property also has a mortgage, the lender holding that mortgage may still foreclose and take title away from the investor later.  In the meantime, the winning bidder can make a return on the investment by renting out the property until the lender forecloses or negotiating a deal with the mortgage lender to buy out the bank’s interest.  The lender may agree to accept a discounted payoff from the new owner to avoid the costs and delay of a foreclosure.

That amount of money between the judgment figure and the court sale winning bid is known as the “surplus.”  This scenario leads to the question of what happens to that surplus money.  The answer is, most likely, the foreclosed former homeowner may claim it.  Florida Statute Section 45.032 says the property owner has first dibs to the surplus, unless a “subordinate lienholder” files a claim for the money within 60 days.  A subordinate lienholder would most likely be a second mortgage lender standing in line behind a first lender.  The law is user-friendly enough to provide the actual language the former owner should use to file a claim with the court. 

The law states the former owner is not required to hire an attorney for this legal action.  The process will require some time and effort but will likely be a worthwhile investment.  Although some attorneys would handle the matter and pursue the surplus claim for a contingency fee (a percentage of the money recovered, like in a personal injury case), anyone potentially entitled to the money may take on this task if they have the time and initiative to do so. 

Any former homeowner deciding to pursue the surplus without an attorney should be aware that the court personnel in the clerk’s office are not supposed to help them.  Anyone seeking a surplus without legal representation should handle the matter carefully to successfully recover the money.  This right to claim the surplus is not something most homeowners would expect to be available to them.  Although receiving a surplus doesn’t provide a new home, the found money can be a great relief in hard times.