Rent Skimming By Real Estate Investors Buying HOA-Lien Foreclosed Homes May Lead To Unneeded Stress, Uncertainty For Unwitting Tenants

In West Palm Beach, Florida, The Palm Beach Post reports:

• Cunning South Florida real estate investors are buying titles to homes on the cheap through community association foreclosures then renting them out until the bank catches up.
  
  It’s the latest tactic aimed at capitalizing on South Florida’s quagmire of vacant and foreclosed homes.
  
  And since banks — the primary lien holder on the homes — sometimes take years to foreclose, the strategy could offer the investor a hefty return. Homeowner association foreclosures are usually based on unpaid dues, with judgments far less than what is owed on the mortgage. A savvy investor can pick up a home for a few thousand dollars from an association foreclosure auction and make that money back in several months’ worth of rent.
  
  But while the method pays starving homeowners associations their back dues and puts money in the investor’s pocket, unwitting tenants may get a surprise when a lender comes calling to repossess the home.
  
  That’s what Daniel Torres said happened to his elderly parents after renting a home in the Covered Bridge community west of Lake Worth.
  
  It was bought for $10,800 in April by a West Palm Beach-based firm after the community association foreclosed on it for unpaid dues. The unit in the quiet neighborhood was not yet in bank foreclosure, although the previous owner had died two years earlier and the last mortgage payment was made in October 2010, according to court records.
  
  The Torreses moved into the home in August. Chase filed foreclosure papers in November against the heirs to the previous owner’s estate. A property management company was soon knocking on the Torres’ door saying they needed to leave because the house was in foreclosure and the locks were being changed.
  
  “It scared me,” said Tony Torres, 75. “I love it here. It’s peaceful, and there are a lot of nice people.”
  
  Dennis Sickle, principal of the home’s title owner, Milan Investments Inc., said the company does not tell tenants the property was purchased subject to a bank mortgage because they are shielded from a bank eviction by the federal Protecting Tenants at Foreclosure Act of 2009. The act says the bank must honor the terms of a lease unless the property is sold to someone who will occupy it as a primary residence. In that case, they must be given a 90-day notice to leave.

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• Attorneys who specialize in real estate law say the method of buying title to homes out of a community association foreclosure and renting them out until a bank takes final possession is both a legal and sound business model that can turn a profit.(1)

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• Sickle’s company picked up its buying pace in April and now holds title to about 20 Palm Beach County properties, according to the property appraiser.(2)

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• In the Torres case, the association didn’t get paid and put a lien on the home in November for $2,924. The Torreses soon got a letter, which they showed to The Post, demanding they send their rent checks directly to the association or face a termination of their rental agreement. The move, which bypasses the landlord, is something allowed in law.
  
  “They don’t need this kind of stress and uncertainty,” said the couple’s son, Daniel Torres, who is involved in a separate fight with the landlord to let his mother keep her Chihuahua.
  
  Daniel Torres said he feels he should have been told the home was purchased subject to a bank mortgage. He found the condominium on Craigslist and dealt with Realtor Adriann Dorbuck, who represented him in the transaction. Dorbuck said she didn’t know that it was an association foreclosure purchase either.
  
  “I was in total shock,” she said. “How could it not be disclosed to us?”

For the story, see Renters, be aware: Foreclosure maneuver affects you.

(1) Depending on how a semi-creative criminal prosecutor interprets and applies state law, engaging in rent skimming (also known as equity skimming) two or more times within a 3-year period might constitute a third-degree felony in Florida. See Section 697.08, Florida Statutes:

• 697.08 Equity skimming.—
  
   (1) It is unlawful for any person, with intent to defraud the owner of real property, to engage in equity skimming, which is, to:
  
  (a) Purchase, within a 3-year period, two or more single-family dwellings, two-family dwellings, three-family dwellings, or four-family dwellings, or a combination thereof, that are subject to a loan that is in default at the time of purchase or within 1 year after the time of purchase, which loan is secured by a mortgage or deed of trust;
  
  (b) Fail to make payments under the mortgage or deed of trust as the payments become due, regardless of whether the purchaser is obligated on the loan; and
  
  (c) Apply, or authorize the application of, rents from such dwellings for the person’s own use.
  
  (2) A violation of subsection (1) constitutes a felony of the third degree, punishable as provided in s. 775.082, s. 775.083, or s. 775.084.

Rent/equity skimming may also be illegal in other jurisdictions. See People v. Phelps, 837 P.2d 755 (Colo. 1992), quoting with approval from United States v. Capano, 786 F.2d 122 (3d Cir.1986):

• "Equity skimming is the practice of diverting revenues generated by mortgaged property in default to purposes other than property maintenance or mortgage payments."

(2) Ibid.