Buying Distressed Real Estate in Florida: 6 Strategies Every Investor Should Know

Co-authored by: May-Soo Ide*

This article is the first in a multi-part series based on the Lowndes white paper, “Selling & Acquiring Distressed Real Estate in Florida.” Each installment will examine key legal and strategic considerations for acquiring distressed assets in the state. The next article will address due diligence issues relevant to these transactions.

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Buying distressed real estate in Florida can be a profitable venture, but the method of acquisition plays a critical role in determining the risks and rewards. Investors have several options available, each with its own legal and financial implications. Understanding these strategies is essential to making informed decisions and avoiding costly mistakes.

1. Purchasing Through a Short Sale
   
   One common approach is the short sale, which occurs when the investor negotiates directly with the property owner under circumstances where the owner’s mortgage lender agrees to accept less than the full amount owed to release the property from its mortgage. This method can help the parties avoid lengthy and costly foreclosure proceedings and may allow the investor to secure potential benefits, such as development rights that may not be included in the collateral acquired in a foreclosure. It also enables the lender to avoid defenses or counterclaims that the owner may raise in court during a foreclosure.
   
   However, short sales can be difficult if junior lienholders, such as a property owner’s association, construction lienor, code enforcement lienholder or second mortgage holder, are involved, since they would also need to accept less than they are owed to release their liens. Additionally, problematic leases would not be automatically extinguished (which is possible in a foreclosure) unless the lessees agree to terminate their rights. All these parties are potentially competing for the proceeds from the sale. When these issues are present, the short sale is usually not a viable option.
2. Acquiring the Loan Documents
   
   Another strategy involves buying the loan itself from the mortgage lender, including the promissory note and other loan documents. The investor then becomes the lender and can continue or begin foreclosure proceedings. This approach gives the investor full control over the foreclosure process and can be a cost-effective strategy, especially when there are junior lienholders whose interests can be extinguished in a foreclosure. It may also allow for negotiation with the borrower to obtain a deed in lieu of foreclosure, thereby avoiding foreclosure altogether.
   
   There are additional financial advantages to this method. No Florida documentary stamp tax is due on the assignment of a loan, and the investor may qualify for statutory protections that cap liability for unpaid condominium or homeowners’ association (HOA) assessments secured by liens on the property.
   
   However, foreclosures require time and money, often taking 6 to 18 months. Legal defenses or bankruptcy filings by the borrower can delay or complicate the process. Taking title via a deed in lieu of foreclosure triggers documentary stamp taxes on the total debt. Additionally, the lender may face federal "phantom income" tax liability if the property’s value is higher than what was paid for the loan (i.e., the Internal Revenue Service may claim that the lender has received income to that extent).
3. Buying a Final Judgment of Foreclosure
   
   After a court finalizes a foreclosure, the lender may sell the judgment itself. The investor who purchases it then takes over the right to complete the foreclosure sale and obtain the property. This approach can be attractive because it avoids the time and risk involved in initiating and proceeding with a foreclosure. Additionally, no documentary stamp tax is due on the assignment of a judgment.
   
   Even so, this strategy often requires a higher purchase price, as the lender has already absorbed the legal costs and risks associated with foreclosure. Court approval may be necessary to assign the judgment, and the borrower retains the right to appeal the judgement for 30 days, which could delay the sale. Safe harbor protections for unpaid condominium and HOA assessments may not transfer to the purchaser, and if the borrower files bankruptcy before the Certificate of Sale is issued, the sale may be further delayed. There is also a risk of phantom income tax liability if the value of the property exceeds the amount paid for the judgment.
4. Buying the Winning Bid from the Foreclosure Sale
   
   In some cases, an investor can buy the winning bid from the original bidder (often the lender) after a foreclosure auction but before the Certificate of Title is issued. This method can be appealing because the foreclosure process and any appeals are already complete, and the risk of delay due to borrower bankruptcy is reduced, as most Certificates of Title are issued within 24 hours of the sale.
   
   Nevertheless, this strategy comes with its own set of challenges. The assignment of the winning bid may require court approval, and safe harbor protections from past-due HOA or condominium assessments may not be available, leaving the investor jointly liable with the borrower. The investor may also be subject to documentary stamp tax on the assignment of the bid and then again on the Certificate of Title. Additionally, the IRS may view the gain as taxable phantom income, and the transaction must close quickly, often within a very narrow window after the sale.
5. Bidding Directly at the Foreclosure Sale
   
   Investors may also choose to bid directly at the foreclosure auction. This approach offers the opportunity to acquire property directly, sometimes at a discount. In some cases, lenders may be willing to let another bidder win if the bid is close to their expected recovery.
   
   However, lenders can credit bid up to the full amount of their judgment, potentially outbidding all others. Buyers who win at auction may become liable for any unpaid condominium or HOA assessments. Foreclosure sale procedures can also be complex and vary by jurisdiction, often involving online bidding platforms, deposit requirements, and strict deadlines. Investors must also pay documentary stamp tax and other court-related fees. If the property is still occupied, eviction may require a court order if lessees refuse to leave voluntarily.
6. Purchasing from the Certificate of Title Holder
   
   Once the foreclosure sale is complete and the winning bidder has received the Certificate of Title, an investor may acquire the property through a traditional real estate closing. This method is often the most straightforward, as many risks associated with foreclosure, such as borrower challenges or redemption rights, are no longer present. Past-due condominium or HOA assessments may be resolved by the seller before closing and may be capped by statute. This transaction is treated like a typical real estate purchase, which can offer more clarity and fewer legal hurdles.
   
   Despite these advantages, this is typically the most expensive option, as the seller (often a lender) will expect full market value. Documentary stamp taxes on the deed are required, although buyers can try to negotiate who pays. Sellers in these transactions usually provide few, if any, warranties or representations.

Each method of acquiring distressed property in Florida carries its own risks, costs, and opportunities. Investors should take the time to consider the approach that best aligns with their goals. As with any complex real estate transaction, working with experienced legal counsel is essential to navigating the legal process and protecting your investment.

Gary Kaleita is a shareholder at Lowndes. He has been certified by The Florida Bar as a specialist in real estate law since 1993, is a member of the firm’s Practice Groups involving Commercial Leasing, Banking and Finance, Condominium and Multi-Family Developments, and Distressed Real Estate. He can be reached at 407.418.6334 or gary.kaleita@lowndes-law.com.