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Beware of the Zombie Property Apocalypse

By: Charles P. Castellon

In recent years, zombie movies and television shows have been a big hit.  I think there’s a certain release that comes from watching gory violence committed by and against the undead.  I’m still unsure of the rules for how to vanquish a zombie, but there’s another zombie problem in the real estate world without a solution in sight.  The term “zombie property” has come to refer to the many thousands of properties abandoned by distressed homeowners unable to pay the mortgage.  These homes have become zombies because  the lenders holding the mortgage have declined to step up and foreclose.  As a result, they sit empty and neglected with tall grass and entire neighborhoods suffer.

There are several reasons why lenders choose not to foreclose.  One factor is that because of all the fraud and mismanagement surrounding the housing boom and bust, including the mass-bundling of mortgages into securities sold to unsuspecting investors, many entities “holding the paper” can’t prove their case.  Another motive is financial (isn’t everything for the lenders?).  Many lenders do not want to take on the fiscal responsibility of home ownership.  This includes property taxes, code enforcement fines, HOA dues, utilities and maintenance costs.

In Florida, where I practice and my firm defends homeowners in foreclosure, the problem is chronic.  According to RealtyTrac, there are over 55,000 zombie properties in the Sunshine State, a figure representing one third of the national total.   The ripple effect is unavoidable, as the neighbors’ property values are sure to suffer from their proximity to these neglected eyesores.  In many neighborhoods, the problem has brought an increase in crime and rapid downward spiral causing many innocent bystander homeowners to lose thousands of dollars in their own property values.

In Florida, homeowner associations are very common and generally do a good job of policing its member property owners to abide by the rules of the community and thereby protecting property values.  What has been problematic is that many lenders who have completed foreclosures and taken title have failed to pay the HOA dues which become the responsibility of the title owner.  There have been instances of HOAs foreclosing upon foreclosing lenders in a bizarre ironic twist.

A related issue is known as the “shadow inventory” of properties the lenders have taken through foreclosure but have declined to market as bank-owned homes for sale.  Also known as real estate owned (REO) properties, these  post-foreclosure sales have been a major part of the real estate market for years.  Players in the real estate and banking industries disagree on the volume held in the shadows, but it’s hard to deny the number is significant under any rational analysis.  How and when the banks unload this inventory will affect the continuing but fragile real estate recovery.

It would be nice to believe the worst of the foreclosure crisis is behind us.  This is likely true, but the continued problems the brought on by zombie properties and the shadow industry remind us that we still have a long way to go toward a healthy economy and real estate market with any real staying power.  At Widerman Malek Celebration Law Office, we represent distressed homeowners facing foreclosure and slay zombies.