"Rent Skimming" After A Foreclosure Sale ... Why think twice about it?

"Rent Skimming": A lot of HOA people are talking about it. Why and What is it?    "Rent skimming" is what occurs when someone or some entity (including an HOA) purchases (or takes ownership in the case of an HOA) of a property at a foreclosure sale, rents the property out to another person, takes the rents, and does not pay the "senior" loans. At the least this would include the lender holding the first mortgage). This is considered to be "skimming" the rents. There is actually a law on the subject.

  HOAs were not likely the impetus for the law - but could be caught up in the "net" it casts. The subject comes up for Associations when the HOA ends up taking back a unit back at its own scheduled foreclosure sale for the debt due in assessments and collections costs, and then rents it out and takes the rents without paying senior loans. HOAs sometimes hold the sales so that the units will "turn over" because the owner has stopped paying. It is more likely that an HOA will go through with the sale when there is equity. Without any, boards are often opting instead to go after the owner in small claims court for outstanding assessments. The HOA cannot hold the sale and sue for recovery of the debt.

  There is a complicated process to go through to get to the point of sale, and the decision to hold the sale knowing the HOA could get the property back is not to be taken lightly.

What Are the Risks? 

  If an HOA rented a foreclosed unit it was holding to an individual and collected the rents without paying the senior mortgages, it could be sued for damages by:

  The lender or the former owner, and damages could include the rents, and attorneys' fees and costs, and "exemplary" damages.

  The tenant, including for the security deposit paid plus moving expenses of the lender forces the owner to move. The tenant can also receive exemplary damages and they must be awarded them if the payments due under the deed of trust were at least two months unpaid when the rental agreement starts.

  No one can effectively "waive' rights to assert the law.

  The law clearly targets multiple rent skimmers. Persons who engage in multiple counts of rent skimming (which could include an HOA that did this with more than one property in the development) are subject to criminal prosecution, incarceration, and very large fines including $10,000 and imprisonment for 5 or more occurrences. 

So why would an association do this?

  Does "desperate to recover losses" sound familiar? Clearly, there are considerable risks in renting out an HOA foreclosed unit and not paying the holders of the loans recorded before the Association's lien.

  HOAs might get various opinions from various lawyers as to the level of risk. As I said, I do not believe the law was intended for associations that are stuck in the great void of lender delay periods commonly lasting from a few months to a year or more. But technically it clearly applies to the situation if an association collects rents and does not pay the senior mortgages. Still, I know of no cases where an association has been sued for rent skimming. It used to be that one incident of rent skimming could lead to the large penalties and criminal action. Now, at least, the law recognizes that those who engage in purposeful multiple incidents should be suffer criminal penalties and serious fines. 

  The statute is found at Civil Code Section 890 et seq. You can find the Civil Codes on the state government website at www.ca.gov. Navigate to the California laws.

  THERE IS A LOT MORE TO LEARN ABOUT FORECLOSURE IN HOAs!

  For more on this and other foreclosure questions - check out the free articles and FYIs, and see the Assessment Primers available elsewhere on the Condoguru website. There is a series of 5 (they are $25 each). They include Basic, Intermediate, Foreclosures, Bankruptcy, Collections, and Assesment-FORMS which includes forms for collections. Click on "Publications". If you purchase 4 Primers, you can get a fifth one free! Just place the order and then email me and tell me the name of the Primer you want for free.