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SHORT SALES IN HOAs - Straight Thinking

What happens to the delinquent assessments?

There has been much commentary on the web about short sales in homeowner associations lately. What happens to the delinquent assessments in a short sale? Some commentators suggest they never get paid or that the debt is extinguished in the short sale. Not so. Some suggest that the association must have a lien on the property to collect or if the sale goes through without payment of the assessments and there is a lien, that the lien is extinguished. Not so.

The best result of course is that the bank/seller do things properly and an escrow demand comes to an association asking how much is owed, and the delinquent amount is considered as part of what must be settled in the sale. Whether the bank, the seller or the buyer pay the delinquencies is of no particular consequence, if someone agrees and they are paid to assist the sale. I have heard of buyers ante'ing up more $$ when the bank appraisal came in too high to do the deal. The buyer might be willing to throw in some money toward the debt to get the good deal.

Considerations: When the assessments are not being paid, or when the HOA is being asked to negotiate down what is due, it is important to consider what is happening and whether it makes sense. Here are some considerations:

1. The debt is that of the seller and if the debt is not paid, the association still can go after the seller for the accrued debt in a personal debt action. But is it worth it? If the seller is a family that lost its home because the owner lost his or her job or suffered grave financial circumstances, probably not. If the seller is an investor who appears to be dumping property to cut losses, maybe so.
2. If the assessment debt is not paid and the property transfers, it is likely that the HOA could still consider putting a lien on the property or if there is a lien, it could move forward to foreclosure (assuming the governing documents provide for it) as the assessment debt is still viable against the property and remains so until the lien or debt is "extinguished" by law. If a senior mortgage holder forecloses for its debt and there is a recorded HOA lien, that lien would normally be extinguised as a matter of law. This is not the case in a voluntary sale to a brother, uncle, or kid, or in a short sale. The HOA cannot pursue a new owner individually for old debt, but the property may be up for grabs. Thus, all parties (lender, seller and buyer) should take heed in settling on a short sale without inquiring about HOA debt. It is risky business. All might end up in litigation against each other.
3. If the HOA is being asked to negotiate down the debt, keep in mind that "a bird in the hand is worth 2 in the bush." In case that is not clear, 50 cents on the dollar in hand might be the best deal in town. Getting the unit transferred to a new owner without waiting for the bank to foreclose (many are stalling foreclosures) might be worth $0 on the dollar. Entering into an agreement with the seller or buyer to make payments might be the way to go if they are willing - assuming they are solvent. You would need a written agreement with the buyer because the obligation does not arise in that direction without agreement.

In other words, HOAs and Condo Boards take note - being ignorant of the rights remaining or being belligerent in your demands might hurt you. Consult with legal counsel to be sure you are knowledgeable about your rights (don't consider a blog to be legal advice - attorneys do tend to argue about things).

Be assertive about timing of liens! As many have said, is doubly important in this economy to have a strict assessment collection policy that allows for recording a lien at the earliest possibility because let's face it, HOAs and Condo contacts are hard for the lenders and title officers to find. If sellers don't ante up the information about their debt to the association, a lien will. And, a lien offers a point of contact, and additional protections in the event of bankruptcy. Yes, the costs to the owner who is already strugging go up considerably when a lien is recorded, but if that owner has not stepped up and entered into a payment plan that is being honored, there are oh-so-many-protections that the Association needs.

Trying to get the bank's attention: After an HOA foreclosure, an association might want to consult with the bank holding any senior mortgage and try to get it to move its foreclosure along or at least seek information as to a timeline. I have talked about how this might help an HOA that rents out the property and collects rents as a possible defense to any claim the lender might make relating to rent-skimming, especially if the lender delays its foreclosure unreasonably. The HOA may want to inquire as to whether the bank might consider reducing the debt if a buyer is located by listing the property for sale. Keep in mind that any potential buyer would have to take it subject to the senior lien so there is little point in listing it if it is "under water" which is likely these days and the lender will not talk about reducing the mortgage to effect sale of the property. I do not know if this is even an option when the loan is in the former owner's name. and the HOA has taken over ownership. It is hard to imagine what options all lenders have or would consider.

I am hearing that some lenders will not even speak with the HOAs, and others are willing to talk about various cooperative options. After an HOA foreclosure the HOA receives a Certificate of Sale and when the 90 day redemption period is over a Trustee's deed should be issued to the HOA. No transfer of the property should occur during the redemption period since the former owner has the right to pay the HOA all costs and assessments to redeem ownership.

A lender could talk to an HOA at any time if the borrower's deed of trust contains a Condominium Rider allowing the bank to pay past due assessments, as the HOA is a party with an interest in the transaction. However, lenders tend to have their hands full these days and may just respond like an ostrich with its head in the sand. And there is another potential problem because some title companies won't issue title insurance in conjunction with the sale of an HOA foreclosed property. Thus, even if an HOA can get the ear of any bank personnel, there are still hurdles to clear to getting meaningful cooperation or even information.

For more association collections, HOA foreclosures and bankruptcies, check out the blogs on my website and Assessment Primers in the webstore.