Published in the ECHO Journal, September 2010
Some Straight Thinking
What happens to the delinquent assessments in a short sale situation?
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 does things properly, which means that an escrow demand comes to an association asking how much is owed and the HOA responds, telling the parties what is owed. The delinquent amount is then considered as part of what must be settled in the sale. That’s what should happen.
Whether the bank, the seller or the buyer pays the delinquencies is of no particular consequence, if someone agrees and they are paid to assist the sale. I have heard of buyers anteing up more $$$ when the bank appraisal came in too high to do the deal and the buyers really want to buy the home. After all, short sales are really good deals for the buyers. The buyer might be willing to throw in some money toward the debt to get the good deal. The realtor might. The bank might. The seller might. There are all kinds of possibilities; so don’t give up too easily.
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 to take a hard line or a soft one. Here are some considerations:
- 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, recovery of any money might be unlikely. However, if the seller is an investor who appears to be dumping property to cut losses, maybe there is a chance of recovery there. Maybe the investor does not know you can come after him or her. Maybe once they do, they will start talking settlement. (The same applies to a collection matter that does not involve a short sale; thinking outside the “foreclosure box” and getting after an owner sometimes opens up doors to other possible areas of recovery).
- If the assessment debt is not paid and the property transfers to a new owner, an association might still be able to put a lien on the property or, if there is a lien, might be able to continue foreclose proceedings (assuming the governing documents provide for it and nothing has happened to extinguish the lien) because the assessment debt is still viable against the property in a volunteer transfer of the property, and it 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 extinguished 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 association cannot pursue a new owner personally 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. And an association should get legal advice before releasing any encumbrances voluntarily.
- If the HOA is being asked to negotiate down the debt, keep in mind the old saying that “a bird in the hand is worth two 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 banks are now stalling foreclosures for long periods of time) might be worth $0 return on the outstanding debt, especially if there are bad tenants or the owner continues to live in the property “for free” while it sits in foreclosure with the bank. Entering into an agreement with the seller or buyer to make payments toward the delinquency might be the way to go if they are willing and assuming they are solvent. You would need a written agreement with the buyer for sure because the obligation does not arise in that direction without agreement and with the seller in order to overcome statutory priorities that otherwise require all sums received to be applied to assessments before any other costs such as collection costs.
In other words, association 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.
Be Assertive About Timing Of Liens!
As many have said, it is doubly important in this economy to have a strict assessment collection policy that allows for recording a lien at the earliest possibility because homeowner association 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 properly recorded lien will. And, a lien offers a point of contact, as well as additional protections in the event of bankruptcy. Yes, it is true that the costs to the owner who is already struggling 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 an association needs.
Trying To Get The Bank’s Attention
After an HOA foreclosure, an association might want to contact the bank holding any senior mortgage and try to get it to move its foreclosure along or at least seek information about 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 a 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 for sale 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 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 they may just respond like ostriches with their heads 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.
Beth A. Grimm is an attorney who serves homeowner associations and homeowners alike. She is a frequent contributor to the Echo Journal and other similar publications in the State of California and on a national level. She provides several publications written in plain English to help people who need information about California law as it relates to homeowner associations. She posts a wealth of information on her Web site at CaliforniaCondoGuru.