Foreclosure Consideration for HOAs
Foreclosure is a bit of a dirty word. Nobody wants to see anyone thrown out of their home – but it happens.
There are basically two different kinds of foreclosures that homeowners association need to worry about: Foreclosure by the bank and foreclosure by the association itself.
When a bank forecloses on a home in the development there are three things the association is concerned with – getting the unpaid HOA dues, keeping the property maintained if it is standing vacant, and making sure that the rules are followed when the bank sells the home to another person.
In a normal sale, unpaid assessments can be subject to a lien on the home and thus paid by the new owner. In some states, if the new owner buys from foreclosure, however, they are guaranteed there will be no debt on the home. This may mean that months or even years of unpaid dues may be owed, even if the house is abandoned. The lender is not responsible for unpaid assessments, but may be responsible for those owed while it has title on the home. (In some states the law has been changed to make the high bidder in the foreclosure auction responsible for the unpaid dues).
Abandoned properties are also a major concern for associations. In townhome and condominium developments, an abandoned home can cause pest issues in the homes next to it. Vacant buildings attract crime and can be too tempting for children to play in, resulting in hazards. Because of this, associations should typically encourage lenders to foreclose. Lenders may well try to avoid foreclosing (and may even post the property for sale without taking title) precisely to avoid paying association dues. In some cases, the Consumer Financial Protection Bureau can help – an association can file a complaint against the bank in order to get them to foreclose – although this does not always work.
When the foreclosed home is sold it will go to the highest bidder, and you might not know who that is right away. There is no guarantee that the new owner has read the CC&R’s – a lot of the time they will then turn around and resell it. The answer is, of course, to work with the lender to make sure that whoever buys the home is known to you and you can talk to them. Another answer for some associations may be to purchase the vacated unit yourselves so you can rent it out or re-sell it with some control – but this may not be financially valuable.
The second kind of foreclosure is when you, the association, foreclose over unpaid liens. Be aware that this is one of the quickest ways to get yourself labeled as an “evil” HOA. The threat of foreclosure is often seen as a “shakedown racket” by owners and potential owners. Unfortunately, failing to foreclose can result in people not being able to get mortgages in your association if the delinquency rate is too high. Unchecked delinquencies also lead to budget shortfalls for the entire community. Also, some associations prefer to try and foreclose before the bank does, especially if the bank is unlikely to pay the fees or has a reputation for abandoning foreclosed properties.
The answer, obviously, is a balance. Foreclosing should be the last resort when an owner owes back assessments – it is better to work with them. Set a proper collection policy and take other action such as barring the resident from amenities, such as the gym, first, if permitted by the covenants. And bear in mind that if you do have to foreclose, the property may sell below market – which oftentimes means it will go to an investor who is going to flip it. This can also cause the home to go to somebody who may not fully understand the restrictions in place in your community, or to somebody who ends up being rejected for residency – this may lead to a courtroom to resolve.
If you do need to foreclose, you have the option of renting the unit that came into your hands as well as selling it – consider which is the best thing to do under the circumstances and turn to your association counsel for valuable advice for each circumstance. The best solution is if foreclosure can be avoided, however, this is not always in the cards.