The 5 Stages of Grief: HOA Foreclosure-to-Rent

A delinquent homeowner in your HOA or condo association is not only a bad thing, it is a financial nightmare. Your association is a nonprofit organization, and your budget is what is known as a “Zero Balance Budget.” Plainly said, it means that if you are spending $500k a year to maintain your community association, you need to collect $500k a year, not $499k a year. Anything less than a perfect cash flow scenario renders a budget impotent. 

However, HOA foreclosure-to-rent only swaps out one problem for another–foreclosing on a delinquent homeowner in exchange for a renter is not the solution it’s made out to be.

If you are a traditional community association or management company, your first inclination is likely to send the file to the attorney. But is your community association attorney actually a collector, or are they there to foreclose? Enforcing a security interest means only one thing, and that is an association lien foreclosure. But just because you can foreclose does not mean you should foreclose. A successful foreclosure is the beginning, not the end of a process that can cause an association a lot of grief.

Let’s break it down to see what happens in an association foreclosure.

HOA Foreclosure-to-Rent Blues and the 5 Stages of Grief

If the community association board goes directly to foreclosure instead of working it out with the delinquent owner with a collection professional the big danger is what happens if their attorney is successful and obtains judgment and possession of the limited title. Here are the five stages of grief when dealing with HOA foreclosure-to-rent:

  • Happiness. You have won the foreclosure case against the delinquent owner! That must mean good things are coming down the pike for your community, right?
  • Despair. Your attorney is going to hand you the title of the property that is still encumbered, and the bill which the association must now pay for. Where you were expecting a cash flow enhancement and a check, you instead got the opposite. And you thought that in a foreclosure sale somebody would pick up the property…it ain’t necessarily so.
  • Confusion. How can you monetize this property now that you have the limited title that is still encumbered by the first mortgage?
  • Shock. Next, your attorney will tell you that you have the right to rent out the unit…to recover their fees and the past due assessments. Congratulations, your community is now responsible for a property rental enterprise and all the liability that goes along with it.
  • Exhaustion. At the end of this overwhelming journey, you’re going to discover that renting to recover past due assessments is not as easy as it may seem. 

What Comes Next

After the emotional rollercoaster of the HOA foreclosure-to-rent process has ended, your board will be faced with some harsh realities about renting property to recover a shortfall in the association’s cash flow due to delinquencies.

First, you’ll need to rehabilitate and prepare a property for renters. That costs money, and the bank will not compensate you for fixing up their property. If the bank jumps up to foreclose on its collateral, you can expect that money to be lost. 

Once you’ve spruced the place up (again, on the community’s dime), you’ll have to find a renter. For most rental properties, this isn’t a major challenge. Everyone needs shelter. But finding a good tenant is difficult, especially with the understanding that they can be moved out in 90 days in case the bank forecloses, or sooner if there is a tax deed sale. Few people want to live life in that kind of uncertainty.

And of course, if you can find a tenant, acting as a landlord is its own kind of torture. Now add to that the fact that the whole board is effectively the acting landlord and you’ve got a recipe for disaster.

Sending your delinquencies immediately to a security interest enforcer (aka your community association attorney) so that you can get hold of some properties to rent is not the stroke of genius it can appear to be. Instead of wading through the pain of foreclosure and group landlordship, contact Axela Technologies. We can collect your delinquent assessments at no cost and with no risk to the association.

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