What to do when lenders foreclose and your Condo or HOA faces losing Money
In the course of collections for community associations, nothing can be more frustrating than when a bank delays its foreclosure action. Getting a non-performing unit into the hands of good-paying owners is an unspeakable joy to the board of directors and the management company. Not only that, it is a significant event to the membership who ultimately bears the burden of all cash flow deficits. If a unit stops paying assessments then those who do pay will pay more or get less by way of services and amenities. Our question for today is:
What do we do when lenders foreclose and our condo or HOA is positioned to lose money? Should we write off lost assessments, or is there another option?
The Strategic Default, and Why People Stop Paying Assessments
In your condo or HOA, if a unit stops paying its maintenance fees, it would not be a “stretch” to say that the owner may have stopped paying the bank as well. Our analytics show that this happens in 42.3% of cases where people default on their obligation to the community association.
An interesting point to observe is that during the real estate meltdown in a similar scenario, 93% of the owners ceased to pay their mortgages. That was because there was no equity in the property which gave convinced property owners to make “strategic defaults.” Simply stated the goal of a “strategic default” is to milk a property for all it is worth by renting it out and not paying the lender or the association.
42.3% of homeowners who stop paying assessments to their community association have also stopped paying their mortgage.
Associations had no other choice than to move forward with a lien foreclosure because the banks were taking years to move forward with their own foreclosures. Today’s economic climate is different. First, this recession is not driven by the real estate market, and the values on properties have not dropped significantly if at all. Also, there are far fewer investors who are buying up properties to rent or flip. Today, people live in these non-paying properties, and that is where the money can be recovered.
Homeowners With Equity In their Home are More Likely to Try to Save It
We are now living in a different time under changed circumstances It is not always necessary for a community association to foreclose on their lien. If there is equity in the unit there is no need to begin legal proceedings to convince an owner to pay. It would be foolhardy for an owner to lose a property with equity for the sake of a paltry amount of maintenance fees owed. However, bank foreclosures still happen and the question becomes, how does the association make up for the loss of assessment payments, and how can the association get the unit paying again?
Helping the Association Minimize Loss from a Bank Foreclosure
Before we discuss how to get the unit paying after the bank forecloses let’s focus on how the association can minimize the loss from a bank foreclosure. A bank foreclosure wipes out the association’s lien and unless you are in a “Super-Lien” state you can expect to be absorbing that entire loss. It does not have to be that way.
When it comes to HOA assessment liens, a super-lien refers to that portion of a homeowners’ association lien that is given higher priority than even the first-mortgage holder, placing the interest of the HOA in front of the first mortgage. In most states, it is usually 6 months of assessments or some formula based upon a percentage of the first mortgage versus the number of months owed (example: In Florida when a bank forecloses correctly the association is entitled to the lesser of 12 months of assessments or 1% of the original first mortgage).
In any case, the amount recovered from a foreclosure in a super-lien state is almost always less than what is actually owed especially if you have added legal fees to your collection efforts for that property.
The amount recovered from a foreclosure in a super-lien state is almost always less than what is actually owed especially if you have added legal fees
So when a bank forecloses it is critical to know if your state is a “super lien “ state and make sure that at the minimum when the bank takes title the association receives its super-lien amount. But even so, you may wind up writing off the last assessments in excess of the amount allowed, as well as the legal fees you spent ‘recovering’ lost assessments
Before You Write-Off Those Lost Assessments, Do This
It is possible for an association to recover more than the state specified super-lien amount if the association engages a proper collections solution.
Axela can help your association in two ways to recover money that you are prepared to write off.
One, should a bank foreclose, take title, and put the property up for auction we will monitor the file. If there is a surplus amount after the auction, Axela will petition the court for the surplus funds for the benefit of the association. We believe that “writing off” debt should be avoided if there is the possibility to recover the association’s funds.
Two, a foreclosure does not extinguish a debt, so the previous owner still owes this debt to the association. This is where our Post Foreclosure Recovery program steps in to engage the previous owner. So, if you have delinquent owners who are slow to pay or have plain out defaulted contact Axela Technologies and let us recover that money for you.