Playing The HOA – A Continuing Study in Audacity (Part III)

A complicated but ultimately absurd scheme by a real estate professional who thought they were the smartest game in town.

By Michael Jenner, MBA, as told to Mitchell Drimmer, CAM

Background:

Mrs. Delinquent*, who owned a unit in an HOA in New Mexico, had stopped paying her mortgage and HOA dues. As a result, she was having her home foreclosed upon by a bank, and the HOA referred her file to Axela Technologies. The collection solution provided by Axela Technologies was working the file to recover the delinquent assessments from the owner in the amount of $17,000 while the bank was pursuing foreclosure on the property. 

Somebody who had a real estate license and owned a real estate company had a very bad idea. Fail Realty* made a deal with Mrs. Delinquent and signed an agreement in which the real estate company was assigned all her rights in the property for the purposes related to the bank foreclosure. She did not assign them any ownership rights.  They had a plan, albeit a crooked one, that they believed would relieve the owner of the property from paying back due assessments. They thought that they could play the system to make it look like the HOA’s lien had been nullified by a lender foreclosure, relieving them of their obligation to satisfy the HOA’s claim for assessments owed on the property. 

Ultimately, the lender did foreclose, and the collectability of the association’s lien was called into question.

Challenges Faced: 

  1. Foreclosure Laws: In New Mexico (and other states), if a property is foreclosed upon by the lender, and the lender takes title, then the association no longer has a security interest. At that point, the only options are to write off the loss or pursue a personal money judgment against the owner. But, if the property is sold or transferred by means other than a foreclosure, the new owner is jointly and severally liable to satisfy the HOA lien and pay the past-due assessments to the association at the closing table.
  2. Scheming Realtor: Fail Realty was possibly expecting to allow the lender to foreclose, hoping for a surplus that they could petition the court for on behalf of Mrs. Delinquent, assumingly receiving a cut of any surplus funds awarded. We have not spoken to said realty company and just let the public court records tell us the story. Their motivation and cunning are enigmatic.
  3. Redemption Games: Alternatively, if there was no surplus of funds to go after, Fail Realty may have planned to redeem the house since Mrs. Delinquent had given them the rights. They would then make it look to the HOA as though they purchased the home post-foreclosure, which would relieve them of liability for the $17,000 in past-due assessments. This way, Mrs. Delinquent could stay in the home without having to pay what she owed.
  4. Significant Delinquency: The association was reluctant to write the balance off as uncollectable as the amount owed significantly impacted their bottom line. However, they thought that a bank foreclosure meant that a write-off or a personal judgment were their only options. Lucky for them, they had Axela Technologies’ collection solution on their side. 

Resolution: 

  1. The property was not sold; it was redeemed. On reviewing the foreclosure records, the collection staff engaged by Axela Technologies discovered that the property was not sold but rather redeemed post-foreclosure by Fail Realty. All are very legal.
  2. Misleading claims are not facts. Fail Realty’s claim that they are not liable for pre-existing association dues because they “purchased the property at the first mortgage foreclosure sale” was misleading. Heck, it was an out-and-out lie to fool the association into writing off the past-due assessments that they were entitled to because the property was not sold but rather redeemed by Fail Realty for the benefit of Mrs. Delinquent. New Mexico law is clear that their attempt to avoid association dues in a very weak transparent scheme could not hold up if they didn’t legally acquire the property through the foreclosure sale. The HOA’s governing documents also made this clear.
  3. Satisfaction of the First Mortgage. Given that the property was redeemed, the first mortgage is satisfied, and the association is in the first lien position. There is no longer a lender with first rights. This means that if the association forecloses on the property, they are not encumbered by a mortgage but rather can wind up owning the property lock, stock, and barrel. The board could then choose to sell or rent the property to recover the assessments owed

Lessons Learned: 

The main lesson here is that when a bank forecloses on a property, do not take anything for granted. Ask some questions that can be answered by a review of the court docket. If you do not have the skill set to review such documents, then engage one of Axela’s collection company partners who does just that. 

Here are the questions to get answers to:

  1. Did the bank not just foreclose, but did they take the title, or did they sell the property before taking the title?
  2. Who eventually took possession of the property, and how did it happen? If the property was redeemed by the owner, then the lien is still in effect in New Mexico and other states. 

In this case, the real estate company was gambling that the association was willing to believe that the property was sold in a lender foreclosure sale, and that would eliminate the obligation by the old owner. The real estate company thought that they made a good investment, and one could easily speculate that this was not the first time they tried to play an association. The difference, in this case, is that the technology solution from Axela Technologies empowered the collection company to determine that something was rotten in New Mexico.

CASE CLOSED:

This scheme not only did not work for the owner, who was looking to avoid paying their obligations, but it put the association in a superior position. Mrs. Delinquent and Fail Realty made some very bad decisions in their attempts to play games with this New Mexico HOA. Now, they must pay up or lose all rights to the property. The association may never have uncovered this scheme if it was not for the collection solution that Axela Technologies brought to the table. 

If an HOA you live in or work with is in a similar situation, contact us today so you can find out How the Future Collects

*Names have been changed to protect the privacy of the parties.

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