To Foreclose, or not to Foreclose? That is the question…
For years, condominium associations and HOAs have grappled with a Shakespearean problem. Foreclosure is an expensive end to a series of transactions that have traditionally cost the association lots of money in the form of lost revenue and fees to pursue a remedy against the delinquent home or unit owner. The final insult can be losing money because of an uninformed decision to foreclose. Wouldn’t it make good business sense to have a detailed foreclosure analysis in hand before making yet another questionable decision?
Foreclosure is a Legal Action, Not a Collections Solution
When a unit becomes delinquent, the age-old solution for condos and HOAs is to seek action from their community association attorney. For community associations, the first priority for dealing with delinquencies should be to recover the money the association is owed. But that is not the attorney’s first priority. The community association attorney is NOT a “collections solution” but rather a “legal action” and their only strategy is to lien and foreclose on the property in question. Not taking cases, even if they should not be litigated, is simply not in the attorney’s best interest financially.
This is how it has been done since the first delinquent owner missed its first maintenance payment due to a condominium association or HOA. It has long been apparent that foreclosing on a unit is not a perfect solution and should be considered as the “action of last resort” when all else has failed. Collection agencies and courtesy letters from the board only go so far.
Before the decision to engage an attorney at the expense of the association is made, the board of directors needs to analyze the cost benefits in order to make an informed decision. Blindly sending a unit into foreclosure can cost the association more money than what is owed. Only a detailed financial review can prudently answer the question: “If we foreclose, will we recover the money that’s owed to our association?”
Predict Before You Commit to Foreclosure
This is why Axela Technologies has created the Pre-Foreclosure Analysis, a new report that provides an intelligent way to make sure the board is making a prudent decision that is in the association’s best interest before it decides to spend more money on the legal proceedings of a foreclosure.
Axela Technologies’ Pre-Foreclosure Analysis helps board members and managers make an informed decision. With this report the board can know in what position the property is in from a financial perspective. Perhaps, they may not want to or even need to foreclose on a specific property. This analysis turns on the lights and allows the board and management to see the benefits or the disadvantages of an association/lien foreclosure.
This report is available to all Axela Technologies clients at a one-time fee, charged and payable by the community association. This charge can be added to the delinquent owner’s ledger as a collections cost, which may be recoverable. Axela Technologies can also provide this report to associations and management companies who do NOT have files in our collections program. This service is part of the Axela Technologies collection process, but the report can be purchased as a stand-alone service.
Here are some of the highlights of the kinds of answers the report provides and what actions the association should consider:
5 Times That Foreclosure is NOT in the Association’s Best Interest
- If the senior lender is actively engaged in a foreclosure action on the property and upon obtaining a judgment will extinguish all subordinate liens, rendering the association’s foreclosure action moot. There is no doubt that if you have engaged an attorney, they will want to be paid for all actions taken. Money lost.
- If the unit is without equity rendering the intervening title not marketable, and the only way to monetize the property would be to rent it. However, what you may not know is the physical condition of the unit. Rehabilitating the unit may be a large expense that can be wiped out by a bank foreclosure not too far in the future. This will result in the association not having the opportunity to recover past due fees, attorney costs, and rehabilitation costs. Money lost.
- Other liens that will not be extinguished by the association’s foreclosure such as IRS liens, tax liens, that will remain and encumber the unit and endanger the association’s ownership position. Having to deal with tax authorities in matters such as this can put the association in a bad and perhaps expensive position. Money lost.
- The owner of the property may be in bankruptcy which would preclude all legal and collection actions contemplated. Now, if you gave this to an attorney it would become apparent that the owner is in bankruptcy and all legal actions might cease but guaranteed your attorney will bill you for the time, they took to find this out. Knowing this information before you engage an attorney will save the association hundreds, if not thousands, of dollars. Money lost.
- The owner may have passed, and the property is in probate court which takes time and expense and usually an unknown outcome. Money lost.
3 Times That Foreclosure Should Lead to Association Fund Recovery
- The number one scenario would be that there is no mortgage or other encumbrances on the property and a foreclosure would give total ownership to the association. This is a good position to be in as the association could sell the unit and recover past due fees, attorney costs, collection costs, taxes, and any other debts owed by the previous owner to the association. This is a critical thing to know. Money likely recovered.
- The property does have equity opening the possibility of a third party purchasing the intervening deed (still encumbered by a first mortgage) for what is owed at foreclosure sale and having a good paying owner take over the property. Additionally, if the property has no mortgage, or has equity, and the association ultimately takes title to the property via their own foreclosure sale, the association would be able to sell the property and experience gains that may exceed the amount owed of the delinquent unit ledger, after the payment of superior liens. Money likely recovered.
- If the bank is not actively pursuing a foreclosure the association may have up to 3-5 years to monetize the unit by renting it out and that would pay for all the money owed and pay down the ledger. Knowing where the bank is regarding a foreclosure is of paramount importance. Money likely recovered.
The association should always put itself in the best position to collect money owed to the association. That requires an understanding of the economic positioning of the unit and many other external factors to make an informed business decision. Understanding the economic positioning of the unit will help the association forecast the possible outcomes.
Axela Technologies Pre-Foreclosure Analysis provides the association with all the pertinent information so that the best and most informed decision is made without simply guessing. Before you send a property to your attorney to foreclose, be armed with the facts in order to make a good business decision.
View the brochure to see a sample report of what you get when you order a Pre-Foreclosure Analysis.
