Foreclosure by BOD - need advice

Frank:

From what I have seen, foreclosing on owners will likely put you even deeper in the hole. In most states, a mortgage lien is superior to an association lien. If you foreclose your association will have to pay the balance due on the mortgage or - how ironic - lose the home to foreclosure by the lender.

Even if you foreclose on a unit that has no mortgage, you are not out of the woods. If you cannot sell the unit at the foreclosure sale, you will be stuck with trying to unload it on your own. Meantime, you will have to pay for insurance, taxes, and maintenance while receiving zero income. To make foreclosure even less attractive, you will need to hire a lawyer who will almost certainly insist on being paid in advance. Win, lose, or draw you will have to pay the attorney.

Alternatives to foreclosure include turning over delinquent accounts to a collection agency or seeking money judgments for the delinquent amounts.

A collection agency will usually charge you nothing up front but will take a large percentage, maybe half, of everything it collects.

Depending on state law and the amount owed, you may be able to obtain a judgment for money from the owner by suing. This requires the exercise of caution. Depending on whether the association can proceed without an attorney, you will have to lay out a bunch of money to file a complaint and have it served and far more if you have to hire an attorney. The only thing that is guaranteed by doing this is that you will spend money. There is no guarantee that you will ever collect any of it. The only time I recommend suing to collect delinquent assessments is if you know where to find the owner and you have reason to suspect that his able to pay but for some reason refuses to do so.

What percentage of your owners are delinquent?

My BOD went nuts a few years ago because we had about 4% of our owners not paying. I have since found that this is a fairly low delinquency rate, but the board spent over nearly $175,000 to collect less than $25,000. Most of the money went in the lawyer's pockets and the amount collected was nearly zero. We are far worse off than we would be if we had just written off the delinquencies as a lost cause.

Have you tried working with the delinquent owners to bring them current? I have seen associations that make the situation worse by refusing partial payments and tacking on late fees. You might consider a less harsh approach.

Thanks for the advice!

We have about 10% that are behind by several months, and closer to 20% that are behind at least one month (maybe due to tax bills due in April, hopefully this will go back down). My concern is that word may spread that nothing has and/or can be done, causing more to stop paying. In addition, even some of those who have paid faithfully thus far may bulk at paying increased dues when we are forced to raise assessments for next year to make up for the shortfall.

How do you avoid this from snowballing out of control?

On a side note, I have heard about the practice of HOAs in NYC to make prospective buyers submit financial info and seek board approval prior to a sale to ensure that they can afford to live there (mortgage/maintenance/fees). This is common practice with co-ops but has even become fashionable with condos, undoubtedly due to the economic landscape. Do they have unique laws there that allows them to do this, or would it be possible (likely with amending the bylaws) to institute this for our HOA in MD as well?

I did a foreclosure. It's a stop bleeding stop gap more than anything. NOT a money making venture at all. Just gets the leeches off. My first suggestion is to make a proper LIEN policy FIRST, We had a 6 month behind on dues policy. This gave people a chance to work a deal with us to pay or gave them a warning message. In state that policy and lien first BEFORE considering foreclosure.

After a year or more with no lien pay back reaction is when to consider foreclosure. The circumstances need to be just right. Your basically doing the work of the bank on their behalf. Meaning the bank gets paid FIRST and foremost on whatever is owed on the house. The HOA gets the leftovers.So NEVER foreclose on a house the bank is involved in doing the same.

The HOA does NOT want own this home. Ironically the FIRST bid goes to the HOA for $1 over the amount owed the HOA. The HOA should NOT be in the home ownership business. It will have to pay the bid costs and pick up a loan if there is money still owed on the house. It isn't like you pick it up for the bid price alone in many cases. Plus the HOA has to pay for repairs, utilities, and HOA dues on the property. Using it as rental barely makes the bills. Plus it is the WHOLE HOA that owns the house NOT one or board. NOT worth owning.

If you do foreclose then make sure to have a buyer available. Check your local paper in the LEGAL section of the classifieds to see if any houses in your HOA are in process of lien or bak foreclosure. Each paper prints this out differently and not always daily. It is PUBLIC information. I have more details and you can review some older posts on the issue. Just proceed with caution.

Frank

More info:

We have had discussions with a law/collection firm about unpaid dues. They use a multi step process to collect. To the best of my recollection it will go like this:

1. HOA writes a letter reminding the person and asks for back dues or a payment schedule acceptable to the HOA within 30 days. No threat. Polite letter.

2. HOA writes a letter saying if back dues not paid or a payment schedule reached within 30 days, it will be turned over to a law/collection firm.

3. Law/collection firm sends a letter informing the homeowner that they have received the case and are prepared to file a lien and commence to foreclose unless owed dues are paid or a payment schedule is arranged with the HOA within 30 days. The firm charges the HOA $65.00 for this letter.

4. Law/collection firm sends a letter saying a lien has been filed and foreclosure has commenced. It will now cost the homeowner $495.00 (to the law firm) plus owed dues to the HOA to stop the process. No charge to the HOA.

5. Law/collection firm files some paperwork with the court about foreclosure and notifies the homeowner that foreclosure has begun and it will cost $995.00 (to the law firm) plus back dues to the HOA to stop the process

The next step would be the HOA pays the law firm $400.00 and foreclosure commences. The process is completely stoppable at this point by the HOA and the HOA would have a lien.

I deleted the name of the firm, but I believe such firms exist everywhere.

Hope this helps.