A flaw in some advice - foreclosure

Started by MissyP • 16 replies • 1469 views

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MissyP (Alabama)
Posts: 63

Posted:

Surprise... I am going to admit that there has been a flaw in my advice on foreclosure. Knew something was wrong but could not quite put my finger on it. Now that I have, you may see something we all kind of missed as well.

The subject of foreclosing comes up a lot on here. My advice is that the HOA NEVER EVER EVER EVER wants to own the home. It's best that if at all possible for a HOA foreclosure (NOT Bank that's another topic) the home is sold out. The HOA is best off by having the potential of a new owner moving in and stopping the bleeding. Most states except for Florida, the new owner is NOT responsible for the old debt incurred by the previous owner. The foreclosure process basically may get the legal fees and the old amount owed to it paid back. That would be the starting bid amount. Which I think we have covered the basics of foreclosures on here multiple times.

Here is where things go askew... Some posters have had "success" in buying the property and renting it out. I can't talk about the process of how they actually do this or if it's fully legal or not for your state/situation. It's something that you will have to take time to investigate and discuss.

This is where the flaw shows up. Most HOA's struggle with rental caps or placing limits on the number of allowable rental units. There are limits on how many properties in a HOA can be held as rental by loan companies. (Mostly government backed loans like FHA, Fannie, and Freddie). That effects the type of loan packages, interest rates, and refinancing offered. It goes further than your CC&R's.

The flaw then would be that IF the HOA choose to purchase the foreclosed property and use it as "rental", would it not be contributing to it's own problem of rental limits? Completely missed that aspect of the effect of choosing this option. Seems that the HOA would indeed not be respectful to it's membership by contributing an additional rental property into their mix. This would indeed have to be reported on the PUD form submitted to the loan companies.

What do you think? Is this a significant "flaw" to the theory or practice of the HOA owning foreclosed property and renting it out? Would it be a benefit still to rent out or is this kind of speaking out of two heads? Just curious...

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By MissyP on 01/23/2014 6:42 AM

The subject of foreclosing comes up a lot on here. My advice is that the HOA NEVER EVER EVER EVER wants to own the home. It's best that if at all possible for a HOA foreclosure (NOT Bank that's another topic) the home is sold out. The HOA is best off by having the potential of a new owner moving in and stopping the bleeding. Most states except for Florida, the new owner is NOT responsible for the old debt incurred by the previous owner. The foreclosure process basically may get the legal fees and the old amount owed to it paid back. That would be the starting bid amount. Which I think we have covered the basics of foreclosures on here multiple times.

Yes, the subject has been discussed many times and you still do not get it. The foreclosure process allows the HOA to recover all of its costs and start with a clean slate from the date of the foreclosure sale forward.

No one has ever said that having the HOA take title due to a lack of bids is ideal. The main reason for a lack of bids is the superior lien from a mortgage lender; no one except investors will shell out cash for a foreclosed property that the bank may take at some future time. The only good reason for the association to own the property is to rent it until the bank sells it out from under them.

Quote:

Posted By MissyP on 01/23/2014 6:42 AM

Some posters have had "success" in buying the property and renting it out.

The reports I have read where investors have purchased a foreclosed property indicate that the new owners seldom pay association fees. It comes down to the HOA doing nothing to collect what it is owed, having the HOA acquire title so they can control the property at least temporarily, or letting an investor put the association back into the state of not getting paid. It's a hard choice but I would recommend taking at least temporary possession.

Quote:

Posted By MissyP on 01/23/2014 6:42 AM

Most HOA's struggle with rental caps or placing limits on the number of allowable rental units. There are limits on how many properties in a HOA can be held as rental by loan companies. (Mostly government backed loans like FHA, Fannie, and Freddie). That effects the type of loan packages, interest rates, and refinancing offered. It goes further than your CC&R's.

The flaw then would be that IF the HOA choose to purchase the foreclosed property and use it as "rental", would it not be contributing to it's own problem of rental limits? Completely missed that aspect of the effect of choosing this option. Seems that the HOA would indeed not be respectful to it's membership by contributing an additional rental property into their mix. This would indeed have to be reported on the PUD form submitted to the loan companies.

What do you think? Is this a significant "flaw" to the theory or practice of the HOA owning foreclosed property and renting it out? Would it be a benefit still to rent out or is this kind of speaking out of two heads? Just curious...

Interesting point but the rental restrictions apply only to some government-back loans. That is, it applies to those loans made to buyers with marginal assets and little home ownership experience. These are precisely the people most likely to default on their loans and other obligations, such as HOA assessments. Those with better credit and more substantial assets still have access to conventional loans.

I am not sure, but doesn't a non-paying home impact the loan process the same as a rental? How about a rental that is also not paying assessments? It seems to me that an association would be healthier if it kept the marginal buyers and the investors out.

MissyP (Alabama)
Posts: 63

Posted:

I meant to say HOA's purchasing the homes and using them as rental. Not just any person/investor. The idea of HOA's purchasing homes they have foreclosed on, then using them a rental property kind of smacks in the face of double-talking. A HOA wants to restrict rentals but yet gets into the rental business? You can't have your cake and eat it too.

My point is that as a HOA foreclosure (NOT BANK)it makes no sense to keep the property. Better off to let it go to the highest bidder and start over from scratch.

RichardP13 (California)
Posts: 1,767

Posted:

Missy

I believe you have a misconception of homeownership.

Ownership and being on title are two different things. When a buyer buys a home and has it financed, they sign a promissory note with Bank of A, along with a PUD rider for the community. The buyer now owes the bank xxx dollars paid over 30 years. The bank secures the loan by a document, in California it's called a Deed of Trust. That document once signed by all parties is recorded with the county in which the property resides. The document is much like the associations CCR's in that it gives the holder of the deed certain powers if the obligation is not fulfilled by the buyer, including foreclosure, if the buyer(s) fail to hold up their end of the contract. A grant deed signed by the seller and buyer is notarized and recorded with the county. That document is used to set up an HOA account for the new buyer(s. The names on the document will come from the names on the promissory note, who in fact are the owners of record.

Once the buyer moves in they are typically going to have two liens on their property, one for the loan, which would be the deed of trust, it could be for one or two mortgages, depending on the financing and the larger amount always goes first. The other lien will be for all property taxes. This process is always ongoing, as taxes are due it goes on and as taxes are paid, lien is removed.

Two years pass and now the owners stop paying assessments. The association follows their collection policy to the letter and after the preliminary notices, records a lien with the county. It goes behind the first mortgage, maybe a second and the property taxes. Months go by and nothing happens. In California, as association are allowed to foreclose on a property within their community after 12 months or $1800, whichever comes first. The Board decides to foreclose on the property and through its agent starts and finalizes the process. The HOA now takes title, not ownership of the property. The bank and the buyer still have their arrangement in place and that has not changed.

The association, through its agent must have a process in place to evict the owners, once they have taken title to the property. They must also have a solid and well thought out plan to clean the property and get it ready to rent. This needs to happen as quickly as possible and before the bank forecloses on the real owners, the ones the association just evicted. If you look at all the paperwork, the association has NO arrangement whatsoever with the bank, NONE.

The message here is that associations foreclosing on property does work, but the action that needs to be taken have to be swift and without prejudice. Remember, the association DOES NOT owe the property, they took title subject to...well the big bad bank jumping down their throats. Anyone can place a lien on a property, even the London Bridge. Proving you actually have ownership rights is a different issue. Counties do not check to make sure the documents are legitimate, only that they follow certain County procedures, such as being signed and notarized. When you buy property you should always have title insurance to avoid what is called "clouded title".

I have witnessed a case where the association foreclosed on a property owing $22,000, never evicted the owners and then because they now have title, owed itself another $5000. Remember, once the association rents the unit they must start to collect back dues, but also collect for current dues, or the association becomes delinquent on its own property.

There really should be no excuse, especially in California, to allow delinquencies to get to the point I see them today. This is a business, pure and simple, and must be treated as such. If you read your CCRs, the Board of Directors is responsible for the management and complete control of the association's affairs. The buck does stop with them.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

There is a difference betwwen a HOA foreclosure and a bank. I was talking straight HOa types. Just to make things simple. I know how foreclosures work. My point or question is:

Do you think a HOA that purchases it's own foreclosure is right in renting that property out or contributing to the rental problem?

I say the HOa should NOT own the property and or use it as rental. that is my opinion. However, we have had posters who have come here to say their HOA do have property as rental. I realized that even though this sounds like a great option to some, is it really?

Former HOA President

RichardP13 (California)
Posts: 1,767

Posted:

Melissa

What you fail to understand is taking title does not give the association ANY ownership rights. They purchased only what was owed to them already. Whippe!

Contributing to rental problem, let me see, getting the association and its member back their money and worrying about a rental problem, I'll take door number one.

The ULTIMATE goal, in foreclosing on a property is getting the non-payers out and paying people in. If the association can get some of its money back in the process, more power to the people taking on that responsibility.

Investors have a process to rent their properties. Why can't the associations learn from that process. It's not that hard folks.

RichardP13 (California)
Posts: 1,767

Posted:

RichardP13 (California)
Posts: 1,767

Posted:

Ooops..double post, must have been trying to make a point.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

the HOA is ALL the owners including yourself. Are you comfortable with being part owner in a HOA rental property? The board can barely run itself. Now you have to add on property ownership? Rental at that while wanting the HOa to limit rentals? Mmm...

Former HOA President

RichardP13 (California)
Posts: 1,767

Posted:

Melissa

What part of the HOA DOES NOT own the property do you not get? They only took title subject to....Get your money as quickly as possible.

Hire a property management company that rents/leases homes and their fee is paid by the renter. The association doesn't have to do anything except retain their services and make sure they are getting paid as agreed upon. A management company can also coordinate this, it's what we do. Who cares about rental limits..I want my damn money!!!!

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Who cares about rental limits? HOA MEMBERS that is who. The ones who can NOT refinance or get a lower rate. The ones who can no longer sell their homes through FHA type loans. The ones who have limited loan package offerings to potential buyers.

Hire a management company to handle the rental property? With what funds? The HOA is ONLY funded by its members FOR its members. The MC gets paid out of that budget. So an increase in dues can be expected or special assessments. Considering the money from the foreclosure is NOT a profit. It is filling in an existing debt.

So now your HOA has put itself into a longer term debt and liable for a home. What if it burns down? The HOA would have to have insurance on it and pay for it to be rebuilt. The HOA has rules on such situations on property loss. The HOA has to keep paying the HOA dues on that property then add MC costs as you suggest? Good for you the MC. Bad for members of the HOA.

Former HOA President

RichardP13 (California)
Posts: 1,767

Posted:

Melissa

You are clueless!!

RichardP13 (California)
Posts: 1,767

Posted:

Melissa

They can't buy if the delinquency rate is 25%. IF the HOA is renting out that many units then they really do have a problem.

Let's give you a math problem and see if you can follow along.

Association is owed $5000.00

Management fee is 6% of the rent.

Association dues are $100.00 a month

Unit is rented on a month to month basis for $1200.00

So, $1000 each month goes to the delinquent account, $60 to the management company, $100 to the association for current dues and $40 a month for a gardener.

No money out of pocket to the association, no increase in dues, NA DA. In five months the debt is paid. The initial clean up to get the property ready can get added into the rent over time. After the delinquency is satisfied, any excess is put into an escrow account, separate from assessments.

GlenL (Ohio)
Posts: 5,491

Posted:

Quote:

Posted By MelissaP1 on 01/23/2014 11:17 AM
Who cares about rental limits?

Correct me if I'm wrong Melissa but aren't you the one who is always posting that HOA's can't have rental limits??????

Studies show that 5 out of 4 people have problems with fractions

SheliaH (Indiana)
Posts: 6,964

Posted:

I agree that the HOA should avoid renting out the property because there are too many expenses (getting the place insured, interior maintenance, tenant screening and all that stuff) and enough money’s probably been spent already to get the deadbeat out. And then you have to deal with the tenants who skip out without paying rent, possibly trashing the place.

To be fair to the renter, you would also have to tell him/her the place is up for sale and so he/she will have to settle for a month to month lease because if the house sells, the tenant may have to move very quickly.

Our community recently foreclosed on a townhouse (third one) and the upside is that the owner didn’t have a mortgage, so when the house sells, we get all the proceeds. The owner had a renter who’s still there – after we took over, we had the renter come to the board meeting. Turns out the owner told him one lie after another as to whether he was having HOA issues or not, although he was never told about the delinquencies.

We had our property manager issue him a lease and he would pay the association the same rate he’d paid the previous owner, but he would also have to have renter’s insurance. The tenant said ok, signed the lease – but didn’t pay the rent and so now our attorney has begun an eviction.

So, I think it depends on the community – if it doesn’t have many rental properties to begin with, and the house could be sold within 6 months to a year, it might be ok. This may be a good question to put to the homeowners and see what they think – give them the pros and cons and perhaps people can make up their minds about rental once and for all.

In my community, it would be a horrible idea because we already have a high number of rentals. As a now former Board member, I always tried to keep owner-occupants like myself in mind when voting on Association issues. Why should we risk losing a chance to sell our home at a good price and/or refinancing because the bank shies away from HOAs with too many rentals? We also have to deal with the mayhem some tenants cause because the owner/landlords seem to rent to anyone who can fog a mirror and don’t care what we have to deal with as long as the rent check clears?

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

PeterD3 (Florida)
Posts: 708

Posted:

"Surprise... I am going to admit that there has been a flaw in my advice on foreclosure."

Why stop there?

PeterD3 (Florida)
Posts: 708

Posted:

Actually,

Your advice is not flawed at all, it's just YOUR advice.

What would you do without "HOA Talk" to share it?

Most don't take it seriously anyways so just roll with it.

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