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July 13, 2010
RENT SKIMMING - HOA Foreclosure - Desperate Situations
A few months ago I did an E-Newsletter on the rent skimming law in California. For those who do not know what that is, it is when someone buys properties at a foreclosure sale held by a junior lienholder or HOA, rents them out, takes the rents and does not pay any money to the senior mortgage holder whose debt is still viable. This person is "skimming" the rents and often continues to do so until the senior mortgage holder forecloses. There are legal penalties for doing that and there is more on this in the E-News Archives on my website. And HOAs that take properties back at foreclosure sales when the owners do not pay the assessments are at risk if they rent the place out, and "skim" the rents.
However, the HOAs are often in a very difficult position, today more than ever before in my history as an HOA attorney (more than 25 years). The economy and rising number of people who simply cannot pay, or simply "walk away", is hurting the HOAs. The inclination of many banks today to stall foreclosures lest they become owners of HOA properties and be held responsible for the upkeep of the property and assessments is very troubling. It is understandable, given that they are in "business" and have their own set of problems and criteria, but it is hurting HOAs!
I have received the calls from Boards that are desperately trying to find some means of collecting assessment money, or collecting the debt from unpaid assessments, about homeowners and investors who have either committed suicide, skipped town or simply crawled within themselves because of their financial plights. So pushing those parties for reimbursement can be like pushing a dead horse.
If an HOA is considering going through with a foreclosure sale and (assuming the property is upside down or unmarketable for any reason) "skimming rent", I suggest first exhausting all possible options (considering all circumstances) with the owner. I suggest contacting the lender to see what the plan is with regard to foreclosure (although many lenders will not communicate with the association until it owns the property).
If these things lead to a dead end, then the HOA may be left with the difficult (but probably reasonable under this scenario) position of taking the property back at its own scheduled sale and collecting rent from the current occupant, or legally evicting them and getting a rent-paying tenant in there.
Once the HOA becomes the owner of the property, then I would suggest communicating with the bank and encouraging it to move forward with foreclosure if the debt is in arrears (which it most certainly would be), or to consider looking at a short sale. If the HOA has exhausted all avenues considering pursuing the owner, and notified the bank encouraging them to move on the property, it seems really that any party that might pursue the HOA under the rent skimming law would have a lot of explaining to do, and difficulty characterizing themselves as any kind of "victim" of the HOA's action.
These measures are suggested as a way to potentially minimize the possible ramifications under the statute that was designed to punish people who take advantage of the downtrodden and then skim the rents instead of taking proper ownership responsibilities with regard to the property. There are no guarantees of course.
The law was not designed to punish HOAs that have fallen victim of owners who no longer take responsibility and banks that are unreasonably delaying foreclosures to protect themselves and hopefully, if any HOA is pursued under this law, the judge would take into consideration the lack of willful or malicious intent. I know of no cases where the HOA has been pursued and know that attorneys have presented this as an option to consider when all else fails.
Posted by Beth Grimm at July 13, 2010 10:52 AM