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July 17, 2010
SHORT SALES IN HOAs, STRAIGHT THINKING
There has been much commentary about short sales in homeowner associations lately. What happens to the delinquent assessments in a short sale? Some commentators suggest they never get paid or that the debt is extinguished in the short sale. Not so. Some suggest that the association must have a lien on the property to collect or if the sale goes through without payment of the assessments and there is a lien, that the lien is extinguished. Not so.
The best result of course is that the bank/seller do things properly and an escrow demand comes to an association asking how much is owed, and the delinquent amount is considered as part of what must be settled in the sale. Whether the bank, the seller or the buyer pay the delinquencies is of no particular consequence, if someone agrees and they are paid to assist the sale. I have heard of buyers ante'ing up more $$ when the bank appraisal came in too high to do the deal. The buyer might be willing to throw in some money toward the debt to get the good deal.
When they are not paid, or when the HOA is being asked to negotiate down what is due, it is important to consider what is happening and whether it makes sense. Here are some considerations:
1. The debt is that of the SELLER and if the debt is not paid, the association still can go after the seller for the accrued debt. But is it worth it? If the seller is a family that lost its home because the owner lost his or her job or suffered grave financial circumstances, probably not. If the seller is an investor who appears to be dumping property to cut losses, maybe so.
2. If the assessment debt is not paid and the property transfers, it would be my contention that the HOA could still consider putting a lien on the property or moving forward on an existing lien to foreclosure (assuming the governing documents provide for it) as the assessment debt still remains on the property and it has not been "extinguished" by law. If a senior mortgage holder forecloses for its debt and the HOA has a lien, that lien would normally be extinguised as a matter of law. This is not the case in a voluntary sale to your brother, uncle, or kid, or in a short sale. You cannot pursue a buyer specifically, but the property may be up for grabs. Thus, all parties (lender, seller and buyer) should take heed in settling on a short sale without inquiring about HOA debt. It is risky business. All might end up in litigation against each other.
3. If the HOA is being asked to negotiate down the debt, keep in mind that "a bird in the hand is worth 2 in the bush." In case that is not clear, 50 cents on the dollar in hand might be the best deal in town. Getting the unit transferred to a new owner without waiting for the bank to foreclose (many are stalling foreclosures) might be worth nothing on the dollar. Entering into an agreement with the buyer to make payments might be the way to go - assuming they are solvent or moving in that direction.
In other words, HOAs and Condo Boards - being ignorant of the rights remaining or being belligerent in your demands might hurt you. Consult with legal counsel to be sure you are knowledgeable about your rights (don't consider a blog to be legal advice - attorneys do tend to argue about things).
As many have said, is doubly important in this economy to have a strict assessment collection policy that allows for recording a lien at the earliest possibility because let's face it, HOAs and Condo contacts are hard for the lenders and title officers to find. If sellers don't ante up the information about their debt to the association, a lien will. And, a lien offers a point of contact, and additional protections in the event of bankruptcy. Yes, the costs to the owner who is already strugging go up considerably when a lien is recorded, but if that owner has not stepped up and entered into a payment plan that is being honored, there are oh-so-many-protections that the Association needs.
Posted by Beth Grimm at July 17, 2010 1:02 PM