What You Need to Know - Condominium and Homeoweners' Association Foreclosures in Florida
Can A Condo or Homeowners Association Foreclose? I am asked this question very frequently. The right of a condominium or homeowners association to foreclose on your property is controlled by state law, so to understand exactly how it works in your state you should check with a local attorney who is knowledgeable about condominium and homeowners association law. I am personally familiar with Florida and Pennsylvania, and have colleagues around the country with whom I have discussed the problem, and it appears from what many of them have said that the problem in many states is similar. So, I am going to base the legal and experience particulars on my Florida background and day to day experience, and as to other jurisdictions, the content here is for educational purposes only. Please consult a local attorney in your state for specific legal advice. Generally, condominium and homeowners associations have the right to file a lien for unpaid assessments, and then, if it remains unpaid, they have the right to foreclose that lien. Assuming there is one (or more than one) mortgage on the property, and even assuming that that mortgage is for more than the value of the property, the association can still foreclose. Here is where it gets tricky. If the association forecloses and there is a first mortgage on the property, the association foreclosure will not get rid of that mortgage, but it CAN get rid of the current owner. A foreclosure sale is held, and the high bidder at the association's foreclosure sale gets title to the property, with the mortgage still on it. This has become a serious problem, both for homeowners and for people who buy at these sales, thinking they can somehow get rid of the mortgage. For the homeowner, the effect is that a buyer at such a foreclosure sale is now the owner of the property, and can evict them and move in, or move a tenant in. While this may sound strange, it is happening in Florida quite a lot for reasons I will explain below. For the buyer at the foreclosure sale, unless the buyer is the association itself, it normally means that the buyer has just thrown away what he or she bid, subject to certain exceptions which I will also discuss below. In most cases, when such a foreclosure occurs, the buyer is the association itself.
What is the Point of an Association Foreclosing?
Many people assume that it makes no sense for an association to go through this. While sometimes that may be true, that is not how many associations view the issue. There are several reasons why:
- In the current foreclosure crisis, many people in mortgage or financial trouble have stopped paying their association maintenance. Every association has a budget, which is its expected expenses for the year and sometimes a contingency reserve is added. It then takes that total annual expense and apportions it among the owners according to whatever formula is mandated by its governing documents (if a condo, the shares are usually prorated based on the size of each unit, if a homeowners association, the shares are usually equal). So, if an operating budget is $1 million for the year, and if there are 500 owners all obligated to the same share, that is $2000 per year per property, or $166 per month. However, if 100 of those owners don't pay, the association will be short by $200,000. In order to pay its bills, since it has to come up with the money somehow, it has to add special assessments to the other owners, making THEIR shares even higher.
- Many associations have made policy decisions that unless they enforce their rights to foreclose, more owners may not pay.
- Many associations have also become aggressive about enforcing their rights to foreclose because owners who have not been paying may realize that they have to pay, or they will lose their home, even if they can get something resolved on their delinquent mortgage via foreclosure defense or Chapter 13.
- In some cases, if the association gains title to the property, even though temporarily until the bank forecloses, it may be able to rent the property out for a few months and so make some return on the property. In fact, in Florida the law was recently changed to specifically authorize associations to do this, so there would be no doubt as to their rights.
- In some cases, third party buyers are actually outbidding the association at its sale. This is usually due to a misunderstanding by the buyer that he or she will be able to get rid of the mortgage (wrong), but the association gets all its money in such cases from the new buyer, so it takes the money and runs.
So, while on the surface it may not seem like it makes sense for an association to foreclose, and while many homeowners believe that "all an association can do is to file a lien but not to take the property", the truth is that this is happening quite a lot now, and as the foreclosure crisis continues, is likely to happen more and more. If you are a homeowner with either a condominium or homeowners association, be very careful. Unless you don't care, make sure to stay on the right side of the association or you are in danger of losing your home to an association foreclosure. Furthermore, as the association moves the foreclosure process forward, the amount of money it would take to "cure" the default gets larger and larger, as the associations are normally allowed to add their attorneys fees and collection costs on top of the past due assessments and interest. I recently had a client for whom I was defending his mortgage foreclosure, and saw a lot of potentially good defensive issues. Things were going well. Then one day he called me to say that he had just been served with a Writ of Possession by the Sheriff. It turned out that, while he never mentioned it, in addition to the mortgage foreclosure, there was an association foreclosure and the association finished its foreclosure and evicted him. Since I was not involved in (or even aware of) the association foreclosure, there was nothing I could do to help, and frankly, association foreclosures normally have very limited defensive opportunities. So, I told him at that point that he either needed to find a way to make an agreement with the association to pay them what they demanded, or to find another place to live righ away. I know of many other similar situations. In most cases the association maintenance is relatively small, and if it is your goal to find a way to keep your home, you will greatly complicate matters unless you continue to pay the association. It needs the money too badly to ignore your non-payment. If you have fallen into arrears and are getting threatening letters, call them and see if you can work something out before the problem gets completely out of control. If you are a person considering bidding at one of these sales, be very careful. Make sure you understand whether there is a mortgage on the property or not, and if so, make sure you factor that into your decision as to whether this is worth your putting you own money into. Usually there is a mortgage, and usually it is large. In some states the mortgage company may be required to allow you to take over the mortgage payments, but in other states, such as Florida, there is no such obligations, so if you bid on a condo foreclosure in Florida, you then have a property with a mortgage that is likely to continue foreclosure and get rid of YOU, and whatever you paid is out the window. While it may be that for some reason you may think it is still worth it to you to bid at the association foreclosure sale, it is important that you completely understand your risk.