Unpaid COA/HOA Assessments:Should You Foreclose and Take the Property?
In my practice of representing community associations ("CAs") in Florida, I am often approached by a client or potential client and asked, "Should we foreclose on the home?" Well, like any good, annoying attorney answer...it depends. It depends on your main concern. Are you wanting to generate income for the CA, or do you just want to gain control of the unit? No two situations are the same, even within the same CA. Perhaps a home is occupied by a squatter or other "undesirable" person who is disrupting the peace of the community. In that case, gaining control of the unit might be the goal, regardless of the financial stakes. If, however, the CA is simply trying to increase its revenue, then it would be more interested in recovering the maximum amount of funds. This article will focus on the financial decisions of foreclosure. TO FORECLOSE OR NOT TO FORECLOSE? The first mistake many CAs make is to allow the owner to become hugely behind in the assessments before taking any action. I have clients who have not collected assessments on some homes for 2 or 3 years! Now, the past due amounts are up to $15,000, $20,000, even $30,000! Obviously, a struggling homeowner is not going to be able to pay that amount in a lump sum, and even a reasonable payment plan might be impossible. You might think of settling for a smaller amount and writing off the rest of the debt -- not so fast! For condominiums, FL. Stat. 718.116(9)(a) provides, in part, "[a] unit owner may not be excused from payment of the unit owner’s share of common expenses unless all other unit owners are likewise proportionately excluded from payment..." So, what are you to do, Board Members? Fist, you must implement AND ENFORCE a uniform collections procedure. It must be automatic with no variations (to avoid claims of selective prosecution), and it must address the situation while the amount owed is still low enough to make options other than foreclosure feasible. Past Due letters must be sent, and the matter turned over to the Association Attorney at the proper time. I recommend notifying the attorney when the account becomes 30 days past due and beginning the notice steps for filing a foreclosure action. If the home is being leased, Florida law provides CAs the right to collect the rent directly from the Tenant when the Owner is past due on his/her assessments. The amount collected would go to offset the debt. This is the easiest way to collect the funds owed, but of course, it only works if the home is rented...and the Tenant cooperates. I have seen Tenants and Owners conspire to claim that they are just "friends" or "family members" staying in the home as guests and not paying rent. In that case, or if the home is vacant or owner-occupied, the best option may very well be foreclosure. TO TAKE TITLE OR NOT TO TAKE TITLE? So, you have decided that foreclosing is the only way you can feasibly get the funds owed. You have obtained the Judgment and a Foreclosure Sale has been scheduled. Nothing more to worry about, right? Wrong! Now, you must consider what to do at the Foreclosure Sale. Does the CA want to take title to the property and become the New Owner, or does it want to let someone else become the New Owner? Your first instinct might be to think, "Take title!" However, this is where your good collections practices comes back into play. Keep in mind that the title at the CA Foreclosure Sale will still be subject to the Mortgage Lien. All the bid-winner is really getting is the right to collect rent until the Lender gets around to foreclosing the Mortgage and taking the property. Theoretically, you could sell the property, but how much is someone going to pay for the right to collect rent for an indefinite period of time? Yes, there is a market for that, so everything I am saying here will vary case-to-case, based on the amount owed by the Foreclosed Owner. If, like some of my cases, the Foreclosed Owner owes $15,000+, it is unlikely that any investor will be willing to pay that much. If the amount owed is only $2,000, then perhaps the CA can even make a profit (either from rental income or selling the right to collect rent). There is pitfall, however, to the CA taking title to the unit. As you may be aware, the Safe Harbor Provision of the Florida Statutes limit the liability of foreclosing Mortgagees. That is, if the Foreclosing Lender takes title at the Mortgage Foreclosure Sale, it only has to pay the last 12 months of assessments OR 1% of the original mortgage principle, whichever is LESS! If the amount owed by your Foreclosed Owner is MORE than that limited amount, what happens to the rest of the money? Who has to pay it? That, my friends, is the hidden pitfall. Florida Statutes provide that ALL owners are liable for ALL the assessments that come due before and after taking title to the property. The only exception is for Lenders (as mentioned above). Let's say that the amount owed is $5,000 and the original mortgage was $200,000. We know that, ultimately, when the Lender forecloses it will have to pay, AT MOST, $2,000 of that $5,000. This leaves a shortfall of $3,000. The CA does have a right to collect that $3,000 from somebody, but from whom? One source is the Foreclosed Owner. The CA can sue the old owner for the deficiency, but given that he/she couldn't pay the bills, what is the likelihood of ever recovering the amount owed? Remember that the statutes say ALL owners are responsible for the payments...even those who buy the property later. Because of this law, when the Lender sells the property on to a new buyer, that new buyer must pay the remaining $3,000 owed. The same holds true even after an Association Lien Foreclosure, as long as the CA does NOT take title to the property at the Foreclosure Sale. Once the CA takes title, it becomes an Owner of the property. Remember, I said ALL Owners are responsible for paying ALL dues. By taking title, the CA takes on the responsibility of paying the past due assessments. It does not actually have to pay them, but it loses the right to demand the funds from the New Owner after the Mortgage Foreclosure Sale. To make things clearer, let's look at that $3,000 deficiency. The CA can either sue the Foreclosed Owner for the money OR wait and charge it to the New Owner. BUT...because the CA is also an Owner, the New Owner can turn right around and sue the CA for the $3,000 it should have paid. This effectively wipes out any liability of the New Owner and leaves only the Foreclosed Owner and a lengthy and expensive procedure, likely to include garnishment of wages, attachment of assets, liens on other property, etc. Even if there are other assets to pay the deficiency, it could take years to collect the $3,000. The best strategy when faced with a possible deficiency from foreclosure, therefore, may be to NOT take title. Instead, let someone, anyone, else win the auction, even if at the minimum $200 bid, and protect the CAs right to demand the deficiency from the New Owner. In each case, you should review whether the property is currently rented or could quickly be rented, as well as the amount owed versus the amount an investor would likely pay either at the Foreclosure Sale or on the market. You should also consider your level of comfort with being a landlord and the management company's experience as one. There are many issues and variables that can and will arise, but hopefully, this article has given you some food for thought when discussing what to do about your aging receivables.