FORECLOSURES IN HOAs: GOOD BUSINESS? (Homeowners' Associations = Single Family Homes) |
An
Opinion By Jan Bergemann Published June 24, 2008 Some
association attorneys, like Robert Tankel in Tankel
implies that quick foreclosure (to beat the First Lender -- usually the
bank -- to the punch) is the only way for an association to recover
assessments?
True or False? FALSE! What
does Tankel NOT tell you? The Association often ends up paying more in legal fees than it recovers in past due assessments. In the article: "HOA Lawyer In Risky Business" Tankel says that "he is looking out for the interests of homeowners and condo associations." In a news report of FOX News 13 (Homeowner's fees leading to foreclosures) Tankel states that "he sees his business as a benefit to those who pay their fees on time." How
does it benefit owners to pay the deficit between the legal fees and the
money actually recovered? A
homeowners' association in I
consider that bad business.
Homeowners, already required to pay higher fees because of some
neighbors not paying and homes empty caused by foreclosure, now have to
pay as well for the lost legal fees. Associations even had to raise dues
in order to pay for the increased legal fees. Attorney
Robert Tankel even explains why filing liens and foreclosures is bad
business (quote from article): "In
this market, the value of the home is almost universally less than the
mortgage. In the situation where the association takes back title,
that's a perfect opportunity for someone in the association to step
forward and become a real estate investor. Buy the judgment from the
association and seek a short sale of the mortgage from the mortgage
company. What
happens when the HOA forecloses on a home, where there is a “First
Mortgagee” (a lender in a superior position)? In
this economic market, where the property is often worth less than the mortgage,
“beating the bank” provides NO advantage to the Association.
In fact, it may (and likely will be) MORE expensive to the
Association than waiting and allowing the Bank to foreclose. 1.
So what actually happens if the HOA forecloses in this market? In
any foreclosure, the property is sold literally “on the courthouse steps."
Anyone can bid.
In a good market, it may make sense for the Association to
foreclose.
A property with equity (e.g. with value greater than the liens and
mortgages that were not “foreclosed out”) may attract third bidders
(not the HOA or bank).
In today's unfavorable market, that is not likely to happen. So
the HOA forecloses and bids $100 for the property.
The HOA Tankel
neglected to point out that the Bank may not accept a deed to the
property.
Right now, banks have a glut of properties on their hands and it
costs the bank to market and sell foreclosed properties.
Additionally,
title companies do not like to insure properties obtained through “small
lien foreclosures”.
No bank will just take the property from an association without
assurances that it can obtain title insurance and is not taking the
property subject to other liens which the HOA did not or could not
foreclose out. If the Association keeps the property it foreclosed, it must begin making monthly mortgage payments on that property, or convince the bank to do a “short sale.” Either way, the Association has upfront costs which may not be recoverable. The Association must also pay for maintenance and upkeep. In some cases, the Association may want to rent the property out, but then it assumes all the responsibilities of being a landlord. Many Associations would not want to assume that additional burden. So what if the Bank is willing to take the property
and the Association “deeds it back”?
As the new owner, the Bank then must pay assessments. Tankel
implies that under FS 720.3085 as it exists now, the bank must pay all
past due assessments. This position has enabled some attorneys to recover
all the past due assessments – which is great.
Unfortunately, mortgage companies screamed and claimed the statute is
unconstitutional. This has not been tested in the courts, and may not be
tested because the Legislature is now considering a bill to change the
law. If the bill becomes law
as of July 1, there will be limits on what the Association can recover
from a Bank that takes over a mortgage. The
“Business Decision” the Association made to foreclose
accomplishes what? What
are the Association’s Costs?
What
are the Association’s Benefits?
2.
What happens if the Association does NOT foreclose the property and
“beat the Bank” to the punch?
To
protect its interest, the Association may want to have its attorney do a
title search, verify the Association’s position and record a lien (less
than $400 in most cases).
Once the bank has filed its foreclosure action, the attorney should
monitor the case or file an answer (approximately $300-$350). In
most cases, the Bank will foreclose. Then
what? What exactly does the
Association lose by not beating the bank to foreclosure? What
are the Association’s Costs by filing a lien but not foreclosing?
What are the Association’s Benefits by not foreclosing?
So
how does beating the bank to foreclosure benefit the Association again? As
Tankel admits, in this market, the mortgage usually is greater than the
equity. By
foreclosing, the Association spends about $1,750 more
in fees and costs and receives no
benefit!! Whether
the Association forecloses or waits for the Bank to foreclose, the Bank
(as the new owner) is liable for past assessments to the extent allowed by
statute, and ongoing assessments.
In addition, the Association now has the burden of mortgage,
maintenance and taxes on the foreclosed property!! The
only way the Association could even break even is if it could be assured
of selling the property for a profit (not likely in this market), or rent
the property for enough to make up for the maintenance and taxes and the
additional attorney's fees and costs. 3.
What
if the Bank does not foreclose? The
HOA has five years to foreclose its recorded lien.
In some cases, it may be wiser for the Association to allow the
homeowner to continue to pay the bank – especially if the homeowner is
attempting to sell or refinance. However,
if the losses become significant, it may be wiser for the Association to
force the hand of the bank and homeowner.
Then
the Association may want to file a foreclosure action. Ultimately, the Association needs to obtain a property owner who will pay assessments Whether or not to
foreclose is a decision that should be carefully considered – and not
made on “automatic pilot,” as Tankel advises. Why
do board members allow property managers or attorneys to decide whether or
not to foreclose on properties? The answer is simple.
Many board members don't have the necessary basic knowledge to run
a business like an association. The association system as we know it here
in the But much worse: Board members often blindly trust the word of
property managers and association attorneys, because they lack
business experience. Board members often seem to forget that these
professionals -- attorneys and community association managers -- are there
to make money, as much money as possible.
Too often these professionals allow greed to get in the way of
their professional judgment. When that happens, as it evidently does
happen based upon the problems we see, their opinion of what is good for
the association and its members is tainted by their own ideas of filling
their own bank accounts. The
Board has a responsibility to weigh the advice given them and make
decisions based on that advice.
Instead, Boards too often “delegate” those duties to
professionals who may be less than professional. My
suggestion for board members in homeowners' associations:
ANYTHING ELSE IS BAD BUSINESS! If you, as the Board of an Association, let an attorney file legal papers without being selective, or even give the property manager carte blanche to make this decision, you are throwing good money after bad -- and fail to reach the acclaimed goal: Collecting money for the association coffers. You actually reach the exact opposite: You make the attorneys rich and the association poor!
With our economy down the drain, please be frugal with spending your association's money. Especially legal fees can get very expensive really quickly! And if the attorney baits you with the promise of not charging legal fees upfront? Please don't fall for it. If there is no money to recover, he will send you the bill for his legal fees and the association will have to pay for it -- and may even end up with owning a worthless piece of property that has to be maintained and creates a huge financial liability for the association! Homeowner's fees leading to foreclosures (VIDEO) |