FORECLOSURES IN HOAs: GOOD BUSINESS?

(Homeowners' Associations = Single Family Homes)

An Opinion By Jan Bergemann 
President, Cyber Citizens For Justice, Inc. 

Published June 24, 2008

Some association attorneys, like Robert Tankel in Dunedin , are trying to convince homeowners’ associations that they should always “rush to beat the bank” to foreclose on homes.   But in this economic climate, who does that benefit financially – the association or the attorneys?

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 Port Charlotte discovered that in 2007 the Association paid about $15,000 more in legal fees for liens and foreclosures than it recovered.  Is this good business?

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. When the association finds itself as the unfortunate owner, I recommend they either try to rent it on Craigslist, or in the alternative, actually deeding it back to the bank immediately. In other words, take the position that the bank now owns it and has to pay the back assessments to the extent allowed by the law, and the law is changing.

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 takes the property subject to the bank’s mortgage.  That means that the HOA must pay off the bank’s mortgage, or deed the property back to the Bank – assuming the Bank wants the property. 

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?

  • Legal fees -- approximately $2000 ;

  • Court costs and service of process – the Legislature has recently increased filing fees, so estimate $500;

  • The $100 to “buy” the property ;

  • A mortgage (if it keeps the property) ;

  • Taxes on the property (if it keeps the property) ;

  • Maintenance and upkeep costs of the property. This is likely to be more than average, since foreclosed property owners often strip and damage the property before being evicted;

  • Managing and marketing the property to recoup losses in a bad market

What are the Association’s Benefits?

  • It may recover past assessments to the limit defined by statute;

  • The property, which in this market it can not likely sell for a profit  (zero benefit);

  • Assessments that the new owner/bank must pay (if the Association deeds the property back to the Bank) OR  

  • Rental income, if the Association keeps and is able to rent the property.

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?

  • Title review, necessary letters, recording a lien  -- approximately $400;

  • Answer the mortgage foreclosure or monitor status of case – approximately $350

What are the Association’s Benefits by not foreclosing?

  • It may recover past assessments to the limit defined by statute, particularly if the homeowner sells or refinances within the five-year life span of the lien;

  • Saves approximately $1,250 in legal fees;

  • Saves approximately $500 in court costs;
  • Saves in taxes, maintenance and upkeep of the property;

  • The new owner, likely the Bank, still must pay ongoing assessments!

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 United States relies on volunteers -- volunteers with no basic knowledge required. Owners often trust their neighbors with financial decisions, even though their neighbors have no business background whatsoever. Or they trust neighbors who turned out to be not really trustworthy. Owners in an association in Orlando found out that the Treasurer had run afoul with the law for bounced checks and had declared bankruptcy twice. In my opinion, this is not the best recommendation for an officer of the board trusted with the financial welfare of the community.

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:

  • Filing liens -- fine!  The Association needs to protect its interests. This includes conducting the necessary research, filing and recording a lien and monitoring the bank’s foreclosure case. Association officers can do this themselves, if they are so inclined. (Note: An employee or property manager cannot legally sign a lien.) In many cases, the Association may want an attorney to handle these matters to prevent costly mistakes. However, legal fees for this “insurance” are considerably less than what it costs the Association to have its attorneys foreclose the property. 

  • Having an attorney file for foreclosure? Only if you or your attorney did the necessary research and found that there is sufficient equity in the property, making it feasible to recover the unpaid dues and legal fees.

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!

   
Attorneys who claim that litigation, liens and foreclosures are such good business know exactly why they don't agree to get paid from the money recovered. In many cases there is none to be recovered! Attorneys know full well that in many cases filing liens and foreclosure papers is really bad business. But why should they care?  They always get their money -- if you are stupid enough to fall for their promises!


Homeowner's fees leading to foreclosures (VIDEO)

HOA Lawyer In Risky Business

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