HOA Foreclosures: Case-by-Case is Key
Last Friday, I attended a legislative briefing by the Director of the Division of Real Estate and the HOA Information Officer on the findings outlined in the 2011 Annual Report of the HOA Information and Resource Center (“Annual Report”). Having repeatedly reviewed and written about the Annual Report, I wasn’t surprised to hear the comments relating to things like transparency and the failure of some HOAs to produce records. What did catch my attention was the contention that some HOA law firms are inappropriately utilizing foreclosure as a remedy for past due assessments or to push folks out of their homes.
I have to say that I found it interesting that “HOA law firms” were classified as a potential decision maker on whether an HOA will foreclose on a delinquent owner. The decision to proceed with a foreclosure should never be delegated to a law firm or an insurance company for that matter. Instead, the boards of HOAs should always make this decision on a case-by-case basis after carefully considering their options and the potential ramifications of proceeding with foreclosure.
There is no question that the foreclosure remedy is a necessary tool in the collections toolbox for HOAs. It’s a good option for dealing with bank-owned properties in which the lenders refuse to pay assessments. It’s also a legitimate option when the less drastic remedies of obtaining a personal judgment, receiverships or tenant garnishments are not successful.
In addition, HOAs should be extremely careful when considering the option of using foreclosure as a routine remedy for collections. While this may sound like a proactive approach to collecting delinquencies, you should consider the reputation your community will receive if foreclosure is used as the routine remedy of choice. In my opinion, this type of reputation would chill the sale of units in these communities. In addition, I think there’s little doubt that if several associations go down this road – we will see a legislative “fix” to the utilization of this extraordinary remedy.
When considering the option of foreclosure, boards should ask themselves and their legal counsel the following questions:
● Are we turning over our collection accounts to legal counsel in a timely manner or are we allowing the delinquencies to pile up before pursuing legal action against delinquent owners? Is this making it more difficult for legal counsel to quickly and efficiently collect on delinquent accounts? Do we need to revisit and rethink the strategy in our Collections Policy?
● Have we explored the option of a reasonable payment plan with the delinquent owner?
● If working out a reasonable payment plan with the delinquent owner was not successful or a valid option, is the filing of a lawsuit to obtain a personal judgment against the owner a viable option? If the association obtains a judgment, is there a strong likelihood that the association will be able to collect on the judgment? If there is a tenant in the owner’s unit, is a tenant garnishment a viable option for satisfying the judgment?
● Is a receivership a viable option for the association to consider?
● Before proceeding with a foreclosure, is there equity in the delinquent owner’s unit? If there isn’t equity, are there other valid reasons for proceeding?
● If the association takes title to a unit without equity and doesn’t pay the first mortgage, what can happen to the unit? What options does the association have relative to renting or selling the unit? What does the real estate market look like? Will the association have a difficult time selling the unit?
While foreclosure can be an appropriate remedy for your association to utilize on a case-by-case basis, it’s important to first consider this option very carefully and to proceed only when you have a full understanding of the process and the potential ramifications to your association.