Last month I explained the basics of an association judicial foreclosure through the time of the sheriff’s sale. In an ideal world, all foreclosures would result in a complete monetary recovery for an association and a new owner would timely pay all future assessment charges.
However, it is not uncommon for an association to take title to a property through its foreclosure sale. This is especially likely to occur if the property has a first Deed of Trust (mortgage) and/or tax liens which exceed the market value of the foreclosed property. So what should an association do once it takes title to a foreclosed property?
First and foremost, the association should immediately insure the property that it now owns. This typically means purchasing insurance coverage which provides both general liability and casualty coverage. As part of this process, the association should change the locks to the property and inspect the property for any visual signs of issues which may cause additional damage to the property or common elements. Any issues with the property which may cause damage to other owners’ property and/or the association’s common elements should be repaired immediately.
Next, the association needs to determine the type of income, if any, that it might be able to generate from the property. An estimate should be obtained by the association to determine what repairs or maintenance issues need to be addressed to make the property habitable. Once the repair estimate has been obtained, the association should meet with its attorney and discuss the pros and cons of renting the property and discuss whether the association’s covenants present any obstacles to leasing the property. If the property has any equity, it is worth determining whether the association can realize a monetary recovery from the sale of the property.
It is possible that a tenant may be occupying the property at the time that the association takes ownership of a property. If this is the case, the association should immediately make contact with the tenant, let them know of the change of ownership and direct that future rental payments be forwarded to the association. The association will also need to decide whether to negotiate a new lease or take action, if legally possible, to remove the tenant. It may be beneficial for an association to hire a property manager to handle the rental and any issues encountered by the tenant(s).
The largest obstacle in obtaining income from the rental or sale of a property is the outstanding Deed of Trust (mortgage). Chances are that there is a default on the loan which means that the bank may foreclose at any time. It may take a few weeks before the bank forecloses or, in the case of select lenders, could take years. This means that the association will need to carefully analyze and weigh this risk together with the cost to make any necessary repairs against the potential benefits from attempting to rent or sell the property.
The bottom line is that the association should act quickly after taking title to a foreclosed property to formulate a plan which makes economic sense. If the association cannot obtain any income from the property, chances are that the bank holding a Deed of Trust on the property will soon foreclose and place a new owner in possession which will start regularly paying the association’s assessments (knock on wood!).