The Delinquent Homeowner is Pursuing a Short Sale - Help!
As we make our way through the “Great Recession”, we find that many owners are still upside down in their units/homes, owing more to their lender than the current potential sales price. In many cases, the owners cannot afford to pay the bank and are looking to get out from ownership of their home or unit. Many owners are trying to do short sales, where they take an offer to buy their property for less than the loan amount and try to obtain their lender’s agreement to take less than the amount that is owed on their loan/trust deed. We are getting calls from community association managers and board members who are asking what to do when faced with the prospect of a short sale, where the owner is also asking their association to discount the amount that is owed for delinquent assessments, late fees, interest, collection fees and costs.
Before the Great Recession, we would have told you to stand fast and try to collect all of the money that is owed because owners were not that upside down on their loans. Today (2010), that would not always be prudent advice. In some cases, an association is going to have to discount the amount that it is owed or face the possibility of having its lien wiped out by the foreclosure of a senior lien and the potential of not collecting any money at all.
There are several factors that the board and management should take into consideration when evaluating a short sale situation:
1. Is the unit/home occupied by the owner or a tenant? If occupied by a tenant, does the association have an assignment of rents provision in its documents? If so, the association should consider exercising that right;
2. Does the owner have other assets or the ability to pay the assessments despite the lack of equity in the unit or property? If so, then perhaps the owner should be urged to pay from other assets and/or the association can evaluate a potential lawsuit for money damages against the owner to collect from other assets. Depending on the amount owed, the association may want to invest in an asset report to see if an owner has other assets;
3. What is the status of the property? Has the owner defaulted on their loan, and has the lender started the foreclosure process? How far along is the association in its collection process? Associations should move as quickly as possible to start the collection process and make sure that a lien gets recorded. California law requires that before the lien can be recorded, a pre-lien letter must be sent to all owners of the property in compliance with the Civil Code. Once the letter is sent, the association must wait thirty (30) days before the lien can be recorded. Without a lien recorded against the unit, the owner could proceed with the short sale and not pay the association any of the monies it is owed.
If the board or management has evaluated both the owner’s ability to pay independent of the property and the status of the property in terms of senior foreclosure, the board will be in a better position to determine whether it should discount the amount that is owed in order to get paid.
It is difficult for us to advise how much an association should discount from the amount that is owed, as that will depend on all of the facts and circumstances. Understand that the owner will, of course, want the association to discount as much as possible off of the amount that is owed in order to complete the short sale process.
If your board or management would like assistance in evaluating its options, Swedeslon & Gottlieb can assist in making a determination as to whether and on what terms to accept a short pay. If you would like our assistance in evaluating the association’s options when confronting a possible short sale, please contact the community association attorneys of SwedelsonGottlieb at (310) 207-2207 or email David C. Swedelson at email@example.com.