By David C. Swedelson and Sandra L. Gottlieb, Condo and HOA Legal Experts, Community Association Attorneys
As we maneuver our way through the end of this recession, the words “short sale” are being bandied about more than at any other time that we can remember. Lenders are apparently more receptive to considering a discount on a mortgage rather then taking the property back in foreclosure. We wrote about short sales back in May 2011 (follow this link). Wikipedia defines a short sale as “a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency.”
You might ask, “Does this apply to homeowners associations?” It sure does! Many of our community association clients are being contacted by realtors who are attempting to negotiate a short sale for their clients for the sale of a condo, home or lot that is underwater (worth less then the loans/encumbrances), requesting that the association consider taking less than what it is owed for assessments, late fees, interest and costs of collection so that the short sale can be completed, and the property sold to an owner that can pay the assessments and fees.
The first thing to note is that an association does not have to agree to the short sale; however, that may result in the collapse of the proposed short sale and lead to the lender foreclosing on the property with the association not recovering any money. To a certain extent, a short sale is (or at least could be) a win-win for the association. If the association knows it is not going to be paid the assessments, late fees, interest and costs of collection it is owed, and chasing the delinquent owner seems like a waste of time, the board can make a decision to cut out the cancer, which is the non-paying homeowner, realizing that the foreclosure of the property (by the senior lender) will likely result in a paying homeowner purchasing the property and meeting the association’s assessment obligations on a going forward basis. If the lender forecloses, it is the new owner of the property that has the same obligation to the association as any other homeowner.
The issue that the board needs to consider is the amount that is being offered to the association as part of the short sale. It may be in the association’s best interest to evaluate the amount of money that the owner is willing to pay to the association to enable the short sale to close. Is the association being asked to accept the same discount as other secured creditors? Will the owner pay out of pocket to close the short sale and avoid a lawsuit from the association? The point is that there are options.
If the board has already decided to go forward with its foreclosure sale, knowing that the property will revert to the association, and that the association will not net any proceeds, accepting 50% – 70% on the dollar when an owner is negotiating a short sale with their lender may make good business and economic sense.
It is important that the association’s board be realistic about what the association will be paid in the short sale transaction. Remember: the lender has agreed to accept less than the loan amount (meaning, what is owed on the mortgage), which means the lender is losing money on the transaction as well; the lender is not going to pay the association any money to complete the short sale. Any funds that the association receives will likely come from the owner, or perhaps the owner’s realtor who may decide to kick-in part of their commission to the association in order to make the deal happen.
If faced with this possibility, we suggest you contact SwedelsonGottlieb to provide your Board of Directors with assistance in evaluating whether a short sale offer to the association is or is not in the association’s benefit. Sandra Gottlieb can be contacted via email: firstname.lastname@example.org. David Swedelson can be contacted via email: email@example.com.