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Foreclosure by Associations Doesn’t Make Financial Sense

By November 22, 2011 No Comments

While there are reports of increased sales in Florida’s condominium market, the picture for condominium associations remains bleak due to more stringent lending practices among banks.

These tighter lending practices represent a drastic swing of the pendulum from a time when there were virtually no regulations, to now, when a buyer’s income and credit history are viewed under a microscope. The result is that the vast majority of sales are to cash buyers. This dynamic clearly limits the market and an association’s ability to claw its way out of financial chaos because mortgages are more commonly out of the picture.

The shared nature of condominium ownership puts these associations in a difficult situation, leaving them with very basic options: cut expenses, foreclose on the units of non-paying residents or develop ways to bring more money into the organization.

Cutting expenses could involve limiting services such as landscaping, staffing and cleaning the pool. These are not options that residents will typically tolerate.

Some associations are raising monthly assessments, an unpopular scenario since it could force residents into foreclosure.

Other associations have resorted to quasi-illegal methods. For example, one association in south Florida was generating significant monthly cash flow by placing a product billboard on its highly visible rooftop, while at the same time it was being fined by the county zoning board. However, the penalty fine was significantly less than the revenue generated from the ad. Another association amended its governing documents to allow fines to a unit owner for leaving garbage cans on the street.

These are desperate times. While we never endorse these quasi-illegal strategies, it’s clear that the only option is to cut expenses or allow a company to manage the receivables. it doesn’t make financial sense for associations to foreclose on a condo unless there is owner equity; leave that action to the banks.

  • If an account goes delinquent for more than seven months, the owner only brings the account current on average 20 percent of the time. When an account goes delinquent beyond ten months, it is very unlikely the owner will bring the account current, and the eventual payoff will be the result of a bank foreclosure, a short sale or a bank mortgage modification.
  • When the bank takes action (foreclosure, short sale, loan modification), the association stands to benefit. In the case of a foreclosure, the association will receive back-owed assessments following a foreclosure and have a better credit source to pay assessments following the foreclosure. on a short sale, the association will receive back-owed assessments at the time of sale and have a new owner liable to pay assessments going forward. and through a loan modification, the association lien will be satisfied, back-owed assessments paid current and the owner may be able to afford the assessments and new mortgage payment going forward. These are all tactics dictated by the banks and, ultimately, are in the best interests of the association.
  • Association lien foreclosure is an action against the current owner of the property, which can be very threatening and effective in normal times. However, the condo owners that are not paying association dues are generally so upside down (mortgages exceed condo value) that an association’s threat of foreclosing on their condo has little or no impact on the property owner, meaning association foreclosure is ineffective. An association foreclosing on a condo has no impact on the bank either, since an association cannot foreclose out a first mortgage.
  • We continue to see many associations foreclosing on unit owners even when a bank is simultaneously foreclosing
    on the same property. We also see many associations filing foreclosures as a means to get the owner to pay past-due
    assessments when it is obvious that the owner has already abandoned the property and has no means or intention to
    pay. association foreclosures are costly, and the expense should not be borne by associations unless there is equity
    in the condo or there is reason to believe the foreclosure action will cause the owner to pay their association dues
    current.

Since 2008, foreclosure has clearly not been a successful collection option for associations:

  • When an association forecloses and takes title, the association lien for all past-due assessments is wiped out without any chance of recovery that would occur in the event of a bank foreclosure, a short sale or a mortgage modification. After writing off all back-owed assessments and bearing the cost of a foreclosure, the association often ends up owning the unit for less than six months before the bank forecloses on it. When an association owns a condo unit, the fees continue to mount for assessments, taxes, insurance and maintenance, resulting in the association being in a worse situation.
  • When an association forecloses and takes title, it averages approximately $3,200 in legal fees.
  • When an association forecloses and takes title, it writes off an average of $5,600 in lien receivables in order to obtain
    ownership.
  • Associations often believe they will recoup foreclosure expenses with rental income. the actual net rental income that an association collects is less than the association’s cost of foreclosing and lien write-offs 95 percent of the time. Every association foreclosure/rental situation should be analyzed prior to taking the action, but the average association foreclosure initiated on a 12-month-delinquent account will have to rent out for at least 18 months for the association to break even on prior lien write-offs and foreclosure expenses.

As condominium associations continue to acknowledge the depths of the problems they’re facing, many are realizing that safeguards have not been put in place to deal with the current financial crisis. they didn’t make allowances for bad debt or the reality of cutting expenses and services. the financially astute boards have done this, but many are, for example, maintaining services and leaving water bills unpaid, putting associations in a position where a building could be condemned. Some are taking some creative – albeit questionable – steps to make up budgetary shortfalls.

As the crisis continues, most associations are experiencing significant financial hardships, but it is clear that association foreclosures are not the answer.