“Condo and homeowner associations (HOA) have the right to foreclose and take possession of a property much quicker than a bank foreclosure because there are no affirmative defenses as in a mortgage foreclosure action,” said Victoria Coyne with Short Sale Innovations, a West Palm Beach company that specializes in short sales. When the HOA forecloses, they will receive a certificate of title issued from the court that is subject to the mortgage. The foreclosure will cost the HOA thousands of dollars, but the idea is to rent the property until the bank forecloses.
“I recently moved to a Palm Beach Condo that had a large number of delinquencies, and the attorney advised the HOA to foreclose on delinquent unit owners,” said Dickenson. “On the surface leasing sounds like a great way to recover HOA losses, but realistically who’s going to lease a property knowing the bank will evict them as soon as they foreclose?”
"In October 2010, the bank approved a short sale offer on one of the condos in my building," said Dickenson. “We were at an impasse because the HOA demanded $24,000 in delinquent fees, but the bank was aware of a Florida bill that only required them to pay $5,000 if they foreclosed.
The Florida Bill, SB 1196, was signed into law in June 2010 and requires lenders to pay the lesser of 1% of the mortgage amount or up to 12 months of past due HOA fees following the bank foreclosure. However, the bill fails to address how much the bank must pay in a short sale situation, and it actually encourages banks to foreclose when HOA’s won’t agree to a reduced payoff amount.
“It was really frustrating because I knew what the HOA would end up with at the end of the day,” said Dickenson. “The HOA attorney wouldn’t return my calls and the HOA didn’t understand why they should accept anything less than the $24,000 they were owed.” In October 2010, the bank cancelled the short sale, and in January 2011, the HOA foreclosed with the expectation this Palm Beach condo Beach condo would generate $1,500 in gross revenue per month.
The HOA never expected the angry homeowner would remove the appliances and leave the unit in disrepair, but this is a common occurrence, and why banks now offer homeowners thousands of dollars to leave the property in good condition when they vacate. After spending thousands to foreclose, the HOA decided to let the condo sit vacant rather than spend money on repairs. The HOA is now on the hook for $519 a month in property taxes and $786 a month in lost HOA dues until the bank forecloses.
The HOA held the condo for 15 months until the bank foreclosed in June 2012. In Florida, the bank is only required to pay the HOA $5,000 in accordance with the SB 1196 bill; therefore the HOA lost $27,371 by not approving the short sale in October 2010.
“This HOA foreclosed on six condos and total losses could exceed $150,000 because the HOA elected to foreclose rather than let the short sales progress,” said Dickenson.
“The HOA should explore alternatives with delinquent owners before spending money on costly foreclosure lawsuits,” said Dickenson. Instead of blocking owners from renting the property, consider adding a clause to a lease where 80% of the rent is paid directly to the HOA and 20% is paid to the owner. The property will remain in the owner’s name for property taxes and other liabilities. The HOA should encourage short sales because they are a win-win for everyone.
A contributor to this article, Short Sale Innovations, has closed over 600 short sales in South Florida by working closely with the banks to ensure the process is quick and efficient.
Kevin Dickenson Palm Beach real estate agent who specializes in distressed residential and commercial properties. In 2011, Dickenson closed over $24M and will be featured on HGTV’s Live Here, Buy This scheduled to air this Fall.
