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FORECLOSURE
OPTIONS
Boards are
required to collect delinquent assessments or face budget shortfalls. Because
many owners are upside down in their mortgages (they owe more than the property
is worth), some have stopped paying their mortgages and association dues.
To protect the membership, boards must quickly
file liens and foreclose
on delinquent owners. To illustrate how the foreclosure process works,
assume the following liens are on the property:
- 1st: Mortgage of $600,000 on property worth
$400,000
- 2nd: Equity loan for $10,000
- 3rd: Association's assessment lien
for $8,000
- 4th: Judgment lien for $15,000
Bank
Foreclosure.
If the 1st or 2nd lienholder forecloses ahead of the association, the association's
lien will be wiped out and the $8,000 owed by the delinquent owner becomes
unsecured. However, the association can still make a claim on any surplus funds
resulting from the senior lienholder's sale. Usually there are none. Even
though the association's position is wiped out, it can still
sue
the former owner and collect on the judgment by levying against the owner's bank account, recording
a judgment lien against his other real property (if any), etc.
If the former owner appears judgment proof, i.e., he has no assets, the board could
write off the
bad debt and not waste
any further money on legal fees
chasing uncollectable debt, especially if the owner declares
bankruptcy.
Association
Foreclosure.
If the association is the first one to foreclose and is the successful bidder at
the foreclosure sale, it takes title to the property subject to all senior liens and free of all
junior liens. This means the 4th lien for
$15,000 is wiped out because it is junior to the association's lien. However, the association takes
ownership of the property subject to the $600,000 mortgage and the $10,000
second. If the association fails to make payments on the 1st and 2nd, both have
the right to foreclose on the property but the association itself is not liable
to the senior lienholders because it did not sign their promissory
notes.Outside Bidders.
If an outside bidder acquires the property at the association's foreclosure
sale, the association will recover its delinquent assessments and
collection costs.
Right of Redemption.
Regardless of who buys the property at the foreclosure sale, ownership is taken
subject to a 90-day right of
redemption, which allows the foreclosed owner to recover the
property if he pays the delinquency and any fees and costs.
Civil Code
1367.4(c)(4)
*A special thanks to attorney Richard Witkin of
for his input on this article. Witkin & Neal
LLP
specializes in nonjudicial foreclosures for community associations. You can find
his contact information in the Service
Directory.
Very truly yours,
Adrian Adams, Esq.
Adams Kessler PLC |
