02/10/09: Condo Can Foreclose If Fees Not Paid
By Benny L. Kass
Q: I am three months behind on my condominium association payments. Can the association foreclose on my unit? My mortgage payments are up to date. I called my mortgage company who told me they could not. Is this correct? Last month, I wrote a letter to the Board asking for a payment plan, but have not yet received a response. I know I owe the money, but I was sick for a period of time. I plan to pay the back fees with my tax refund.
A: Unfortunately, your bank was wrong. Most condominium documents - and the law -- permit the Board of Directors to institute foreclosure proceedings if you are delinquent on your condo fees for a period of time.
You should read your condominium documents carefully. There is a section in the Bylaws, usually called "Compliance and Default", which spells out all of the remedies that a condominium association can take when a unit owner is in violation of the terms and conditions of the legal documents. Typical language reads as follows:
Failure to comply with any of the terms of the Act, the Condominium Instruments or the Rules and Regulations shall be grounds for relief which may include, without limiting the same, an action to recover any sums due for money damages, injunctive relief, fines, sanctions, foreclosure or power of sale of the lien for payment of all assessments, any other relief provided for in these Bylaws, the Act, the Rules or any combination thereof, and any other relief afforded by a court of competent jurisdiction, all of which relief may be sought by the Association, the Board of Directors, the Managing Agent, or, if appropriate, by an aggrieved Unit Owner and shall not constitute an election of remedies.
Simply stated, this means that if a unit owner has not paid his/her condominium fees, the Board of Directors of the Association can file a lawsuit in the local Court for money damages, file a lien on your unit, and eventually institute foreclosure proceedings.
While the association has this legal right, in practical terms, foreclosure is not always the best remedy. Before beginning the process, the delinquent unit owner's lender must be given written notice of the intent to foreclose. The lender - in its sole discretion -may pay the condo delinquency and add this amount to the outstanding balance on your mortgage.
Should your lender opt not to make these payments, the Association has to decide whether it really makes sense to foreclose. There are upfront costs that have to be paid, such as advertising, auctioneer and legal fees. This can cost the association several thousand dollars, even before the foreclose sale takes place.
There is an outstanding mortgage, which will have to be paid off - or at least addressed - by the successful bidder at the auction. If the loan balance is high - and there is little or no equity in the property - this will seriously impact on whether there will be bidders at the foreclosure sale. In today's market, many houses are actually under water. This means that the mortgage balance exceeds the value of the unit.
People go to such sales hoping to get a real bargain. We hear stories where properties have sold for thousands - if not hundreds of thousands of dollars - below their current market value. But if bargains are not available because the outstanding mortgage is so high, there may be no bidders at the sale.
What does this mean? In that case, the association has two options: they can buy the unit at the foreclosure sale, or cancel the sale and absorb all of the costs. If it buys the unit, it becomes the property owner, and will be burdened with numerous expenses. First, unless the current mortgage lender can be convinced to allow an assumption of the outstanding mortgage for a period of time, that mortgage will have to be paid off.
Second, the association will have to deal with the current owners of the unit, and either evict them or arrange a temporary rental agreement.
Third, now that the association is the owner of the unit, it will have to pay the real estate tax. Additionally, it has to pay the monthly assessment just like any other unit owner, which could mean that everyone's assessment may have to be increased.
And the association has to keep in mind that under these circumstances, they still will not have collected the delinquent assessments, nor will future condominium fees be coming in for this unit from real owners.
In the ideal world, the association can sell the unit and the new owner will start paying the fees. The hemorrhaging will have stopped. But as President Obama said earlier this week, "this is not the ordinary run-of-the mill recession". There is no guarantee that the association will be able to sell the unit quickly in today's market. Additionally, should the unit be placed on the market for sale, this will compete with - and alienate - other owners who are trying to sell their units.
Yes, foreclosure is one remedy available to your association, but should be considered only as a last resort. I am surprised that your Board has not yet responded to your request for a payment plan. A typical plan works like this: you agree that by a certain date, you will resume your monthly payments. You will also add a percentage of your outstanding balance in an amount agreed to by the Board. If you honor the agreement, you will ultimately catch up and become current. However, if you default on the agreement, then the Board has the right to pursue you either in court or by instituting foreclosure proceedings.
I suggest that you talk to the Board president and make sure that the Board understands that such a plan may be a win-win for both sides. The longer they wait, the harder it will be for everyone.
The laws in the metropolitan Washington area are different so you should consult your own attorney for specific advice.
One other suggestion. Talk with the accounting department at your workplace. You might want to increase your deductions so that you get more take-home pay, instead of waiting for that tax refund at the beginning of each year. Although the IRS may pay you a some interest on the amount you have overpaid, I believe that most people would prefer having the cash now - rather than waiting for that refund check.