“A couple of years ago, I’d have told my clients asking about foreclosing and renting, ‘Don’t expect to recoup all your money through a lease because the mortgage company’s going to foreclose on the unit pretty quickly,'” explains Michael S. Hunter, an attorney and partner at Horack Talley Pharr & Lowndes PA in Charlotte, N.C., who represents associations. “Now I’m not so quick to say that because banks are taking so long to foreclose. Now associations can collect 6-12 months of rent before the bank forecloses.”
Jed L. Frankel, a partner at Eisinger, Brown, Lewis, Frankel & Chaiet PA in Hollywood, Fla., who advises community associations, is cautious when he advises clients on the foreclosure-to-rent strategy. “I’ve had some clients doing that for a couple of years, but it’s very dangerous,” he says. “Once the association owns the unit, it becomes a landlord—assuming you rent it out. Florida is a very pro-tenant state, so you become responsible for upkeep and insurance for the unit. That opens the association up to economic liability.
“In addition, it’s not so easy to rent out units, and as an association do you really want to be stuck owning a number of units you can’t rent, in addition to maintaining them?” adds Frankel. “A lot of associations don’t have somebody who’s capable of renting out units. On top of that, you have to spend money to foreclose. It may be smart in a particular instance, but you can’t say across the board it’s a solution to everybody’s problems.”
Even if you can’t rent out a unit you’ve foreclosed on, there are benefits to foreclosing, says Ben Solomon, an attorney and founder of the Association Law Group in Miami Beach, Fla., who advises more than 500 associations and also represents developers through his second law firm, Solomon & Furshman LLP.
“When associations say, ‘We’re not going to wait for the bank, and instead we’ll pursue our own legal remedy,’ it puts direct and indirect pressure on the bank,” explains Solomon. “If there’s no competing interest for title to the property, you’ve given a lot of extra breathing room to the bank. But when the association files foreclosure, there are varying results, but there can be good results. For example, when a short sale is presented while the association is foreclosing, that puts a lot of pressure on the bank to accept the short sale. It also tends to speed up the lender’s own foreclosure because lenders realize there isn’t going to be anything to work out with the borrower. That’s why associations should be foreclosing. But the way lawyers charge legal fees makes it cost prohibitive.”
A Huge Obstacle: Cost
Indeed, money is often a big barrier to association foreclosures, which is why you should ask your attorney to consider an alternate fee arrangement. For example, Solomon’s firm doesn’t charge associations for foreclosures until it gets paid.
“If the association takes back its property at the foreclosure sale and opens the unit to renter income, we don’t trigger our fee because the association hasn’t been paid,” he explains. “We recover our fees when the owner pays the association, or if there’s a short sale, we ensure that the attorneys’ fees to us have to be included. If the lender then forecloses, Florida law has a statutory cap limiting lenders to paying the lesser of 12 months of past due assessments or 1 percent of the original mortgage. But we’ve never lost when arguing that we also get to recover the association’s legal fees and costs, along with its late fees and interest, in addition to that cap.”
Real-Life Foreclosure-to-Rent Scenarios
Do any associations foreclose with the intent to sell the units? Very few, says Frankel. “The condo and HOA real estate market is so bad that I don’t think selling is a viable option,” he says. “Even when the association takes title, it’s still subject to the holder of the first mortgage, and you have to pay the back real estate taxes to pass clear title to someone. I’ve had a couple of associations that have tried to do short sales, but the banks haven’t been cooperative with that.”
Most simply want to rent out units or just want bad apples out of the association. “I’ve had a couple that had bad unit owners who weren’t paying their assessments and were flaunting it,” says Frankel. “The associations went through the process just to get rid of these people. But that’s less common today because now in Florida we can prevent delinquent owners from using common elements.”
The naked truth is that the process can work beautifully, or it can be an expensive bust. “One of the advantages—when it’s going to work out well—is when the association buys the unit at a foreclosure sale, and there’s a tenant already in it,” says Hunter. “We say, ‘Great! Send your checks to us.’ It’s up and running, and we just have the tenants sign a new lease. That’s not that common, but it happens. And in some cases, we rent units back to the former owners. We say, ‘Fine, you pay this lease, and as soon as you’ve paid us what you owe us, we’ll deed it back to you.’ Associations don’t want to be in the business of renting property. They just want their debt paid.”
What can also happen is that the association takes control of a unit that isn’t rentable without major work. “On one foreclosure a few months ago, board members inspected the unit and found that the owner had turned it into little Italy—the home had an Italian motif throughout,” explains Hunter. “It’s unrentable because it would cost too much to fix it. Now the board is sitting on it waiting to have the lender foreclose. But I wouldn’t say it was wasted money because the woman who lived there was a thorn in everyone’s side, and they were glad to get her out. There may be reasons other than debt to get someone out.”
Bottom Line on HOA Foreclosures
Frankel advises clients to give serious thought before pursuing the foreclosure-to-rent strategy. “If I were advising an association that had a delinquent unit right now, I’d tell the board to think very hard before spending money to pursue foreclosure,” he says. “Look at it on a case-by-case basis. Ask, ‘If we own this unit, what are we going to do with it?’ If it’s going to sit vacant deteriorating, it might be better to have the current owners in there. But others would say, ‘We can’t let this owner do this because it’s going to give other owners ideas. Even if it sits empty, we have to have other unit owners see what will happen if they don’t pay.'”
Solomon also advises considering where the lender is in its foreclosure process. “We’ve learned that you don’t give too much credibility to the early steps the bank is taking,” he says. “But if the bank is at the last stage of the process—maybe it has a judgment and there’s a foreclosure sale scheduled—we’ll say, ‘Let’s save that $420 that it costs to file a foreclosure action in Florida and monitor the lender’s case for 30 days. If the bank proceeds, great. Short of that, the general rule is that you should foreclose. The only reason not to is if the legal fees are too high.”