A "short sale" occurs when an owner of a
property seeks to avoid foreclosure by selling the property for less
than is owed on the mortgage. Because the lender is taking a loss on the
property, a short sale requires the lender's approval.
Failure to Lien. If an
association failed to
record a lien against the property for the
delinquent assessments, it could receive nothing from the sale if the association were bypassed in the escrow. The
board can still pursue the delinquent owner in court for a
money
judgment. Even so, the judgment may be effectively noncollectable if the seller has no money, declares bankruptcy or moves out of state.
Lien Filed. If the association
filed a lien, then it has a good chance of getting paid. The board can
expect to be pressured by the parties to waive the delinquent
assessments and release the lien. That is because the buyer is offering
less than is owed on the property. In other words, there is no
equity--nothing "extra" in the transaction to pay the association.
For example, if the mortgage was
$350,000 and the short sale is for $200,000, the bank is taking a loss
of $150,000. If the association has a lien for $10,000, the sale cannot
proceed until the lien is satisfied. Since there is nothing in the sale
to satisfy the lien, the parties will pressure the board to release the
lien otherwise the sale will fall through.
No Duty to Release Lien. Despite
the pressure, the board has no duty to release the lien until the
association's claims have been satisfied. Even so, standing firm could
result in a lost sale. This would leave the delinquent owner in
possession causing more delinquent assessments to accumulate and triggering a foreclosure sale by the lender, thereby wiping out the
association's lien.
Negotiations. The better
approach is to negotiate with the parties. If the board waives the
association's late fees, interest and collection costs, the buyer could
kick in a little extra money on his offer, the seller could put money
into the deal, and the realtors could reduce their commissions. With everyone contributing a little, the association could recover
something rather than nothing. In addition, it puts a dues-paying owner
in the property.
RECOMMENDATION:
Boards need to be diligent about recording liens on delinquent owners so
as to protect the association's position. Without a lien, the
association is unsecured and at greater risk of recovering nothing.
ASSISTANCE: Associations needing legal assistance can
contact us.
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