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. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.