Is Foreclosure the Right Option?
Inevitably owners get behind on their assessments. Not just three, four or even five months, but ten, eleven or 12 months delinquent. Despite the association’s best efforts to get the owner to pay, there is no money coming in. Then what? Generally, an association has several ways to collect unpaid assessments:
- lien the property and wait for a refinance or sale;
- sue the owner to obtain a money judgment, then garnish wages, bank accounts, etc. to collect the judgment; and
- foreclose on its lien.
Option 1 may not be quick, if ever, and option 2 may not be feasible for several reasons:
- the owner may not be locatable
- the owner may have no bank account
- the owner may not be employed
- the owner may be self-employed
- the owner’s employer or bank accounts may not be locatable
- the owner may live out of state and have no assets in Colorado
If any of the above occur, foreclosure should be evaluated by the association. In addition, foreclosure may also be an option in more severe circumstances where the owner is a repeat offender–repeatedly behind (once a money judgment is paid, the process starts over again and again) or if there are serious delinquency problems in the community and the association needs to send a message.
Setting the tone
Especially in the current economic environment, many people are being forced to make decisions as to which creditors to pay, and they often don’t choose to pay the association. Mortgage, car and credit card payments seem more pressing if there is not enough income. As a result associations must “remind” residents of the importance of paying their assessments. Without assessment income, common areas may fall into disrepair, amenities may not be available and ultimately property values may suffer. It is recommended that an association address these problems proactively and early. Many board members are hesitant to authorize foreclosure due to the stigma of foreclosure. Board members should remember that by ignoring the obligation of an individual owner, the board may be putting the interests of one owner in front of the best interests of the entire association. While it is recommended that associations attempt to resolve delinquencies before commencing a foreclosure, foreclosure can be an important option that associations should not be afraid to use.
While associations have other options available, foreclosure is a powerful and necessary tool in the association’s collection efforts arsenal. People take notice when there property is being foreclosed. Foreclosure may motivate those who have not been making assessments to bring their account current. More often than not once a delinquent homeowner gets notice of a pending foreclosure on their property, they make some type of payment arrangement or refinance.
Overcoming the Cost Factor
Once a board decides to foreclose, the next logical question the board asks itself is “how much?” A judicial foreclosure action involves a district court lawsuit, and a significant procedural process to be followed. Therefore, the legal fees can be several thousand dollars. This cost should not be a deterrent to foreclosure, because the debtor will be responsible for reimbursing the association for these legal fees. In addition, if there is sufficient equity in the property, the association will recover its legal fees if it becomes the owner of the property and it then sells or rents it.
Equity is the difference between the sale price of the unit, minus the amount owed on the first mortgage, plus any unpaid taxes. The association’s lien has priority over junior encumbrances, which means that any junior encumbrances (such as a second mortgage) will not have to be paid in the event the association successfully forecloses. Upon completion of the sale, ownership is conveyed to the association if it was the highest bidder, subject to the first deed of trust, through the issuance of a sheriff’s deed. The association can then sell the property and retain the equity. This equity can be used to offset the unpaid assessments, interest, late fees and legal fees.
With or without equity the benefits remain the same. It is the amount of equity in the property that can determine whether the association recovers uncollected assessments and the cost of the foreclosure after selling the property. Therefore association may decide that they will only foreclose on properties that have equity. This might be short sided because the cost of not foreclosing is the continued accrual of unpaid assessments, late fees and interest.
There are several situations in which an association should consider judicial foreclosure. As a collection technique, foreclosure is extremely effective. On a community wide scale, use of foreclosure by the board emphasizes how serious the collection of assessments is to the community. On an individual basis, it gives the resident notice that the community is not going away and arrangements must be made or the resident may lose their home.