Short Sales and Homeowner Associations
A short sale is a sale of an owner’s property where the proceeds from the sale will fall short of the balance of debts secured by the liens against the property. Nevertheless, because the owner cannot afford to repay the entire amount, the lien holders agree to release their liens on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties.
Put another way, a short sale is where the seller owes the bank more than the property is worth. The term “short sale” literally means that the property is being sold “short” of what the seller owes the bank. In a short sale transaction, the bank must agree to accept less than what the seller owes and agree to release all liens on the property so that the property can be sold.
A short sale is frequently used as an alternative to foreclosure because it mitigates additional fees and costs to both the creditor and borrower. As such, most creditors require the borrower to prove he/she has an economic or financial hardship preventing him/her from being able to pay the deficiency.
Many homeowners who are behind in their mortgage payments are also behind in their homeowners association dues… so, what does this mean for associations? The simple answer is that if a homeowner owes the association money, the short sale can’t be completed without the association’s agreement to forgive some or all of the debt or without a payment in full. This leverage will result in negotiation between the homeowner, the mortgage company, and the association, with each vying to get as much of the sales proceeds as possible.
Although associations are not required to settle for any amount less than the full balance owed to them, it is often times beneficial for associations to consider taking a lesser sum so that the short sale can go through. When faced with this situation, associations should weigh carefully, the options and the possible outcomes before simply rejecting offers to settle for less than is owed.
Remember that a short sale is used as an alternative to foreclosure. This means that the owner cannot afford to stay in the property and if it can’t be sold, foreclosure by the bank is almost sure to follow. It is well known by now that banks are not terribly quick to complete the foreclosure process; this will mean an increase in the delinquency owed to the association as the owner is certainly not going to be paying assessments during the time when the bank is foreclosing. In addition, once the foreclosure completes, the association is stuck with a bank owned property, which comes with its host of associated problems.
Additionally, if the bank takes the property through foreclosure, the association will be limited in its recovery of the lien balance to the six month super lien.
An obvious benefit of working with the owner and bank and having a successful short sale is that a new, paying member of the community will be taking ownership of the property, which is a much better alternative than ending up with a property owned by the bank, even if it comes at the expense of some of the delinquent dues. As we often say regarding settlements, a bird in the hand may be worth two in the bush. The long and short term benefit to the association by accepting a deficiency payment (especially if the proposed amount is greater than six months of assessments) may outweigh digging your heals in causing the short sale to fall through.