HOA Foreclosure with Negative Equity

Has anyone had any experience with HOA foreclosure on a house with negative equity?

Our community is fairly small, so every annual assessment is significant. Over the last 3 years, we have consistently pursued collections on delinquencies with good success. We have issued liens and Intent to Foreclose notices, but never actually had to initiate a foreclosure. FYI -- Our CCRs allow both judicial and non-judicial foreclosures.

Last year, we have cleared all delinquencies except one. This home has been vacant for over 2 years and the owner lives out of state. The home is 3 years delinquent with a current amount due that is roughly 15% of our annual budget. The home is liened and has been on the market as a short sale for about 1 year. We were hoping it would sell and the lien would be paid at close, but there has been no activity on the house. I would guess that the home has about $90K negative equity, but is current on taxes.

To be consistent with our policies, we are thinking we might need to move to the next step with this house: foreclosure. Has anyone had any experience with this on a home with negative equity. I'm told the bank typically pays when they receive the notice ... is this correct? I'm guessing otherwise, there is no way we would recover the funds unless we want to rent the unit?

The owner has essentially walked away. I'm told he hasn't made any payments for a year by the listing agent. The bank is not authorized to talk to us about the account, however, the realtor says the bank isn't going to foreclose if there's a chance of shortsale -- This is happening more in more in MI -- the banks don't want to assume responsibility.

As an HOA, we are out 3 years dues and the origional collection costs to put the lien on the home. Our MC doesn't charge admin late fee costs until collection, so it costs us nothing further but the missing dues to sit on it, but doing so deviates from our adopted collection policy. We'd kind of like to take it to its end and be done with it, but it's completely uncharted territory for us.

I'm guessing the bank is who is paying the taxes. Our MC keeps telling us that the bank will likely pay up if we pursue Intent to Foreclose, but I wouldn't have the first clue what to do if we needed to more foreward with a foreclosure. We certainly don't really want to own the home.

Dee,

Don't rely on the MC's word that the bank will pay up if the HOA decides to foreclose. If the HOA doesn't want to own the home they don't have to bid on it. Since you are in the dark about foreclosure proceedings, I would strongly recommend having your attorney handle this if the board decides to pursure foreclosure. Just because your adopted collection policy calls for foreclosure doesn't mean you have to go that route. Sometimes it just makes no sense to foreclose and this may be one of those times. If you check your CCRs and/or state law I'm sure you will find that the HOAs lien for assessments takes priority over all other liens EXCEPT, a recorded first mortgage. This means the HOA would only get their money if anything was left over after the bank takes what's owed them. IMO, it's doubtful that even if the HOA forecloses you will get one red cent!!! I would suggest writing off this delinquency and move on. And, if there is a next time, don't wait so long to take action, including writing off a "bad debt".

Do not foreclose! The HOA will likely become legally responsible for paying off the original mortgage and it'll have to pay $90K out the HOA treasury to live up to that legal responsibility.

But, like that other guy said, see a lawyer.

By no means am I an expert but ...

Writing off a bad debt for most HOAs doesn't seem to make much sense to me.

One, if the HOA uses cash (not accrual) accounting, a debt owned to the HOA isn't taxable until the HOA actually receives the money. If the HOA is using accrual accounting, this reason doesn't apply.

Two, HOAs aren't generally taxed on fees collected from homeowners. For HOAs, the IRS treats fees as "exempt function income" (see IRS 1120-H Instructions), not as taxable income, like sales/revenues. So, the HOA already does not have to pay taxes on fees, be they collected or just owed.

Three, HOAs are non-profits, anyway, and usually balance income and expenses so they don't end up owing any tax. Any excess should be paid back to the membership.

But, again, I'm no expert so consult a tax expert.