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Subject:  HOA Foreclosure with Negative Equity
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Author Messages
DeeS1
(Michigan)

Posts:223


01/19/2010 5:37 AM  
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?
MaryA1


Posts:0


01/19/2010 5:56 AM  
Dee,

It seems to me you should have written the delinquency off a year ago, at least, considering the impact it's having on your finances -- 15% of your budget, wow!!! With approx 90K negative equity I'm surprised the owners haven't already walked away. I'm hearing that owners who aren't even having problems making mort. payments are just walking away from their homes that have declined in value. Have you checked with the mort co to make certain the home isn't already in a bank foreclosure? Even if the the HOA forecloses I believe the bank will get their money first. The HOA may not even get a cent and will have even more costs to write off.
DeeS1
(Michigan)

Posts:223


01/19/2010 6:08 AM  
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.
DeeS1
(Michigan)

Posts:223


01/19/2010 6:18 AM  
All the homes in our community are hugely underwater ... the sub is roughly 5 years old and even those that put 20% down have about $100K neg eq. However, the majority of the homes are 100% financed, so even worse off. We will all be neighbors for a long while!
MaryA1


Posts:0


01/19/2010 6:20 AM  
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".
DeeS1
(Michigan)

Posts:223


01/19/2010 6:38 AM  
Forgive my ignorance ... but what does writing off the bad debt do for us vs leaving the lien account with continued accumulation of late fees? To my knowledge, we haven't had to pay any taxes, so a write off wouldn't do anything, would it?
DanielH1
(California)

Posts:482


01/19/2010 9:17 AM  
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.

MaryA1


Posts:0


01/19/2010 11:32 AM  
Dee,

Writing off the bad debt discharges the delinquency. Assessments and late fees do not continue to accumulate. The bad debt is an expense on your P&L and will affect the bottom line. But, you will not accumulate any more delinquent amounts against that lot owner so don't include that lot in computing your estimated annual assessments. If the owner has already walked away from his home, I doubt you will ever recover any of the delinquent assessments and other costs he has racked up. If at some point in time the lien is paid off, great; but don't hang by your teeth waiting for that to happen.
DanielH1
(California)

Posts:482


01/19/2010 2:17 PM  
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.
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