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How Can Your Association Protect Itself When By Elizabeth L. Hileman and Nicole A. Williams, Esq. A few years ago when real estate values were higher than they are now, foreclosed properties were sold for amounts greater than what was owed to the banks. This resulted in surplus funds from the foreclosure sale that would be paid to other lien holders who had filed a claim for the surplus funds. Now that home values are down, properties that are the subject of foreclosure sales are being sold back to the lenders at a loss. Thus, there are no surplus funds from which to satisfy other liens. Still, it is important for a community association to protect itself in the event of a foreclosure sale by having its attorneys file a valid lien against delinquent properties within its community on behalf of the association. A lien is an announcement to the public, and in particular to an entity that initiates a foreclosure sale, that the current homeowner owes money to your community and gives your community an interest in the property as a secured creditor. As a lien holder, your community is entitled to receive notice of any foreclosure sale on that property. Notice of a pending foreclosure sale allows the community association’s attorney to monitor the foreclosure and to promptly obtain the name and address of the purchaser of the property as well as the date of the foreclosure sale. Having this information allows the association’s attorney to take actions that best protect the community’s interest in the property after the foreclosure sale takes place. The bank (or other purchaser at the foreclosure sale) is responsible for the assessments owed to the community association from the date it acquired the property at the foreclosure sale until the date it sells the property. These amounts are referred to as the post-foreclosure balance. By having the name and address of the purchaser, the association’s attorney can demand payment of the post-foreclosure assessments from the new owner by serving a notice of intent to create a lien against the property in the name of the new owner. By filing a lien against the property under the name of the new owner, the association is more likely to be paid the post-foreclosure assessments at the time of resale. Payment of the community association assessments will generally occur only at the time the bank re-sells the property. This may result in cash flow problems for many associations if the foreclosed properties within the community are not sold quickly. However, some banks will pay the post-foreclosure assessments prior to selling the property after receiving a notice of intent to create a lien from the community association’s attorney. This can minimize any potential cash flow problems that your community may experience. When foreclosure sales occur, the previous owners of the foreclosed properties remain responsible for all charges assessed by the community associations prior to the sale of the properties, unless that debt is discharged in a bankruptcy proceeding. Since banks or other purchasers of foreclosed properties are only responsible for the post-foreclosure amounts, community associations should consider filing a lawsuit against the prior homeowner to mitigate potential loss of income because of the foreclosure sale of a property within your community. A money judgment that results from filing a lawsuit against the previous homeowners can be enforced through bank and/or wage garnishments to collect what is owed to the association. Homes that are vacant because of foreclosure sales can be problematic for community associations. Incidents of damaged water pipes as a result of freezing during winter months have occurred. These incidents have caused problems for neighboring property owners. In addition, the exterior of foreclosed properties are often not adequately maintained. Overgrown grass and unsightly lawns have contributed to decreasing property values. Although many of these problems are likely to be violations of the documents that govern your community, associations mistakenly believe they have no recourse. An experienced community association law attorney can advise your association of its rights and the appropriate steps needed to encourage banks to maintain the value of the properties it owns as a result of foreclosure sales. A large number of foreclosed properties in any community can present significant challenges and losses that cannot be avoided. However, an association that empowers itself by utilizing the avenues available to it are more likely to recover most of the assessments due as well as insisting bank owners maintain the vacant community properties it owns until the properties are resold.
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