Foreclosure In Paradise
By Tomas Rementeria, LCAM • Senior Property Manager at Ocean Reef
As Property Manager to 11 Community Associations in a prestigious private equity community in Key Largo, Florida, I have found that even this high-end community has its small share of bank foreclosures. For Community Associations, nothing can be more paralyzing than the effects of a bank foreclosure. Revenues budgeted to pay for utilities, lawn maintenance, and staff are just not there. Adding to this burden are the owners who decide to strategically default, and then continue to live in the residence expense-free while court proceedings drag on for years.
Banks are overwhelmed with foreclosures and, in some cases, intentionally drag their feet in order to minimize liability exposure and the expense of paying the Community Association fees. Florida Laws limit the exposure banks have to Community Associations by only requiring one-year’s worth of regular assessments or 1 percent of the original loan amount, whichever is less. This explains why banks may choose to delay foreclosing in order to minimize their losses – a strategy that works for the banks but ultimately hurts the Community Association. Florida Law also prevents paying owners from evicting non-paying owners until there is a lien in place and the lien is foreclosed upon. The delinquent owner may have an attorney that delays legal proceedings for years, and judges tend to err on the side of the foreclosed owner. With the cards stacked against Community Associations, ittakes a seasoned team of professionals to protect you against the hazards of this perilous economy.
First Line of Defense: Good Management
The Management Company and manager is your first line of defense. A good manager will be one-step ahead of delinquent owners by sending the necessary letters when needed and following up until they become current. CSI Management Services hires the best management professionals trained in establishing sound collection policies. It’s these policies that protect the owners against selective enforcement that can cause your collection effort to fail. The next line of defense is selecting the right attorney to handle the collections process. There are law firms similar to factory assembly lines that treat all cases the same, and you become stuck on a slow moving conveyor belt. Then there are overly aggressive attorneys whose actions taken far exceed the bad debt that exists. The goal is to find an attorney who treats each case as a unique situation, yet is not overly aggressive.
Case in Point
One community that I manage uses Timothy Thomes, a shareholder at Gunster Law Firm. This Community had one property in bank foreclosure that owed the Association over $35,000. The owner was willing to short sale the property and attempt to repay the Condominium; however, when they were required to come a little out of pocket, they walked away. Tim was able to place liens on both the real property and the personal property of the owner. This creative move motivated the owner to come back to the table and complete the short sale. At the end of the day, the Condominium was paid in full, including interest and legal fees. Not all stories have such a happy ending; yet if you have the right professionals serving the Community Association, chances of this success story are much higher.
How Board Members Should Negotiate Short Sales
As foreclosure rates remain unstable across Florida, a beacon of light has begun to shine across Downtown Miami:
• Yearly sales have increased, with 2012 having a 24 percent spike above 2011’s rates.
• The average price per square foot also jumped 7 percent from last year’s price.
• Several local new condo projects have been proposed or are already in construction.
How did this happen? So many condominiums in distress are selling and Associations are slowly moving forward toward a better financial position. Enter the expression, “cash is king,” or more importantly, enter the era of the “short sale.” A real estate short sale is when your mortgage bank agrees to take less than what is currently owed on the unpaid balance. A short sale can provide mutual benefits for both the homeowner and the bank because it helps both parties avoid foreclosure. What about the Association?
While every short sale offer should be negotiated on a ”case by case” approach, the first question a Board should ask is, “At what stage is the unit in the lender foreclosure process?” The Board should consider the amount the Association will receive if the short sale is approved versus the amount they are owed. If the Board chooses not to accept the offer, the next question is how much longer would the Association have to wait to receive any funds, which could be limited by the Florida Safe Harbor provision as outlined in the Florida Statute 718.116(1)(b). If the unit is in the beginning stages, the short sale offer can be better negotiated. Otherwise, there are other factors to consider. The main factor is whether accepting the short sale offer will result in the Association taking less than full payment owed. In most cases, the answer is yes. This is where the creative process kicks into gear, and the Board of Directors should consider these other approaches:
• If any brokers/agents are involved and are taking full commission, then suggest that the broker/agent reduce his/her commission and redirect that percentage to the Association.
• Usually in short sale scenarios, the buyer’s offer has been approved by the lender, which is usually under the current real estate value. Ask the buyer to contribute to the debt.
• It also never hurts no go back to the lender and “counter” their offer for a better deal.
While the Association is under no obligation to participate in short sales, it is good policy to review: (1) a copy of the preliminary HUD1 Settlement Statement (which shows the distribution of all funds in the transaction); and (2) a copy of the short sale payoff. It is also a good idea to have a real estate attorney review all short sale offers to evaluate a HUD1 Settlement Statement and see if anyone is making more money than they should be.
At the final conclusion of all possible negotiations, when the short sale offer is accepted by the Board, the end result is usually that there will be bad debt to write off (loss to the Association). However, there will then be a new owner, which will hopefully result in positive cash flow for the Association moving forward.