Tuesday, December 11, 2012

Show Me the Money

Due to the economic downturn over the last several years, we have seen many changes within the home finance market - including the decreased ability for many homeowners to afford to pay the mortgage on their homes.  This type of situation is unfortunate, but for now - it is a reality that many homeowners have had to face.  As a result, people often do not contemplate how situations such as these can affect an Association.  The fact is - Associations are also highly affected by economic downturns.

Associations have come to realize that if a homeowner is behind on their mortgage payments, it usually means that they are behind on other bills as well - including Association assessments.  These missed payments affect the financial stability of the Association.  The most beneficial option for anyone going through such hardship is the ability to sell their home.  These days, if someone is able to sell their home for a profit - or just break even - it is great news.  If a home does end up selling, the unpaid assessments are collected at closing (and are generally paid by the seller).  In a perfect situation, the seller does not owe any past due assessments and can sell the home without having to bring additional money to the table.  In either scenario, the Association is usually in good shape and will be able to collect this money.
When someone is going through financial hardships - which also impact their home - there are several different outcomes that ultimately affect the home and the Association.  In most of these situations, the Association does not fare as well.  These outcomes include: foreclosure, short sale, and bankruptcy. 

Foreclosure is a word that we seem to hear more and more frequently.  This occurs when someone does not make their mortgage payments, so as a result, the lending institution takes the house back.  Questions always arise as to how past Association assessments are handled in the event of foreclosure.  There is a lot of detail that goes into the collections efforts made by the Association to try to recoup these unpaid assessments - but all such efforts are generally for loss once the home moves to foreclosure. At that point, the lending institution takes over the home and all amounts owed to the Association are written off by the Association. From the date the foreclosure takes place, the acquiring financial institution is then responsible for Association assessments until they are able to sell the home.  Lenders generally always pay the portion that they owe (i.e. the amount since they foreclosed) when they sell the home but there is really no practical way to compensate for the loss funds due by the homeowner prior to the foreclosure.

Short sale is when an owner negotiates with their lending institution to obtain approval to sell their home for less than what is owed on the home.  In the event of a short sale, any outstanding Association assessments are still owed and payable at closing.  However, a lot of times in a short sale the seller does attempt to limit any additional costs that may be related to the sale.  This could include bank fees, Realtor commissions, and Association assessments.  Owners frequently contact the Association to try to work out a settlement to pay less than what is actually owed.  If this offer is reasonable it is generally recommended that the Association accept the settlement. This is due to the fact that if the settlement is denied, there is a good chance it will cause the closing to fall through - which then increases the chances of foreclosure and a complete loss of the unpaid assessments.  While the homeowner will still be personally liable, the probability of collections does decrease, and "some money is better than no money."

Bankruptcy is a situation that may not result in a change of ownership, but it does greatly affect the Association.  There are two types of bankruptcies that are generally seen with homeowners:  Chapter 7 and Chapter 13.  In a Chapter 7 bankruptcy, the debt of the homeowner is completely wiped off.  This means that the courts approved for all debts to be removed in order to help out the person in financial trouble.  This debt does include any past due Association assessments.  Just like a foreclosure, that past due amount must be written off by the Association.  In Chapter 13 bankruptcy, the debt is reorganized in order to make the debt more affordable.  In this scenario, the past due Association assessments are generally included in that reorganization and can still be collected.

Because of the above, one can easily see how unpaid assessments can affect the Association. Can you imagine the impact of multiple financial hardship situations within just one Association? As a result, it is so important for those in good financial standing to continue to pay Association assessments on time. This will help keep the Community from struggling any more than it already is!

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