Community association foreclosures
One of the most important ways for an owner to be involved in a community is to pay his or her assessments. Community associations cannot fulfill their obligations related to maintenance, repair, and operations without owners paying their assessments. Many associations have had enough of delinquent owners who continue not to pay and are increasingly looking to foreclosure as a way to rid themselves of these deadbeat owners.
There are two types of foreclosure in Georgia. Judicial and non-judicial. A typical non-judicial foreclosure is a mortgage which provides that if an owner does not pay the monthly payments, the mortgage company may foreclose without having to sue the homeowner. By contrast, community association foreclosures are judicial foreclosures that do require the association to sue the owner.
Once an association has sued an owner and obtained a judgment, the biggest hurdle to foreclosure had historically been the legal requirement that the association pay off any pre-existing mortgage or lien against the owner’s property prior to foreclosure. Since most owners have a mortgage, and since most associations do not have the extra cash on hand to pay off the owner’s mortgage, community association foreclosures have been rare. Also, although Georgia law recognizes an exception that allows a superior court to use its equitable powers to allow a foreclosure without having to first payoff an existing mortgage, that has historically been a very rare exception and not granted often by the superior courts. The result has accordingly been that community association foreclosures were not a viable remedy for many associations.
That all changed for many community associations on July 1, 2004 with amendments to the Georgia Condominium Act (the “Condo Act”) and the Georgia Property Owners’ Association Act (the “POA Act”). These amendments to the Condo Act and POA Act specifically authorize judicial foreclosures of community association liens subject to prior mortgages or liens. This means that associations governed by the Condo Act and POA Act are no longer required to pay off the owner’s existing mortgage or lien prior to foreclosure. This does not mean, of course, that the owner’s existing mortgage or lien simply disappears. Instead, any mortgage or lien will remain in place against the property after the association forecloses and will need to be paid off to avoid a subsequent foreclosure by the holder of that mortgage or lien. The following two examples illustrate how this works.
In the first example, assume an owner, Carl, owns a condominium unit valued at $100,000, owes $50,000 on his mortgage, and owes the association $10,000 in past due assessments. The association sues Carl and obtains an order for judicial foreclosure under the Condo Act. The association then auctions off the unit for $10,000 on the courthouse steps through the sheriff’s department. An investor, Sally, buys the unit for $10,000, and the association is paid the $10,000. The association is paid off in full, and the foreclosure terminates Carl’s ownership of the unit. The association is very happy with this result.
But what about the existing $50,000 mortgage? Sally is now the legal owner, and Carl’s $50,000 mortgage is still against the property. Since Carl is no longer the owner, there is little likelihood he is going to continue to make his monthly mortgage payments. Sally knows this will result in Carl’s mortgage company foreclosing out from under her, so to prevent that from happening, she pays off the $50,000 mortgage directly. She thus bought a condominium unit valued at $100,000 for a combined purchase price of $60,000 with $10,000 to the association and $50,000 to Carl’s mortgage company. Everyone, except Carl, is a winner in this perfect situation.
As we all know, however, perfect situations do not come along every day. Instead, this second example is what is more likely to occur. Assume again that Carl owns a condominium unit valued at $100,000 and again owes the association $10,000 in past due assessments. But this time he owes $95,000 on his mortgage. Assume again that the association obtains an order for judicial foreclosure and that the unit is auctioned off on the courthouse steps. Sally once again attends the auction but this time does not bid on the unit because she knows she will have to pay the association $10,000 to obtain ownership of the unit and will then have to pay Carl’s mortgage company $95,000 to prevent it from foreclosing out from under her. She does not want to spend a combined purchase amount of $105,000 on a $100,000 unit. Likewise, no other investor is going to purchase the unit. In this situation, the association will purchase the unit for the judgment amount of $10,000 or a lesser amount, such as $10.00. The association does not actually pay $10,000 in cash (or a lesser amount, such as $10.00); it instead, in essence, exchanges its $10,000 judgment (or $10.00 of the judgment) for the unit. The association thus becomes the owner, and Carl’s ownership is terminated.
But what about the existing $95,000 mortgage? Since the association does not have the money or desire to pay off the existing $95,000 mortgage, Carl’s mortgage company will foreclose on the $95,000 mortgage out from under the association. The association will thus lose its short-lived ownership of the unit and will not be paid any money, but, the good news is that it will be rid of Carl as an owner, which was its goal from the beginning. And there is also a very good chance the mortgage company, after its foreclosure, will sell the unit to a new owner who will pay assessments.
In addition to the two examples above, there are several other possible turns the foreclosure action can take. We have seen situations where the owner pays in full to avoid the foreclosure, and we have seen owners file for bankruptcy. We have also successfully had property auctioned off and have had a title insurance company pay over $20,000 to prevent a foreclosure.
The primary purpose of foreclosure is to terminate the delinquent owner’s ownership of the property to keep past due assessments from continuing to accrue, and there is no guarantee an association will receive any funds as a result of foreclosure. As long as the association’s board understands this upfront and does not have false expectations, the foreclosure process can be extremely beneficial to stop the bleeding. Contact your community association attorney for more details.
The reason the association might want to bid less than the full judgment amount is to be able to still pursue garnishment of wages or bank account against the owner for the remainder of the judgment, rather than trade the entire judgment for the unit.