Finances

To Foreclose or Not to Foreclose? What to Consider When That Is the Question

Foreclosure is a matter of last resort. Whether an owner is unable to or ne­glectful in paying assessments owed to an association, the last remedy that should be considered to get paid is foreclosure. A foreclosure takes time, it is costly, and it is designed to displace an association mem­ber who cannot or will not fulfill his or her obligation to pay assessments like the other members do. On the other hand, a foreclo­sure against a property that has sufficient eq­uity in it (meaning the value of the property exceeds the amount of debt owed on it) can be a complete remedy that recovers unpaid assessments, the cost of foreclosure, and eliminates the ongoing hassle for an associ­ation by replacing a nonpaying owner with (hopefully) a paying one.

Under Virginia law, an association has two types of foreclosure remedies available to it: a judicial and a non-judicial foreclosure. A judicial foreclosure requires the filing of a lawsuit that asks a court to sell a proper­ty to satisfy an association’s judgments or statutory liens.

The ultimate goal of the foreclosure is to force the sale of the property at a price sufficient to cover the costs of the sale including the attorneys’ fees incurred, any delinquent real estate taxes, the balance owed on any mortgage senior in priority to the association’s judgment or lien, and, in an order prescribed by Virginia law, the association’s liens, the association’s judgments, and any additional mortgages or liens on the property.

In order to proceed with a judicial fore­closure, a Virginia association will have to demonstrate that the rental proceeds from a property over the course of five years would be insufficient to satisfy the associa­tion’s judgments. If the rental proceeds are determined to be sufficient, the court may displace an owner for the period of time necessary to allow an association to rent the property until its judgments are paid. If the rental proceeds for the property are determined insufficient, a court will enter an order allowing the foreclosure to pro­ceed. While a court retains oversight of the foreclosure, it will likely seek assistance by appointing a commissioner in chancery to hear evidence about the value of the prop­erty and the payoff amounts for any delin­quent real estate taxes or liens against it. An association will be expected to give evidence of the value of the property, likely through a professional appraisal, and identify any delinquent taxes and other recorded liens against the property. The association will also have to solicit from those other lien holders the payoff amounts for their liens. The commissioner in chancery will hear the same and report back to the court his or her findings.

Once those findings are received, the court will appoint a commissioner of sale, who in many cases is the attorney for the associa­tion. The commissioner of sale can sell the property either via an auction or a realtor. Once a bid has been received it will have to be accepted by the court. The commissioner of sale will also ensure the safe deposit and distribution of funds from the sale and pre­pare a deed for the new owner.

In addition to the expense, the downside to any type of foreclosure is that the process may be stopped or stayed at any time by the filing of a bankruptcy petition by the de­linquent owner. If the owner files for bank­ruptcy, an association will have to cease all efforts to foreclose the property and the cost expended in the foreclosure action will be lost unless the bankruptcy is dismissed without a discharge of the debt.

A non-judicial foreclosure involves the foreclosure of an association’s statutory lien and, as the name implies, does not require the filing of a lawsuit. The non-judicial fore­closure remedy is a statutory right provided to associations through the Virginia Con­dominium Act and Property Owners’ As­sociation Act. The process for a non-judicial foreclosure is faster and less complex than a judicial foreclosure and results in a sale on the courthouse steps. But not surprisingly, because this type of foreclosure occurs out­side of a court, there are some disadvantages to a non-judicial foreclosure compared to a judicial foreclosure. For a non-judicial fore­closure to succeed, the auction must attract a bid that is sufficient to satisfy any delin­quent real estate taxes, the balance owed on the first deed of trust, and the association’s statutory lien or the sale will have to be can­celled and the costs of a non-judicial foreclo­sure will have been incurred, but will not be collected. With a non-judicial foreclosure, in particular, great care should be given to ascertain the value of a property before the process is ever started to predict the bids that may be received at the auction. Equity in the property is a necessary component for a successful non-judicial foreclosure.

An association can have success with ei­ther a judicial or a non-judicial foreclo­sure. Upon receiving notice that a foreclosure is proceeding, some owners will submit payment in full right away. There is always the hope with a foreclosure that it will induce an owner to repay any assessments owed, perhaps using the equi­ty in the property to complete a loan mod­ification, and pay to the association the delinquent assessments from the proceeds of the loan. For those owners who do not pay, a foreclosure may be an effective rem­edy available to the association for the re­covery of delinquent assessments. When all other collection options have been ex­hausted associations should work with le­gal counsel to identify delinquent properties that may be candidates for fore­closure and receive consultation about the benefits, risks, and costs of foreclosure of any particular property.

 

By Chad Rinard, ESQ.
Chad is an attorney for Whiteford, Taylor & Preston LLP. His practice is fo­cused on the representation of condominium and community association clients in the Northern Virginia and Fredericksburg areas. He has significant experience representing associations in the courts of Virginia as well as before the supervisors of local municipalities.

 

 

 

 

 

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