Money Found at the End of the Rainbow: a Homeowner Association Success Story

By Paul W. Windust, Esq.

Assessment collection in today's economic climate is a challenge. Especially frustrating is a situation where a non-paying unit owner remains in his or her unit without paying the mortgage or the assessment obligations (which sometimes include the owner's use of electricity or hot water). The owner can remain in the unit primarily because the lender will not foreclose and the association does not want to foreclose because the unit has no equity. However, one recent success story may signal one way to assessment recovery in an improving real estate market.

A one hundred and twenty unit project in San Francisco faced a common problem. A long-time owner in the community stopped paying her assessments as well as her mortgage loan. The owner was unemployed, so the association ruled out simply suing the owner for a money judgment that did not appear collectible. After five years of delinquency, the association reluctantly decided to use the typical process of non-judicial foreclosure of its assessment lien. The association attempted on many occasions to enter into a payment plan with the owner during the foreclosure process, but with no success. Eventually, the date for the sale arrived. No one appeared at the foreclosure sale to outbid the association because, at that time, the unit had little or no equity. As a result, ownership of the unit reverted to the association. The trustee issued to the association a certificate of sale, which signaled the start of the 90-day redemption period during which the owner had the right to pay the outstanding debt and collection costs and reclaim full ownership of her unit.

During the redemption period the association repeatedly reached out to the owner suggesting either payment plans or that she sell the unit so that a new, assessment-paying owner could take possession. The owner refused. At the end of the redemption period, the association recorded the Trustee's Deed, taking all right, title and right of possession of the unit. However, one problem quickly emerged; the former unit owner refused to vacate the unit. The association contacted my office for legal assistance and to develop a strategy.

Now, the association was faced with evicting the former owner so that the property could be rented or sold. I advised the association to attempt a “cash for keys” transaction where the association offered to pay for the former owner to move out of the unit. The former owner refused even this. Instead, she proposed a plan whereby she would repay the unpaid assessments and in return receive title to the unit. The association was open to this arrangement because it did not want to own or manage the unit, it just wanted the assessments to be paid and to recover its out of pocket collection costs. I drafted an agreement under which the former owner would recover title to the unit, but with all proper protections to the association. The association proposed a plan whereby the owner could, over time, pay what was owed in assessments, collection costs, and attorney fees and recover title to the unit. Despite the association's good faith intentions to enter into a deal whereby the former owner could regain title to the unit, the owner could not afford what the association required to finalize the agreement.

With the chances for a deal over, the association returned its focus to taking possession of the unit. Again, the owner resisted virtually every effort by the association to take possession of the unit. I filed on the association's behalf a lawsuit to evict the tenant (called an “unlawful detainer”). She contested the suit but lost at trial. Then, the owner made more legal challenges to delay her physical eviction from the unit but we overcame those hurdles as well. Third, the former owner sought a loan modification with her lender whereby the association would be paid all unpaid assessments, plus collection costs, late charges, and interest. That failed also. She then filed bankruptcy resulting in what is called an “automatic stay” meaning that legal actions against the former owner had to be approved in advance by the bankruptcy court. I successfully petitioned the bankruptcy court and obtained bankruptcy court permission to proceed with the eviction (called “relief from stay”). We still were not done. The former owner then enlisted the “Occupy San Francisco” groups to block or obstruct the association's eviction efforts. All of these efforts delayed the association from taking possession of the unit and resulted in additional legal expense. Nevertheless, the association stuck with their goal of obtaining the property to recoup the unpaid assessments and collection costs.

Finally, two years after recording the Trustee's Deed the association was successful in taking possession of unit. However, now that the association had taken possession of the unit, the long dormant mortgage lender started its own foreclosure of the unit. Now, the association faced the real possibility of losing title to the unit after it worked so hard, and incurred so much expense, to take possession. With my assistance, the association quickly focused on selling the unit to obtain a market sales price and hopefully recover its unpaid assessments and legal fees.

Interestingly, the length of time it took to take possession of the unit worked in the association's favor. During that two year stretch, the San Francisco real estate market improved considerably. The association quickly engaged a local estate agent, performed some unit clean up, put in new carpet and paint, and marketed the unit. Surprisingly, the unit got a lot of interest and generated multiple offers. Within one week of listing the unit for sale, the association was in contract with a potential buyer at a price that would ensure payment of the first mortgage in full and yield a recovery to the association of close to $80,000.

With the proceeds from the sale of the unit, the association was able to recover unpaid assessments, late charges and interest which the former unit owner had not paid for over seven years, payoff the legal fees incurred in gain possession of the unit, and have funds remaining to return to the former owner (a galling legal requirement). Most of all, the association now had a new community member ready, willing and able to pay her share of community expenses.

The keys to the association's success started with its decision to follow through with the foreclosure process and re-gain possession of the unit. This decision made sense because of the improving real estate market. Also key to the association's success was assistance of knowledgeable legal counsel that could handle the eviction process, overcome the roadblocks put up by the owner, and shepherd the association through the marketing and re-sale of the unit. With an improving real estate market, we envision more success stories for community associations.

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