To Foreclose or Not To Foreclose? What To Consider When That Is The Question
Originally published in the February 2018 volume of the Washington Metropolitan Chapter Community Association's Institute's Quorum.
By: Chad Rinard, Esq.
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 judgement or lien, and, in an order prescribed by Virginia law, the association's liens, the association's judgements, 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 judgements. 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 compete 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.