Most common interest community associations have seen large amounts of foreclosures due to the high mortgage default rates. While the presence of a mortgage foreclosure generally foreshadows unpaid special assessments and monthly maintenance fees, they should be seen as opportunities for associations. Knowing how to handle mortgage foreclosures is crucial to a common interest community’s overall collection policy, and its financial security.
A successful mortgage foreclosure –will result in an association collecting arrears owed by a unit owner, and the mortgage company must pay the HOA fees, monthly maintenance fees, special assessments, and other condo fees for common elements attributable to that unit from the date of the judicial sale forward. When an association becomes aware of a mortgage foreclosure in its common interest community, it must file a responsive pleading, or a notice of appearance, to ensure that all notices of the judicial sale, including the date of the sale, are sent to the association. The association can thus calendar the date of the sale and demand the payments of HOA fees, monthly maintenance fees, special assessments, and other condo fees begin immediately thereafter.
Surplus funds resulting from a judicial sale make occur when equity is created when the value of a unit changes due to inflation or a reduced mortgage. Surplus funds consist of amounts paid by a judicial sale’s successful bidder in addition to the amounts due on the foreclosed mortgage. Third parties will often bid on units at judicial sales, and then resell the unit for a higher amount, satisfying the underlying mortgage via their successful bid. Creditors of the foreclosed unit, or of the unit owner, may petition the court for release of those "surplus funds" to them directly, to be used to satisfy the owner’s debt. A successful foreclosure could very well satisfy a unit’s debt with the association.
Associations are able to bid, and even purchase, a unit in foreclosure. If there is equity in the unit, and the association is owed a sum significant enough to justify additional legal efforts, the association can bid on the unit at the judicial sale and, if successfully purchasing the unit, it could either install a paying tenant to generate revenue or sell the unit. The act of bidding may potentially increase the eventual purchase price for outside bidders, generating surplus funds that can be sought by the association. It is only by participating in and/or monitoring that foreclosure through entering an appearance that the association will be aware of the judicial sale, and its circumstances, and put into play any or all of these strategies.