Profusely widespread throughout Florida are numerous Home Owner’s Associations (HOA). Simply put, I do short sales; therefore, I despise them. This article will outline some of the reasons why HOA’s can be troublesome for a short sale as well as some of the best ways to position yourself to avoid these all-too-common pitfalls.
First things first, the best scenario for dealing with an HOA on a short sale is if there is no HOA at all. More than likely though, if you are a property owner considering a short sale and are reading this, then you probably do have an HOA which then brings me to the second-best scenario: HOA is current and not past due. Now if you’re current on the HOA and plan to remain current then kudos to you and you need not read this article any further. I hereby bid you a fond farewell. Bon voyage.
Still here? Rut-roh! Here’s what you need to know if you will be past due prior to your short sale closing. Generally speaking the shorting lender will not pay the entire amount owed the HOA. In Florida the typical concession you would get from a shorting lender for an HOA is limited to the lesser of one year’s worth of the dues or 1% of the mortgage, because of FS Section 720.3085 (c) which reads:
(c) Notwithstanding anything to the contrary contained in this section, the liability of a first mortgagee, or its successor or assignee as a subsequent holder of the first mortgage who acquires title to a parcel by foreclosure or by deed in lieu of foreclosure for the unpaid assessments that became due before the mortgagee’s acquisition of title, shall be the lesser of:
1. The parcel’s unpaid common expenses and regular periodic or special assessments that accrued or came due during the 12 months immediately preceding the acquisition of title and for which payment in full has not been received by the association; or
2. One percent of the original mortgage debt.
In other words, if the shorting lender rejects your short sale and opts to foreclose, then that is the limit on what the state of Florida requires them to pay the HOA when the foreclosure is completed. However, it’s not as simple as that and here’s why.
Let’s say for example that your HOA is $300 per month. You will need to submit a full balance letter to the shorting lender in order for them to determine how much they will pay. Continuing with this example, let’s say you haven’t paid the HOA for three months and submit a full balance letter of $900 to the shorting lender. The good news is that they will likely agree to pay that amount at closing. The bad news is that the amount owed the HOA by the time you get to closing will be higher than $900 because another $300 accumulates every month after that full balance letter was submitted. If it closes three months after submitting then you have an $1,800 bill of which your shorting lender will only pay $900, so someone will need to pay the remaining $900. And that someone is probably you. But it gets worse…
Your HOA will likely refer your file to their attorney who will summarily add to any request for payoff a copious amount of unwanted attorney fees. Oh, and they will likely charge a few hundred just to give you a payoff which will need to be ordered a second time by the title company in order for the short sale to close by warranty deed. Kinda depressing, yes, but now we can talk about solutions.
Your short sale needs to be structured correctly at the on-set. Hopefully, you have not listed your property for a short sale prior to reading this article, but if you have then you can skip the next paragraph because it is too late for you to implement what I will type immediately below.
Oh, you haven’t listed your home for short sale yet. Great. Then let’s continue with our example and say that $300,000 is the likely current market value of your property. If the shorting lender will approve a price significantly lower than that of say $285k, then the buyer would likely be willing to pay the entire HOA balance including the attorney fees and collection costs. This would mean there is nothing for you, the seller, to pay and that would be the ideal situation; but you’re probably asking how you can get your shorting lender to approve a significantly lower price and that will be a subject for another blog post, so stay tuned grasshopper.
Negotiating with your HOA for a reduced payoff. They might offer a small percentage discount after much back and forth negotiations but it really depends on your HOA. If for example, the property is part of a de minimis PUD then the HOA dues might be small and paid quarterly or even yearly. Tread very carefully with these. The HOA will probably require every penny be repaid including all their crummy attorney fees and a few hundred in extra fees for the payoff letters. You also run the risk of having the HOA file foreclosure because there are companies which buy HOA foreclosure liens for the entire amount and then own the property by way of a certificate of title, summarily evict the property owner, and put a tenant in the house and collect rent until the first mortgage foreclosures. The HOA itself may opt to take title to the property in this way, so you have to be careful if the unpaid HOA fees are small compared to the rental value of the property then you might not get a discount at all.
Lastly, there exists the possibility that some of the service providers on your short sale can pay the HOA for you. By service providers I mean real estate listing broker, buyer’s broker, and/or title company. This can be problematic because most realtors you run into will be unwilling to assist you in this way and this is another reason that you need to be careful to structure your transaction correctly from the beginning. I just had a short sale close today which prompted the writing of this article. HOA was owed approximately $4,500. Seller had no means of paying any of it, but generously, the buyer paid $800, buyer’s broker paid $700, title company paid $800, and yours truly as the listing broker paid $2,200. This left $0 for the seller to pay.
These are some of the ways to deal with a delinquent HOA on a short sale. To recap, having no HOA at all takes first place, followed by an HOA that is current and not past due, followed by correct short sale price which motivates buyer to pay the HOA, followed by HOA offering a discount, and ending with settlement providers picking up the tab. The moral of the story is to choose carefully who you hire to handle your short sale negotiation; that choice can be the difference between successfully closing without you having to part with a dime to pay the HOA, or you throwing away thousands of dollars to an HOA because you decided to read this article too late.