Short Sales and Community Associations

A short sale is a common alternative to foreclosure when a delinquent owner owes lien holders on the property more money than the property is actually worth.  A short sale can occur prior to the filing of a foreclosure action, but it is still a frequently used alternative to a sheriff’s sale in a pending foreclosure.  In a short sale, each lien holder must agree to accept less than what the seller owes and agree to release all liens on the property in order to allow the sale.  Typically short sales are facilitated by the first mortgage holder, but because all lien holders must approve the sale, boards are also involved if the seller owes the association money.  Because each lien holder will most likely be accepting a lesser amount than is owed, several offers could be made through negotiation.  Of course, there is no requirement that any party accept a settlement offer; this simply means that particular short sale will not go through.

There are several factors for a board to consider when a short sale offer is proposed.  It is important to recognize that if an owner is behind on their mortgage payments to the extent that a short sale is proposed, they are most likely behind on their association assessments.  As a result, if the property is not already in foreclosure, a foreclosure action is most likely the next step if the short sale is unsuccessful.  A foreclosure action, whether initiated by the association or by a mortgage holder, can add a considerable amount of time where ongoing fees remain unpaid.  As a result, a short sale is usually a faster alternative to stop the bleeding of bad debt by getting a new owner in the property to pay the ongoing assessments.  Further, if the property goes through a sheriff’s sale, there is a good chance that the proceeds from the sheriff’s sale will be insufficient to pay anything to the association as a junior lien holder.  While accepting a lesser amount owed to the association is not ideal, a short sale will at least provide some funds to the association.

While our office will certainly walk you through the process and provide recommendations along the way, the decision to facilitate a short sale is ultimately the boards.  As a result, if your association is ever in this situation, it is extremely important to weigh all the options to ensure the best possible outcome for the community.


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