When it comes to real estate, individual owners aren't the only ones facing foreclosure or bankruptcy. Real estate developers and homeowners' associations (HOAs) can fall into bankruptcy or foreclosure, and there's often no quick and easy solution to the problem.
Many people choose a home, whether it's a single family house, a townhouse or condominium, for the benefits of its HOA and amenities. Your have legal interests in HOA property. Know the problems you may face, and the solutions, when your HOA or developer faces bankruptcy or foreclosure.
Defining Distressed Properties
A real estate project is considered to be in distress if there's been a default or non-payment on the project's financing, such as a mortgage, and:
- The lender either forecloses the mortgage, or uses other enforcement terms found in the mortgage. For example, accelerating the loan, with full payment due immediately, or
- The creditor and debtor agree to a "workout" to settle the default
Generally, a lender will take some sort of enforcement steps or agree to a workout 60 to 90 days after payments are missed.
Who Is the Property Owner-Borrower?
A property developer or HOA also has the power to borrow. A developer typically takes out a mortgage to fund a construction project, and runs the HOA. Past a certain completion point, the developer turns HOA control over to a board of individual owners.
It's also possible for an HOA to borrow, for example to fund repairs or improvements for common areas or elements. Finally, individual owners may have mortgages on their units or homes.
Workouts in the Best Worst-Case Scenario
Nobody wants a developer's or HOA's financial problems to end with bankruptcy or foreclosure. There are complex legal issues to solve, and no certain answers.
Finding an alternative solution, called a "workout" is often in everyone's best interest. A workout may be as simple as the lender's agreement to reinstate the loan if back payments are made. Workouts may be more drastic, too, with the developer's deeding the entire project to the lender, which agrees not to foreclose. Other workout options are:
- Extending loan due dates
- Interest rate reduction
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Forbearance, or suspension, of interest in exchange for added collateral from the HOA/developer
- The lender takes partial project ownership in exchange for some of the debt
When HOAs or developers are in a tight financial spot, they should ask for workout solutions with the lender. It often makes the best of a situation with no easy answers.
Bankruptcy, Foreclosure and Owner Impact
When your HOA or developer faces financial crisis, individual owners are the ones to feel the impact in a personal way. Services may be cut, maintenance and improvements can be delayed or cancelled, and there can be loss of common area and amenity use.
Bankruptcy Scenarios
With respect to HOAs and developers, the outcome in a bankruptcy case could be uncertain. So, if you're connected with a developer or HOA that has filed for bankruptcy consider contacting a bankruptcy or real estate attorney promptly, to find out what your rights are and how to protect them.
The HOA or developer, as the debtor, may be able to choose to keep or cancel certain contracts. For example, the developer may decide the best thing is to cancel a long-term lease for parking for a condo project. Unit owners would lose that amenity.
A debtor-developer could even try to reject the project's declaration of covenants, conditions and restrictions (CC& Rs). The result could be a major change in the type of property you thought you were buying.
Next: Facing Foreclosure