Short Sales and HOAs: Clearing Claremont Association Debts

A short sale can be approved, priced, documented and days from closing, and still stop over a debt nobody costed at the beginning: the homeowners association balance.

It is an easy one to miss. Owners under financial strain often prioritise the mortgage and let the association dues slide, reasonably enough, since the mortgage is the larger payment and the more frightening letter. But an association is a creditor with its own remedies, its own counsel and its own governing documents, and it is not a party to the lender's approval process. It has to be dealt with separately, and it is frequently the reason a file that looked finished suddenly is not.

This article covers how association debt behaves in a short sale, who ends up paying it, and how to get the real number into the file early. It deepens the short-sale guide and belongs beside the junior lien article, because the mechanics rhyme.

Standing rules as always: a HUD-approved housing counselor is free and is the first call; nobody legitimate charges a homeowner an upfront fee for foreclosure or short-sale help; and this is general information. Association law in California is detailed, and a real estate attorney is the right source for how any of it applies to a specific property.

What an association can actually do

Associations in California operate under a statutory framework, commonly known as the Davis-Stirling Common Interest Development Act, together with each community's own recorded governing documents. Verify current requirements with counsel, because the statutes are amended and the details matter.

Within that framework, an association may generally assess regular and special assessments, apply late charges and interest as its documents provide, refer a delinquent account for collection, and — following statutory notice and procedural requirements — record a lien against the property for unpaid assessments. In some circumstances associations may pursue further remedies, subject to conditions set by statute.

The practical consequence for a short sale is simple. A recorded association lien is an encumbrance on title, and title has to be delivered clear. Somebody has to pay it, negotiate it down, or obtain a release, before escrow can close.

Why it derails short sales specifically

In an ordinary sale with equity, an association balance is an inconvenience. It comes off the proceeds at closing and the seller nets less.

In a short sale there are no proceeds. Every dollar leaving the transaction is a dollar the first lender is being asked to give up, and lenders approve a defined list of costs at defined amounts. An approval letter typically specifies what may be paid from the proceeds and how much. An association balance that arrived late, or that grew after the letter was issued, sits outside that approval, and the file has to go back.

Three specific complications recur.

THE BALANCE KEEPS GROWING. Assessments accrue monthly through a review that may run across months, along with late charges, interest and collection costs. The figure quoted at listing is not the figure at closing, and nobody should treat it as fixed.

COLLECTION COSTS OUTPACE THE DUES. Once an account moves to a collection firm, attorney fees and administrative charges are added under the association's documents. The recoverable total can exceed the underlying assessments by a wide margin.

THE ASSOCIATION IS NOT OBLIGED TO NEGOTIATE. A board acts on behalf of the other owners, who have been carrying the shortfall. A reduction may be possible and it is always worth asking, in writing, with a clear explanation of the alternative. It is not something anyone should promise.

Getting the number early

The single most useful action is unglamorous: request a written statement of the account from the association or its management company at the very beginning, at the same time payoff statements are ordered for every mortgage and lien.

Ask for the itemised total — assessments, late charges, interest, collection and legal costs — and ask whether a lien has been recorded and when. Ask what the balance will be at a projected closing, so the figure carried into the file has room in it.

Then get it into the estimated settlement statement that goes to the lender. A cost disclosed at the start is a cost the approval can be built around. The same cost surfaced in the final week is a renegotiation, and renegotiations at that point are where transactions die.

Order the association's disclosure package early as well. Buyers are entitled to it, it takes time to produce, and in a transaction already measured in months a delay at the end is expensive. Any pending special assessment or litigation disclosed in that package can affect a buyer's financing, which the offer-writing article touches on from the buyer's side.

Who pays, in practice

There is no universal answer, and any article that offers one is guessing about your file. The realistic possibilities are these.

THE FIRST LENDER ALLOWS IT from proceeds, up to a stated amount in the approval letter. Common, but bounded, and the bound is set by the lender.

THE BUYER ABSORBS SOME OF IT, priced into the offer. Buyers of short sales are already self-selected for patience; some will trade a contribution for certainty, especially if it is raised early rather than sprung late.

THE ASSOCIATION ACCEPTS A REDUCED PAYOFF, in writing, in exchange for a release. Sometimes available. Never assumed, and never relied on without the release document in hand.

THE SELLER PAYS THE DIFFERENCE, which is often precisely what a household in hardship cannot do, and is the reason the balance needs to be known at the start rather than the end.

What remains after closing, if anything, is a legal question with a fact-specific answer. It depends on what was released, what was recorded, and what the documents say. Ask an attorney, and ask a CPA about any tax consequences of debt that is forgiven.

The wider point

Association debt is one instance of a general rule that governs this entire process: a short sale is only as sound as its arithmetic, and the arithmetic has to include EVERY claim on the property. Mortgages, home equity lines, judgment liens, tax liens, association balances.

Owners who count them all at the beginning sometimes discover the situation is worse than they thought, which is painful but useful. Others discover the opposite, and find they are not short at all — in which case an ordinary sale, or reinstatement, or a modification may be the better road. A housing counselor will walk through those without a commission at stake.

Nobody can promise an approval, a timeline, or a particular outcome. To keep reading, the short-sale guide is the map, and the step-by-step process shows where these numbers enter the file.

Anthony Grynchal has been licensed in California since November 2009.