Foreclosures and Receiverships: Which Action Should the Association Pursue?

The typical process for collecting unpaid assessments is to proceed with a lawsuit after an owner has failed to respond to a thirty-day demand letter.  This route, although successful in many cases, does not always provide the desired results.  Associations are therefore looking to alternative methods of collecting unpaid assessments.  Judicial foreclosures and receiverships are such alternative methods.  The question becomes which one should the association pursue?

JUDICIAL FORECLOSURE:
The judicial foreclosure process is similar to a public trustee foreclosure.  Just as the public trustee may foreclosure for unpaid mortgage payments, an association may foreclosure upon its lien for unpaid assessments.  Both are processes by which the owner’s interest in the property are terminated for failure to provide required payments either to the mortgage company or the association.

The goals in a judicial foreclosure action are to either (1) obtain payment of all amounts owing (delinquent assessments and legal fees and costs); or (2) obtain ownership of the property.  Most often, the delinquency is cured prior to the foreclosure sale and payment in full is provided to the association.  However, there are instances when the foreclosure process is completed and the association obtains title to the property.

As a general guideline, an association should consider a judicial foreclosure action when:

1. The balance owed to the Association is greater than $3,000.00;
2. There is equity in the property in excess of $20,000.00;
3. The property is not already in foreclosure;
4. The traditional method of proceeding with a county court lawsuit is not feasible or recommended (not feasible because it is believed that service of the lawsuit on the owner would be unsuccessful and not recommended because it is believed the owner is judgment proof); and;
5. The owner is habitually delinquent in assessments.

In addition, if the property is owned by an entity, such as a Trust, L.L.C. or corporation, and the entity is delinquent in assessments the association should consider a judicial foreclosure action.

Unlike a receivership, a judicial foreclosure action does not require the property to be vacant or tenant-occupied. The Association may proceed with a judicial foreclosure action regardless of whether the property is owner-occupied, tenant-occupied or vacant.  For a discussion further discussion of the judicial foreclosure process see our articles, “Foreclosure of Assessment Liens”  and “Checklist for Feasibility of Foreclosure.”

RECEIVERSHIP:
Unlike a judicial foreclosure action, the receivership process does not terminate an owner’s interest in the property, but rather temporarily removes the owner’s ability to control the property and places a disinterested third party, the Receiver, in control of the property.   A receivership may be initiated either pre-judgment or post-judgment and typically requires a court order approving the receivership action.  Once the court approves the receivership, the Receiver manages the property and seeks to either continue with the current tenant or place a new tenant in the property to collect the receiver’s fees and expenses, the unpaid assessments, legal fees and current assessments.

The goals in a receivership action are (1) to obtain payment of current assessments; (2) reduce past due assessments; and (3) protect the property from deterioration or vandalism.

Typically, an association should consider a receivership action when:

1. The property is vacant or tenant occupied;
2. The owner is delinquent in assessment payments;
3. The property is not already in foreclosure;
4. The property is in danger of being damaged; and;
5. The property is in good condition and therefore does not require extensive repairs and/or upgrades.

For a further discussion of the receivership process see our articles, “Receivers: An Alternative Method to Collecting Delinquent Assessments” and “Checklist for Feasibility of Receivership.”

Our firm has extensive experience with both judicial foreclosure actions and receiverships.  The Collection Attorneys evaluate files on a daily basis to determine if the traditional approach of proceeding with a lawsuit is the most appropriate way in which to collect unpaid assessments or if a specific file is appropriate for a judicial foreclosure or receivership action.