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Unpaid HOA fees boost foreclosure risk
published Tue, 24 Mar 09 01:00:00 -0700

Benny Kass
Inman News

DEAR BENNY: I am three months behind in my homeowner's association payments. Can the condominium foreclose on my unit? My mortgage payments are up to date, and I called my lender who said no, they cannot foreclose. What do you say?

I wrote a letter to the board asking for a payment plan in January of this year, but no response as of yet. I know I owe the money, but I was sick for a period of time. I am planning to pay the back fees with my taxes. --P.S.

DEAR P.S.: Your lender is wrong. Review your legal documents carefully and you will see that the board has a number of remedies if an owner is delinquent in his/her condominium fees. The board can bring a lawsuit for collection; in many cases can restrict access to common areas, such as exercise rooms or swimming pools; and can ultimately, unless your state legislature has enacted restrictions, foreclose on your unit.

I am surprised that your board has ignored your request for a payment plan. Such a plan makes sense -- especially in today's economic situation. What does the board want to do: foreclose and then possibly be stuck with your unit if no one buys at the sale?

I suggest you keep pressing the board for a decision.

DEAR BENNY: After 25 years I'm tired of being a landlord and was thinking of selling my rental house and carrying back the loan. Where can I get more information on what's involved? --Gina

DEAR GINA: When you sell property and take back financing, you are no different from any other commercial lender. You want to be as sure as possible that your buyer is financially able to make the monthly payments (which include principal, interest, taxes and insurance -- which we call "PITI"), and you also want to make sure that the loan is properly secured with the house as collateral. This means that you record the mortgage document among the land records where the property is located.

There is a lot of information on the Internet -- just type in "seller take back financing" at your favorite search engine.

However, as helpful as the Internet will be, you will need specific assistance. Your buyer/borrower will have to sign a promissory note, and a deed of trust (called a mortgage in some parts of the country). Don't rely on the buyer's attorney or title (escrow) company to assist you. Retain your own attorney to draw up all of the necessary papers and to help you determine if your potential buyer is a good candidate for a seller take-back loan.

DEAR BENNY: My friends have a home they are allowing their daughter to live in rent-free. We were discussing selling the home, which they moved out of three years ago. Since they have gone past the three-year period, what is their capital gain amount or tax liability on this home? Is the entire amount that they sell it for taxable? Or does the IRS still deduct the amount paid for the property and call that part untaxable? --Patti

DEAR PATTI: If I understand your question, your friends moved out of their principal residence three years ago, and now want to sell it to their daughter. Since there is a time limit on their right to exclude up to $500,000 of their gain if they are married and file a joint income tax return (or up to $250,000 for single filers), what are their tax consequences? ...CONTINUED

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In order to take advantage of the exclusion of gain, you have to own and live in the house for two years out of the five years before the property is sold. The two years do not have to be continuous; you just have to be able to prove that you did live in the house for a total of two years.

If you fail to meet what is known as the "ownership and use" test, you have to pay capital gains tax. The tax is based only on the profit you made. Example: You bought the property for $200,000, made no improvements, and sold it for $300,000. Although you can deduct such items as closing costs and real estate commissions in determining profit, for this example you have made $100,000 and will have to pay capital gains tax. The current rate for this federal tax is 15 percent. You may also have to pay state and local income tax.

Here's a suggestion, however. If the daughter was living rent-free, it could be argued that this is an extension of the family and thus your friends may be able to tack on the daughter's use so as to permit the family to claim the exemption. I cannot provide specific legal advice and recommend that the family consult a tax attorney or accountant for more information. Clearly, any legal way that one can avoid having to pay taxes is acceptable to the IRS.

DEAR BENNY: I have an odd situation regarding the residence that I am currently leasing. I entered into a one-year lease with a very affluent couple. A few months later, the couple disappeared. More investigation on my part concluded that the husband was an owner of an investment fund and disappeared once the banking industry went awry. Millions of dollars of investors' money allegedly disappeared with the husband CEO. The wife kept in touch with me and I worked out an agreement with her, whereby she would transfer the deed over to me for a lump sum amount and I would continue payments on the home, until I am able to obtain a new loan or work out an assumption with the bank. She agreed, we noted everything in writing, and we're living in the home with our names on the deed but the mortgage in the owner's name.

What will the bank do when they find out that the owners transferred ownership? Is there anything we can do to make sure that our rights as a bona fide purchaser are protected? --Charmaine

DEAR CHARMAINE: Wow! Another fraudulent financier. When will this madness and corruption stop?

My first question is whether you really own the house. If the house originally was in the name of the husband and wife, and the missing husband did not sign the deed, you do not own the property. You must immediately retain a real estate attorney in your area to investigate.

If you do own the house, are you in a financial position where you can refinance and get a mortgage loan in your name -- and pay off the old loan? Interest rates are very low now, so you should seriously explore that option. Alternatively, come clean with the bank that holds the mortgage and I suspect that they will work with you.

But, the first question must be answered immediately: Do you really own the property?

DEAR BENNY: Condominium owners don't realize until it's too late that they are at the mercy of their boards. What can the community do when the board doesn't follow the bylaws and rules and regulations? --Del

DEAR DEL: That's a tough question. There are times when a board has to make value judgments as to whether they should follow the legal documents -- even though they realize they are legally obligated to do so. ...CONTINUED

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One example that is very current deals with rentals of condominium units. Many association bylaws put restrictions on renting -- such as either no rentals allowed or only a certain percentage of units can be rented at any one time. However, in today's economy, many owners who must leave the area for whatever reason find that they are unable to sell and must rent -- despite the fact that the quota spelled out in the bylaws has been met.

What should a board do in this case? Obviously, the first choice is to try to amend the legal documents. But that's not always easy. More importantly, when the economy gets better, the association wants the leasing restrictions to remain in place.

I have told my condominium clients that the board should hold a public meeting, and advise the owners that based on the circumstances, and despite the clear language in the bylaws, the board will just not enforce the leasing restrictions for the foreseeable future.

If the members do not object, then the board can "close their eyes" to the violation. But if there are objections, the board would have to consider whether the costs involved in litigation are a worthwhile expenditure, and they still may opt not to enforce.

Don't get me wrong. I am not advocating that boards have the right to ignore the clear dictates in the legal documents. In general, they do not have this right.

What should owners do if their board is ignoring the rules? I tell everyone that they have the following options: (1) initiate a recall proceeding, so as to try to "throw the rascals" out of office (the bylaws should spell out the legal requirements for this process); (2) run for the board and try to change the system; (3) a number of unit owners should retain a lawyer who can file suit to force the board to comply with the documents; (4) accept the situation and live with it, or (5) move out of the community.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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