Lien Foreclosure: Is it Still a Viable Option?

If owners fail to pay their assessments to their community association, the community association has two distinct options in collecting the outstanding assessments: (1) the community association may file a lawsuit against the owner for a personal money judgment or (2) the community association may foreclose its assessment lien.  Sometimes filing a personal money judgment lawsuit is not the best option as an owner resides out of state, is an LLC, or is judgment proof.  With the downturn of the economy and market values of homes declining, community associations have asked whether lien foreclosure is still a viable option.  The answer is it can be a viable option. 

If an owner is delinquent in the payment of assessments for a period of one year or in the amount of one thousand two hundred dollars ($1,200.00), whichever comes first, the association may initiate a foreclosure action against such owner.  Certain fees, charges, late charges, monetary penalties, and interest are not enforceable as assessments however.

Assuming foreclosure eligibility requirements are met, whether foreclosure is a viable option depends largely on what other liens, interests, and encumbrances burden the subject property.  Pursuant to A.R.S. Section 33-1807 (planned communities) and Section 33-1256 (condominiums), a lien for assessments is prior to all other liens, interests, and encumbrances on lots or units except for (1) liens and encumbrances recorded before the recordation of the Declaration, (2) a recorded first mortgage or deed of trust on the unit, and (3) liens for real estate taxes and other governmental assessments against the unit.

If the property is not subject to a mortgage or there is a minimal first mortgage, foreclosure is a viable option as there is likely equity in the property.  The association may benefit from foreclosing its lien on the property and selling the property at a later date.  The association can foreclose second mortgages and judgment liens.  If there is sufficient equity in the property, it will usually attract third party bidders, who may bid over the amount of the judgment.  In this scenario, the association would be paid in full.

Even if the property is subject to a recorded first mortgage and there is no equity in the property, foreclosure still may be a viable option.  Sometimes the threat of foreclosure alone is enough to get a delinquent owner’s attention.  If an owner resides at the property and is current on his/her mortgage, the owner will often pay the association in order to keep his/her home.  Also, if the owner of the property is out of state, an LLC, or judgment proof, the only way to get the property off their hands or to have the account paid in full is to foreclose.  Therefore, the risk of not recovering assessments and legal fees in the foreclosure lawsuit can be worth taking.

If you have any questions about foreclosures, please contact Nikita V. Patel or any other attorney with the firm.