The Foreclosure Trick That Banks Don't Want Condo Boards to Know

Condo boards, unlike co-op boards, traditionally have had few good options when apartment-owners don't pay their monthly charges. While a co-op board can withdraw a delinquent shareholders' shares, and the co-op association is first in line to receive money from foreclosure sales, a condo board is in a more precarious position — it's third in line after the mortgage lender and the city (for property taxes). This often makes a condo board reticent about foreclosing on a unit in severe arrears, since it costs money to take legal action — and if you'll never recoup unpaid common charges, let alone attorney fees, why waste more money on a lost cause?

"It is too expensive to do nothing," argues veteran real estate attorney Marc Schneider, a partner at Schneider Mitola. First, he notes, while waiting for the bank to take ownership and get common charges and assessments flowing again, a condo association loses income every month. But less obviously and more importantly, a condo association has a legal advantage over a lender that opens up two significant options to stop the loss of income from the unit, even for recouping arrears and collecting late fees and legal costs.

How? By taking advantage of a condo association's ability to foreclose on units more quickly than a lender can.

First to Foreclose Wins

Foreclosure actions for banks and other mortgage lenders take longer than they do for condominium associations, says Schneider, who explains that lenders have many more legal and regulatory requirements to fulfill. There are notice requirements, mandatory foreclosure-settlement conferences, and other regulations that apply to lenders but not to condo associations. There are also defenses a homeowner can raise against lending institutions that don't apply elsewhere.

"If the condominium finishes its foreclosure action first, it has the right to rent that unit until the bank finishes its own foreclosure action," Schneider notes. "I have many condominiums and home owner associations that are doing this and have recouped money they are owed — common charges as well as legal fees, late fees, and interest."

One such association is Woodbury Greens, a 125-unit homeowner association of condominium townhouses in Woodbury, Long Island, and one of Schneider's clients. "You need to be aggressive," says Steven Stern, president of the 15-member board. "You only make money if you spend money. With the unit we tried this on, we were successful — we've been able to foreclose and rent it out. In that instance, we were able to make up a good portion of the common charges and assessments."

Photo by Danielle Finkelstein