"Foreclosure" is a word no co-op or condo owner wants to hear, but when residents fall behind on maintenance fees or common charges - when their financial burden becomes too large to shoulder - sometimes foreclosure can be the only answer.
Most co-op and condo boards, however, will do whatever they can to avoid foreclosing. Not only can it become a highly emotional situation, it also can become an expensive problem that takes months or even years to work through. For all parties involved, finding an alternative is almost always preferable to foreclosure.
With the recent economic downturn and subsequent rise in unemployment, it's not unusual for homeowners to find themselves financially in over their heads. "Unfortunately, it's part of the business," says Steven Schneider of The Back Office, a board operations support firm based in Manhattan. "Especially after September 11, there are some people who just can't meet their obligations."
According to The New York Times, however, despite the downturn, foreclosures nationwide are declining. The number of delinquent loans ending in foreclosure has dropped from 30 percent in 1998 to around 20 percent at the end of last year. These days, more lenders are looking to the long-term, trying to keep loans intact by finding alternative methods to help homeowners get through the economic rough patch and get back on track.
It can happen so fast - a person loses a job or perhaps an investment fails. Soon, they are missing maintenance fees or common charge payments, and before they know it, they've fallen into serious trouble with their building's board. Most foreclosures occur because of delinquent maintenance fees, although sometimes other proprietary lease breaches - such as a significant house rule infraction - can set the dominoes in motion. If the resident has not rectified these problems within a set amount of time, the building's board can vote to foreclose.
Knowing when to foreclose and when to negotiate can be one of the most difficult choices a board can face. Being aware of the homeowner's financial patterns can help. "A lot depends on past history," says attorney Stanley Dreyer of Gallet, Dreyer & Berkey, LLP in Manhattan. "Is this the first time they've missed a payment, or is this a constant thing?"
Another risk indicator is the value of the resident's loan or mortgage. If the debt is substantial, foreclosing might not solve the problem of overdue fees. "Find out how much is owed on the loan," says Oliver Rosengart, Assistant Attorney General at the New York State Attorney General's office in Albany. "If it's less than the value of the property and the cost of the arrears, then it pays to wait and not foreclose." Otherwise, the board might find themselves in the middle of an expensive, involved process with little hope of ever getting their money back.
In a cooperative setting, if foreclosure looks like the only option, the board will sign a resolution to foreclose. Once the board signs the resolution, the resident still has the opportunity to halt the process. "The first step is to send out a notice of default with a notice to cure," says attorney Marc Schneider of Krieger & Schneider, LLP in Manhattan. This notice serves as a warning and usually gives owners ten days to fix or "cure" an issue of non-payment, and 30 days to cure any other breaches. If the situation has not been remedied after the cure period, the lawyer will issue a five-day notice to terminate the lease.
Before the co-op can proceed, a lien search must be conducted to ascertain if there are any liens against the defaulting shareholder's stock. Additionally, the co-op should check its records for something called a recognition agreement, made between the shareholder, the co-op and the bank issuing the loan, signed at the time of closing. This agreement states that if there is any default, all parties will be notified. Once the lender is notified, says Schneider, "in a lot of cases, the lender will step in and pay the past due fees." The individual then becomes obligated to the bank.
"The banks don't want the foreclosure either," says Rosengart. "They'll either settle with the lender, add it to the amount owed, or they'll evict the person and get whatever they can on the sale."
While this alternative works well for co-op boards, the same is not true for condos. "In a condo, there's a mortgage and the mortgage has priority over the common charges," says Schneider. In a co-op, the contractual agreements are arranged in such a way that maintenance fees take precedence over the bank's loan. In condos, the bank's mortgage takes precedence, meaning delinquent mortgage issues could be addressed by the bank before the process even gets to past due condo fees.
In a co-op, if all parties have been notified and an agreement still has not been worked out, the foreclosure process will proceed and the property will be put up for auction. A notice is served on the individual or shareholder, then published in a local newspaper, disclosing the property location as well as the date, time and location of the foreclosure sale. In a slightly anachronistic turn, the auction is usually held on the local courthouse steps. Buyers can claim the property for a fraction of its market worth, with the co-op and lender most likely earning their money back.
In a co-op, with something commonly referred to as a Uniform Commercial Code foreclosure, the process can take as little as 90 days. "In a mortgage foreclosure on a condo, it can take up to two years," Rosengart says.
Thankfully, most situations do not get this far. "Ninety-nine percent are cured within notice time," Dreyer says. "Nobody wants to lose their equity, especially with today's property values."
Avoiding foreclosure is almost always the most sensible solution. "For one thing," says Rosengart, "it's in the best interest of a peaceful building." In more practical terms, he says, "The board will save a lot of money on legal fees." Although in foreclosure cases, the resident is responsible for those fees, reality indicates the board may never get it back.
Talking remains the best remedy for solving impending foreclosure situations. "If there are problems, the shareholder should always contact the board," Dreyer says. "Ignoring the situation will get you into hot water. If you have a problem, immediately ask for a meeting with the board." Discussions can lead to agreements - a different payment plan, a later pay-off date - anything to tide both parties over until the resident can get back on their feet. At the very least, it will lead to a mutual understanding of the problem.
Ignoring a board's warnings is also the best way for residents to shoot themselves in the foot. According to Schneider, "For the shareholder, the best thing they can do is not ignore the warnings. A lot of people believe that the board can't do anything - they own their apartment and can't be removed. But really, they're tenants under a proprietary lease, and their shares can be foreclosed."
At the same time, board members and managing agents need to watch for signs of trouble. "Boards should not allow a shareholder to get more than two months in arrears," says Schneider. "Because after that, if someone is already having trouble making payments, it's going to be too difficult for them to catch up."
Early warnings by the board may help, too. "If people are missing payments on a fairly frequent basis, then start pushing all the buttons at the same time," advises Dreyer. "Send them notices, or go to the bank, and tell them what's happening."
If payment plans won't work, or if it looks like the resident will not be able to meet their financial obligations, alternatives to foreclosure may yet remain. The board might encourage the owner to sublet the apartment. By subletting, the owner ensures that current and future maintenance fees are paid, while at the same time gaining some financial breathing room. Once they've found their financial footing and paid off their overdue fees, they can resume possession of their property. No one has lost any equity, no credit ratings have been tarnished, and no legal fees have been incurred.
In extreme circumstances, the best alternative may be for the resident to sell their property - certainly a better choice than seeing it sold at auction well below market value. Says Rosengart, "If a co-op wants to resolve the problem, they should go to the resident and ask if they will agree to a slow sale - selling it through regular channels. The board can tell the resident that if they agree to a slow sale, they'll wait for the money." This way, the owner maximizes their profits, making enough to pay off loans and fees and still secure a new residence.
While the word "foreclosure" is certainly enough to induce panic in most circles, the truth is there are ways around it. The best advice for both boards and residents: keep those lines of communication open.