Foreclosures and HOA – by Emily Dressler

Ed. - Today's post is a guest article by Emily Dresser of the web site www.deeds.com

What happens when a financial institution or other group buys a condo development out of foreclosure? Do they have to follow the original deed that the developer had or the agreements the original developer had with the local government as a site condominium development? Is this situation similar to a zombie title foreclosure?

Currently, zombie foreclosures represent every one in five foreclosures nationwide, according to housing data firm RealtyTrac. It’s not just individual homeowners losing their homes to foreclosure; some condominium developers have lost developments to foreclosure after filing for bankruptcy.

A foreclosed or abandoned site condo complex could quickly turn into a modern ghost town and can create numerous legal issues for homeowners who purchased units in the development early on and for a homeowners’ association. Owners who moved into the development before it was completed are left wondering if the development will be finished, if the proposed amenities will be built, and if necessary infrastructures like roads will be finished. Who is responsible to complete the development? How will warranty claims be addressed? Can they stay in their homes? Will the new owner follow the covenants in the master deed?

A number of things could happen in a situation like this, and any owner is advised to seek legal counsel. Some states have laws addressing the bankruptcy of condominium developers and what happens to the HOA if the developer declares bankruptcy.

The new owner could terminate the Homeowner’s Association, or could buy enough units to gain control of the association. Many condo owners depend on their HOA for routine maintenance, landscaping, and other amenities. If the required number of units hasn’t sold for the developer to hand over control of the HOA after they have filed for bankruptcy, the homeowners are often left to defer to state law and the Uniform Common Interest Ownership Act (if the state is a UCIOA state).

The homeowners who are left behind after the foreclosure sale could possibly seek judicial declaration stating that the developers’ bankruptcy is a de facto turnover of the association to the homeowners. This allows the owners to have control of the HOA, assuming enough of the units are occupied.

Emily Dressler writes for deeds.com, a leading publisher of state- and county-specific real estate deeds. For a more in-depth look at zombie titles and foreclosures visit, http://www.deeds.com/information/Zombie-Titles-and-Foreclosures-1364584818.html, and to purchase a state-specific real estate deed, visit deeds.com.    

(Ed. – We certainly experienced what Emily wrote about locally, with several site condo developments abandoned by the original developers, many of whom when out of business or bankrupt and sold off the remaining lots or lost them to the banks. Fortunately, many developers locally just shut things down and rode out the recession and have now resumed building. In the interim early buyers were left with a feeling of abandonment and confusion over what their rights might be and what obligations they might have inadvertently inherited.)