Condo talk: Keep an open mind to short sales

Short sales are becoming more common in condominiums and other buildings overseen by associations, given the drop in real estate values over the past several years. Depending on the facts and circumstances of each particular situation, a short sale of a unit may actually be the lesser of the financial evils for the association, and for the market value of other condos, townhouses or units in that association.

A “short sale” is the sale of real estate (a unit in an association, for our purposes) where the sales price is not sufficient to cover the secured liens, like the mortgage and unpaid association fees. The secured parties, like the mortgage lender and association, would agree to accept less than full payment that each is owed — and to release their liens — in order for the short sale to close.

A short sale is often used by the owner to avoid a foreclosure of the unit by the mortgage lender.

An emotion-driven, knee-jerk rejection by a board to any request to pay less than the full amount due may result in a “one-two punch” to the association. First, the association may receive far less of the outstanding assessments, or none of the outstanding assessments at all, if the short sale falls through and the unit proceeds to foreclosure. Next, foreclosing lenders typically sell units for a fraction of their value in order to remove them from the growing inventory of housing owned by lenders. This will cause the depressed value of units in this economy to plummet even further.

That is a “knockout” combination my friend, and probably not in keeping with the board’s fiduciary duty.

Here are some examples, but not an exhaustive list, of factors a board could consider in deciding whether or not to accept less than the full amount of unpaid assessments on a unit in order to accommodate a short sale:

Ÿ Is the unit owner underwater; that is, is the amount of secured claims against the unit more than the market value of the unit?

Ÿ Is the unit reasonably priced (based on the current market)?

Ÿ What is the alternative to the short sale? That is, is there a foreclosure pending or imminent that could eventually extinguish the association’s lien for unpaid assessments?

Ÿ Is the association being asked to share proportionately with other secured creditors in a reduction of amounts owed?

Many associations are concerned about the precedent established by agreeing to accept less than full payment of an owner’s account balance. However, each proposed short sale should be considered, and a decision made, on a case-by-case basis, considering the specific facts and circumstances of each particular proposal.

There may be strategies available to the board to permit a unit to close in a short sale upon payment of less than all assessments due, and still preserve the ability of the association to collect the remaining balance from the seller after the closing. If the board agrees to accept less than what is owed in a short sale, the assessment status letter must be carefully drafted to preserve such rights, and to reflect what is owed and what will be accepted by the board through a designated closing date.

As a side note, the Illinois Condominium Property Act states that “(t)he association shall have no authority to forbear the payment of assessments by any unit owner.” This less than grammatically perfect provision has not been the subject of a reported appellate level court decision. Many interpret this provision to mean the board cannot “settle” for less than all of the assessments due and owing on an owner’s account. That may be far too narrow of an interpretation, particularly in today’s economy.

Associations need to implement an aggressive assessment collection policy to reduce or eliminate delinquencies and the need to make the difficult decisions faced in a short sale. If an association does nonetheless find itself faced with a short sale of a unit that has a significant assessment balance, rather than dismissing an owner’s short sale proposal out of hand, a board should seek the guidance of an attorney to assist in evaluating the board’s authority and the handling and documenting of specific proposals.

Ÿ David M. Bendoff is an attorney with Kovitz Shifrin Nesbit in Buffalo Grove. Send questions for the column to him at CondoTalk@ksnlaw.com. The firm provides legal service to condominium, townhouse, homeowner associations and housing cooperatives. This column is not a substitute for consultation with legal counsel.