When a lien is recorded against the property it encumbers the property, changes the owner’s debt to a secured debt and becomes part of the preliminary title report. So, basically, until a lien is recorded on the property the debt is considered unsecured and can easily be overlooked or wiped out. Therefore, having a lien is extremely important if the owner refinances, sells, files bankruptcy or looses the property through a trustee sale by a lender, here’s why.

REFINANCE

NO LIEN: If a lien is NOT recorded against the property the escrow company may or may not contact the Association to notify them of the refinance and to request pay off figures. Without the lien the Association can miss the opportunity to be paid in full. Escrow is not required by law to collect the debt for the Association.

YES LIEN: If a lien IS recorded against the property the escrow company MUST contact the Association for pay off figures and to clear the lien. This is a requirement of the lenders.

SALE "WITH EQUITY"

NO LIEN: If a lien is NOT recorded against the property the escrow company may not know how to contact the Association to notify them of them of the sale and to request pay off figures. Therefore, without the lien the Association can miss the opportunity to be easily paid through the escrow. If escrow closes without payment, the Association would have to pursue the collection of the debt through the escrow company, small claims court or through as a personal obligation. The debt does not become the buyer’s responsibility.

YES LIEN: If a lien IS recorded against the property the escrow company MUST contact the Association for pay off figures and to clear the title. This is a requirement of the lenders. AND if the escrow doesn’t clear the title there is title insurance that is purchased through the escrow that can pay the claim. However, most of the time the escrow company just takes responsibility for their error and writes a check to cover the debt.

SALE "WITHOUT EQUITY" aka SHORT SALE

In a short sale there is not enough equity to pay all of the lien holders, therefore the Realtor or the escrow officer will contact all of the lien holders to see if they will reduce their debt enough to allow the short sale to go through. If any of the lien holders refuse to reduce their debt and provide a release of lien the short sale will not go through and the property will most likely be foreclosed by the lender.

NO LIEN: If a lien is NOT recorded against the property the Association will not be part of the short sale negotiations and will most likely not receive any of the sellers previous debt through the escrow, they will only receive the current months assessment and possibly the next months and a transfer and document fee. Therefore, without the lien the Association can miss the opportunity to be easily paid through the escrow. If escrow closes without payment on the previous debt, the Association would have to pursue the collection of the debt as a personal obligation. The debt does not become the buyer’s responsibility.

YES LIEN: If a lien IS recorded against the property the escrow company MUST contact the Association for pay off figures and to clear the title. This is a requirement of the lenders. The lien puts the Association at the negotiation table with all of the other lien holders, but the Association does not want to play hard ball with this power. It is important to get as much as they can through the escrow and then have the balance of the sellers debt paid through a personal obligation in a written agreement in exchange for the release of lien. This creates a win win for the owner and the Association because the owner avoids the foreclosure, the Association is paid some of the debt through escrow and the owner agrees by written agreement to pay the ir balance over time on an affordable payment plan so that the Association does not have to chase after the owner for the debt or write off the debt. So short sales are not bad for the Association they just need to involve good negotiation skills.

DEED IN LIEU OF FORELCOSURE

A Deed In Lieu (DIL) of foreclosure is where the owner signs the property over to a lien holder to avoid foreclosure. In order for a deed in lieu to be valid, it has to be accepted by the lien holder. Deed in lieu is rare because the lien holder will only accept the DIL if the property is not over encumbered because once the lien holder accepts the DIL they are responsible to pay all of the encumbrances against the property.

TRUSTEE’S SALE BY LENDER - Sold to Third Party with Excess Funds

NO LIEN: If a lien is NOT recorded against the property the Association will NOT be notified of any excess funds from the public auction sale of the property to a third party, which means the Association will not receive a claim form to make a claim against the excess funds that will be disburse to the secured encumbrances against the property in the order of their recorded date.

YES LIEN: If the lien IS recorded against the property the Association will be eligible to place a claim against the excess funds and could receive payment towards some or all of the owners debt. Any balance could be pursued as a personal obligation of the owner’s through small claims court or as a personal obligation, unless, a chapter 7 bankruptcy is involved. The debt does not become the buyer’s responsibility

TRUSTEE’S SALE BY LENDER – Reverts to Lender

If the property reverts to the lender the lender is only responsible for the assessments and special assessments from the date of the trustee sale forward until they resell the property. The lender is not responsible for the previous owner’s debt. The debt is not owed by the property it is owed by whoever owns the property from the date they purchase to the date the property is resold. The debt is a personal obligation with the benefit of lien and foreclosure for nonpayment and can and should follow the debtor unless it is discharged by bankruptcy.

NO LIEN: If a lien is NOT recorded against the property the Association should be contacted by escrow for the pay off figures from the date of the trustee sale forward. A demand for the full amount due on the property is almost always rejected.

YES LIEN: If a lien IS recorded against the property the lien is considered “extinguished” by the trustee sale however the Association will be contacted by escrow for the pay off figures from the date of the trustee sale forward and may be asked to prepare a release of lien so that escrow can easily clear the title.

BANKRUPTCY

Bankruptcies are more complicated to give easy straight answers on the debt because everything depends on the particular case but here is a basic overview.

NO LIEN: If a lien is NOT recorded against the property the Association’s debt will be listed as an unsecured creditor, which means the Association will not be paid anything through the bankruptcy UNLESS the plan calls for payment to the unsecured creditors which is pennies on the dollar and almost never happens.

YES LIEN: If a lien IS recorded against the property the Association’s debt will be listed as a secured creditor, which means the Association will be paid through the bankruptcy plan as long as the owner keeps the property.

OUR RECOMMENDATION

It is our recommendation that an Association turn over accounts that are delinquent 90 days to a specialized collection company to ensure that the proper collection activities are taken to secure the debt for the Association and its paying members. This includes the full administration of monthly payment plans secured by a recorded lien against the property. It is further our recommendation that if an Association is forced to have a special assessment that the Association should strongly consider securing their special assessments with a recorded lien as part of any payment plan requested by an owner that cannot pay the special assessment in full in one lump sum.