Sometimes Rentals Work FOR Associations

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One of the topics that confound community associations and their boards is what to do about renters. Many times, the question is what can be done to limit them, prohibit them or somehow control them. The goals of a landlord can be different from the goals of a resident owner, and there are plenty of opportunities for conflict. But is there a time when it pays for the association to be a landlord? What if a zombie house – a delinquent in paying assessments – can be turned into a rent-paying income stream? Certainly, this presupposes a community where rentals are not limited. But, where the option to rent exists (and is permitted by the Governing Documents), new strategies have opened new doors to do just that.

 

Many associations have seen a scenario where a unit becomes vacant, yet the mortgage company is not moving ahead on a foreclosure. Or, a property that is underwater gets lost in limbo when an elderly owner passes away. The challenge has always been how to get control of a property to exploit its rental possibilities. This is especially true where there is an existing mortgage with priority over the association. Taking that unit to a sheriff sale is expensive and time consuming. That prior lien stands in the way of flipping the property.

 

Associations are finding ways around those obstacles, and are increasingly getting help from the courts to help. Courts have started to recognize that a valuable asset should not be wasted and, more importantly, that is enormously unfair for the other members of the community to bear the costs of carrying a vacant unit. As a result, judges have become more open to allowing an association to take control of a property before foreclosure or a sheriff sale. A concept that some states refer to as “rent receivership” is growing in Pennsylvania, and it has been a great help to associations that have been burdened by a zombie house and a deadbeat owner.

 

http://pacondolaw.com/sometimes-rental…for-associations/In one Montgomery County condominium, the surviving owner abandoned her unit when her husband died and she moved out of state. The unit was underwater, since the unit was worth less than the balance due on the mortgage. With no source of income and no ability to sell the property, she went to live with other family and left the unit behind. In a situation seen more often that one might think, the mortgage company did nothing. The unit stayed vacant, and no one paid the condo assessments. The association was able to get a judgment but couldn’t find any assets worth executing on and didn’t want to go through the expense of a Sheriff Sale. Invoking the broad judgment powers available to the Court under the Pennsylvania Rules of Civil Procedure, the Association petitioned the Court for supplemental relief. The Court allowed the association itself to possession of the Unit and rent it to a tenant. In effect, the association became the landlord. The association was fortunate that only some minor renovations were needed to make it rentable, and a tenant was located. The possession and tenancy continued for more than a year before the mortgage company woke from its slumber and started foreclosure proceedings. While the association had control of the unit, the delinquent balance was reduced by more than $10,000.00!

 

A similar situation was the subject of a recent Bucks County case. One man owned 4 rental units in the community, and lived in yet another unit. For reasons no one knows, he allowed all of his units became vacant and ran up a huge debt to the association. Three of his properties were in foreclosure, but two others were not. As in so many delinquency situations, all of his properties had no meaningful equity, so the association’s lien was of little value. The Bucks County Court allowed the association to take control of the rental units but, because there were multiple properties involved, an independent receiver was appointed. The receiver is, in effect, a court appointed rental agent. He has the power to oversee the properties, to renovate or repair them as needed. The receiver can collect the rent, and apply the net proceeds to pay the debt to the association. The receivership will continue in effect as long as any money is due to the association or until a foreclosure and sheriff sale. Here, since some of the rental properties are already facing active foreclosure lawsuits, the association and the receiver will focus on the remaining units.

 

In the right circumstances, possession and rental of a delinquent unit can be a real boon to an association plagued with a zombie property. A vacant property that is a whole in the budget and a bane to the community can be turned into a valuable asset. A new strategy to combat delinquents is available for a progressive board with creative and aggressive counsel.

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