Real Estate & Property Law

Rent Skimming - A Warning to HOAs and Condo Associations

Here is a common scenario in California (and likely throughout the US):

A manager or board member calls with several questions related to the recent acquisition of a unit through the HOA's foreclosure. There may or may not be a person currently residing in the unit so what do you do with them? The HOA may be interested in renting the unit. The unpaid assessment debt may be huge and of course the HOA is interested in recouping those costs. The senior lender(s) may also be in the process of foreclosure (and there may be extremely long delays in their processes).

So what do you do? You get legal advice. See the prior post on the business judgment rule. And hopefully it is good advice.

There are risks with renting in California. California Civil Code Section 890 is a "rent skimming law" enacted to prevent people from buying at foreclosure sales and "skimming the rents off" until the lender forecloses. It also has components for civil actions and criminal actions (for those who do this multiple times, and who "squat" in foreclosure properties and then rent them out to unsuspecting people, take the money and run). There are some protections for individual owners who use the money to pay certain costs. There are no specific protections for homeowners associations, even though they were surely not the "target" in mind when the statute was enacted.

There are hurdles to selling the property as well. Title companies tend to shy away from insuring HOA foreclosed properties - at least in the short term after foreclosure.

I cannot stress enough that it is important to understand the law in this area. So get thee to a good lawyer before you get thee into court on a surprise charge of rent skimming!

Full post as published by California Condo & HOA Law on March 24, 2010 (boomark / email).