Co-signer takes fall in friend's foreclosure

REThink Real Estate

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Jul. 22, 2010

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REThink Real Estate

Tara-Nicholle Nelson
Inman News

Q: Am I responsible for homeowners association (HOA) dues on a foreclosed home even if I didn't sign the HOA agreement? I am on the title and mortgage. I co-owned a home with a friend and it was her responsibility to pay the mortgage and HOA dues because she was the one living there.

Unfortunately the home foreclosed and now the HOA is threatening to sue both her and me for past dues. Am I responsible even though she was the only one who signed the agreement?

A: In the olden days, we used to call what you did "co-signing" for a loan. These days, most lenders use the term "co-borrowing," probably to make crystal clear to the co-signer/co-borrower what he or she is really doing: borrowing, to the same extent as the other borrower -- in your case, your friend who actually occupied the home.

Sounds to me like crystal-clarity is exactly what was lacking in your situation. You refer, correctly, to your situation as having "co-owned." As you're probably aware, that means that your friend's foreclosure is also your foreclosure -- for purposes of your credit and your ability to qualify to buy another home in the coming years. But I digress.

That relationship, that arrangement, of "co-ownership" binds you legally to a number of obligations beyond just the mortgage payment. HOA dues are one -- although the recourse for nonpayment is generally a lien against the property.

It is very likely that, to close the transaction, you may have signed something, like the HOA's covenants, conditions and restrictions (CC&Rs) -- which you may have executed expressly or via their incorporation into the deed or legal description of the home -- that bound you to pay the HOA dues.

It's also possible, depending on the terms of the actual HOA documentation, CC&Rs and the HOA agreement you reference, that the HOA's position is incorrect, and that their only recourse against you, as an owner who failed to sign an agreement to pay the dues, was to place a lien against and/or foreclose on the home.

The only way for you to get certainty on this is to consult with a local real estate attorney, who is familiar with the laws of your state and can review all the documents involved -- everything you signed during escrow and at closing, as well as the HOA agreement you didn't sign.

If the lawyer opines that the HOA has no recourse against you beyond a lien, I'd encourage you to have her engage the association directly in a conversation about the matter -- or at least send over an opinion letter. And that may cost, as attorney fees aren't cheap.

In fact, you might consider whether you'd prefer to negotiate a settlement with the HOA -- even if you feel you're not liable, after you've had a lawyer review the documents. The fact is, the HOA could still very well send a collection agency after you, or take you to court in an attempt to collect -- even if it's in the wrong.

And I assure you, the time and energy it would take you to defend a lawsuit or attempt to correct the matter with a collection agency might not be worth what you could simply settle it for.

I'm also interested in whether you had a written agreement with your "friend" and co-owner. Generally, in co-borrowing situations where the bills are going to be split other than 50-50, a tenancy-in-common agreement or some other written document that reflects the parties' agreements about who will pay what is extremely advisable.

Did you have anything like this? Even copies of e-mails or other written communications, perhaps less formal than an actual contract?

In the event that you are held responsible or forced to pay any portion of the delinquent HOA dues, if you can document that she agreed to cover these items, you might be able to recover funds from her with an indemnification lawsuit (or the threat thereof).

Indemnification simply means a reparation, of sorts, that a court might order her to make if they found her responsible for your damages (i.e., the delinquent HOA dues you had to pay).

However, if you're not able to document that she agreed up front that she would be responsible for them, a court would likely find that your damages were a more proximate, or direct, result of nothing but your own decision to co-own the property with her.

Either way, you can chalk this entire experience up as tuition -- a very, very expensive lesson you've learned about not overextending your generosity. In many cases (not all), when someone needs a co-signer/co-borrower other than their parents or close relatives, it's because their credit history is rough.

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