The purpose of a Lender foreclosing on a property is to get paid what was loaned. The Lender can get paid by the bidder at a Sheriff's Sale. If there are no bidders at the Sheriff's Sale, then the lender will obtain title to the property free and clear of any liens which are junior to the Lender. The lender can then re-sell the property to re-coup the money loaned.

What is a Junior lien? A "second" mortgage, judgment lien, mechanics lien and any other lien recorded after the lenders mortgage. Some Federal Liens and Municipal Tax liens are not junior to mortgage liens even though they are recorded after the mortgage is recorded.

This concept of lien holder status is understood by all the players. The "second" mortgage lender understands his lien can be wiped out by foreclosure by the first mortgage lender. After the foreclosure, the second mortgage lender, who has not been paid, can not demand payment from anyone. He has no claim for a lawsuit.

A funny thing has happened to this common understanding. Condominium Associations do not understand the rules.

A Condominium Association typically imposes dues on all residents to maintain the commonly owned areas for all homeowners. If a particular homeowner does not pay his dues, the Condo Association can get a judgment or a lien against the unit. This Lien is recorded after the mortgage and therefore meets the definition of a Junior lien. While this should be the end of the story, it is not.

Typically, the Board of Directors of Condo Associations are not secondary mortgage lenders and do not understand their lien is wiped out by foreclosure by the first mortgage lender. Condo Associations usually have money set aside in reserves and thus have funds to sue. Therefore, there has been a lot of lawsuits by Condo Associations after the lenders foreclosure wiped out the condo's lien.

While a lawsuit without merit should get little notice, it did get the attention of Title Insurance Companies. Title Insurance Companies started to refuse to insure condos after foreclosure, when there were Condo Association liens, even though the liens were junior to the mortgage and were wiped out in the foreclosure. The Title Insurance Companies understand the law but they also understand business. The Title Insurance Company will need to defend the claim in court. This costs time and money. The preponderance of lawsuits by Condo Associations made for an easy business decision not to insure a condo after foreclosure with a Condo Association lien. Typically, Title Insurance Companies will insure title to properties where other secondary lenders are wiped out in foreclosure, because these lenders understand the rules and do not litigate.

Now, the lender who foreclosed and gets title to the property can not insure the title and thus will have difficulty selling the property to a third party. The lender can pay the Condo Association fees, releasing the lien and then be able to obtain title insurance so the property is marketable. The lender can also try to obtain a written waiver from the Condo Association. Unfortunately, the Condo Association realize that if they refuse or make a stink, they can force the lender to pay at least a portion of the Condo Association lien in exchange for a release. This set a bad precedent.

But the legislature provided a "cure". It is the "Super Lien Law an amendment to the New Jersey Condominium Act.

The Amendment provides limited priority to condominium assessments over prior recorded mortgages and other liens. It only applies to mortgages recorded after April 1996. It does not apply to Condo Homeowner Associations or to Property Owner Associations.

The amendment limits the priority of the condo liens to the condo assessment for the 6 months prior to the recording of the lien. Thus, only 6 months of condo dues are given priority. Also, only the portion of the condo dues which are for the common area expenses are given priority. Any amount of the condo dues for reserves or contingencies can not be included in the amount receiving priority. Late fees, attorney fees, interest and penalties can not be included in the amount receiving priority. The amendment does not grant Condo Association liens priority over municipal tax liens or Federal liens. Another requirement for Condo Association liens to receive priority status over the mortgage lien is for the condo lien to be recorded prior to receiving foreclosure notice by the mortgage lender or prior to the lender filing the lis pendens. The Condo Association must give notice about the lien filing to the first mortgagee in order to receive priority status. The Condo Association lien priority lasts for 5 years.

Like every thing to do with the law, there are lots of i's to dot and t's to cross. Does the above amendment fix the problem? Are title companies insuring condo's with Condo Association liens? Or has the legislation just increased the cost of doing the paper work?

The New Jersey Condominium Act with the Super Lien Amendment still contains contradictory statements, it effectively places the burden on mortgage lenders to pay off Condo Association Liens to speed the process of getting insurable title. Since the amendment allows only 6 months of Association Fees, it provides a good cut off point in negotiating lien waivers. From a lenders point of view, it is probably much easier to add 6 month of condo fees to the cost of foreclosing the property.

For example, If the condo fee is $500 per month then 6 months of fees are $3,000. It is probably easier to pay the association $3,000 rather than pay an attorney to find out the percentage of the $500 per month directly related to common area and eligible to the priority status. Assume the percentage is 90%, then $2,700 is the priority amount but it probably cost more than $300 in attorney fees. Next, should the lender pay the attorney to find out if the Condo Association provided proper notice to the lender or recorded the Condo Association lien prior to the lender lis pendens? From the lenders point of view, it is easier and faster to pay off the Condo Association get a release and re-market the property.

During the warm weather season, many people consider purchasing vacation condo's. What is the lesson for an individual purchasing a condo in foreclosure with Condo Association liens? Like always, do your research. The above explanation and the law may seem complicated but it is not a reason to walk away with out further examination.

While the necessary research for purchasing foreclosures is detailed in the book, Focusing On Foreclosures, the are some items to be emphasized for this article.

First, if you are purchasing from the defendant (homeowner) prior to the Sheriff's auction all lien amounts will be paid from the purchase. The transaction is handled just like any real estate transaction and you will get clear insurable title. If the purchase price is less than all the liens together, the seller should bring money to the closing table or you can negotiate a short sale with the lien holders.

If you are purchasing the property at a Sheriff's Sale, subtract the amount of the
condo lien from the highest amount you are willing to bid. For example, you are willing to bid $50,000 but the Condo Association lien is $8,000. You highest bid is $42,000. Next, you now have $8,000 of negotiating room with the Condo Association.

First, as an individual and potential new homeowner, the association is more likely to negotiate fairly with you then an anonymous lender. Prior to negotiating with the Condo Association, check the facts. Was the mortgage date prior to April 1, 1996? If so, none of the lien has priority status. Next, did the Condo Association file the lien prior to the lis pendens, if not, no priority status.

Next, contact several Title Insurance Companies to determine if they will insure the property. If title insurance appears to be a problem, start negotiating at say $1,000 to get a written waiver from the Condo Association and proceed with the title insurance.

All things considered, an individual has more leverage with the Condo Association then the original mortgage lender. The Condo Association does not want to alienate a new homeowner, nor do they want the new homeowner to make a fuss or organize the other residents.

Finally, as with all real estate transactions, do consult with an attorney. Any waiver or agreement signed should be reviewed and acceptable to your attorney and the title company.