Applying judicial foreclosure laws to defaulting timeshare weeks is so time-consuming and costly that it is often impractical. Fortunately—in large part, due to ARDA—states are becoming aware of the predicament and adopting non-judicial foreclosure statutes that make the process substantially less expensive and more efficient. Non-judicial foreclosures have saved timeshare companies and developers hundreds of thousands of dollars, despite being a relatively recent and underutilized procedure.
By way of brief back story, judicial foreclosures were designed to protect owners of homes from losing their primary residences. Unfortunately, the process is too cumbersome and expensive for one-week timeshare interests; the cost is often far more than the amount of the lien. This has left developers and HOAs stuck with a large inventory of weeks that are in default. The costs of the defaulted assessments would unfortunately then be spread out among the owners or absorbed by the HOA or developer.
Florida, with its robust and matured timeshare industry, realized the impact of the accumulating amount of defaults and unpaid assessments and subsequently passed its own version of non-judicial foreclosures to allow developers and HOAs to better manage their properties and also help alleviate the already crowded judicial docket.
Currently, more than 20 states have implemented condensed foreclosure processes for timeshare assessments that have made it cheaper, faster, and much more efficient to foreclose on weeks with unpaid assessments.
NJF in Action
Several of our developer clients have already realized key advantages of the non-judicial foreclosure process.
One such developer approached our firm needing to foreclose on approximately 1500 weeks for unpaid assessments. Prior to this new law, the process of foreclosing timeshares was just as arduous and expensive as foreclosing a house—with costly filing fees, court costs, and pricy service of process expenses. Such an endeavor would have cost our client over a million dollars and would take an inordinate amount of time having to rely on crowded judicial dockets. Also, Florida limits the plaintiff to a maximum of 15 defendants with each filing. This would have forced our client to file at least 100 separate foreclosure actions, resulting in the billing of thousands of hours in attorney time. Finally, the logistics and expense behind the issuance of 1500 summonses would have been a complete nightmare, as the majority of owners are outside the state (and often the country).
Now, through a series of technical procedures, notices, and filings, we were able to drastically reduce costs associated with timeshare foreclosures and complete the entire process in about four months. The greatest challenge we faced in handling such a large volume was administrative. In order to control and reduce costs, we found it necessary to utilize new software and techniques that allowed us to handle the volumes of mailings, responses, and recordings with ease. Once the process was finalized, our client was able to proceed with their conversion of these units into condominiums and began selling the newly converted units. Fortunately for our client, Florida’s non-judicial foreclosure process provided them with the relief they sought in an affordable, manageable, and realistic timeframe, allowing for business operation and revenue to flow without creating a financial disaster.
General Application
The use of non-judicial foreclosures can vary, but the actions are normally part of a business plan with the developer.
As a first step, the HOA assigns or sells its assessment lien rights to the developer, who then proceeds to take back the defaulting weeks. Often, there is a larger goal in mind beyond simply taking back ownership of the week. The weeks may be resold or replaced with a different product. In some cases, entire buildings are converted from timeshare to whole unit condominiums or other forms of ownership and sold off to create capital and/or help bring a timeshare out of bankruptcy. In other cases, developers need to replenish their inventories. We’ve also used this process to mitigate the long term damage posed by Viking Ship companies and other entities or individuals, who are deliberately abandoning their timeshare to the detriment of developers and HOAs. The use of non-judicial foreclosures has afforded many resorts the opportunity to quickly, efficiently, and legally return defaulting units to their portfolio.
The requirements for non-judicial foreclosure are established by state statute and usually with minimal or no court intervention. While the exact procedures vary from state to state, the general principle is substantially similar around the country. In Florida, when a default occurs, the owner is mailed a default letter, and a Claim of Lien is recorded in the county where the timeshare is located. Simultaneously, a trustee is appointed—this is usually a member of the law firm retained to handle the foreclosures. After a series of recordings, the trustee is tasked with informing the owners by both certified and regular mail of the amount of the assessment, makes a demand for payment, and notifies them of the impending foreclosure. During this phase, our firm has also found it extremely beneficial to offer delinquent owners Deeds-in-Lieu of foreclosure. In exchange for a transfer fee, these owners can sign over their timeshare back to the HOA or developer to avoid having a foreclosure on their record. We have found that approximately one-third of the owners elect to take this route, which saves our clients time and money.
Based on the response from the delinquent owner, the Trustee undertakes a series of additional procedures to facilitate statutory requirements that are designed to fulfill and satisfy notice requirements. Once these guidelines are met, the Trustee may sell the timeshare week to the highest bidder through a public auction. As is customary with a foreclosure, the HOA or lienholder can initially bid in the amount of their claim. Since the amount owing on the mortgage or assessment lien normally exceeds the value of the timeshare week, our experience is that there is no appearance and/or bids entered against the HOA or lienholder seeking foreclosure. The lienholder or HOA can then bid in the amount owed and at the conclusion of the public sale, receive a statutory deed from the Trustee.
Whether cleaning out just a few defaulting weeks or addressing thousands, the use of non-judicial foreclosures have helped alleviate many of the issues developers and HOAs face. The streamlined foreclosure process has assisted associations— both large and small—manage and structure their portfolios in a more profitable and proactive manner.
