How Renting Can Give a Condo Association Leverage with a Bank

"We had a scenario where we were far ahead of the bank on a unit that was substantially underwater, [meaning] the bank was owed substantially more than the value of the property," Schneider says. "The association had foreclosed on the unit and was now the owner. We went to the bank and said, 'We can get a buyer for this property. But we can't do that if we have to pay you the remaining amount on the mortgage. You have a number of years left before you finish your foreclosure action, and you probably won't make enough money from the foreclosure to pay off the full amount of the loan. Wouldn't you be better off if we just got a buyer?'"

Here's how it works: say the condo unit is worth $500,000 and the bank is owed $700,000. Since the bank can't get $700,000 from a buyer, you find a buyer who will pay $500,000. From that, the condo association subtracts $40,000 — the amount in arrears for the unit. The bank gets the bulk of its money back — and exits a lengthy foreclosure process and the condo is made whole. If the bank says no, the association can say, 'Okay, we'll rent it out; see you in three years.'

Schneider's approach has both proponents and critics.

"It's a new approach, one that's different," observes Peter Lehr, director of management at Kaled Management. "It could be successful, but it's about partnering with the bank," rather than looking at the bank as an adversary, he suggests. "You've got to say to them, 'We can get this done faster, so let's partner on this. No one gets hurt in this partnership. You get a little bit, I get a little bit — we're all happy.' That's how I would look to go. It's about alliances."

Yet that can be trickier than it sounds. "Usually the bank doesn't want to cooperate with you," says attorney James Samson, a partner at Samson Fink & Dubow. "Especially a small one, since there's usually Freddie Mac or Fannie Mae involved with the loans," he says, referring to the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association, two of the three quasi-governmental agencies that together underwrite the majority of mortgages in the country and which would also have to agree to any deal. Worse, he says, "If the loan is sitting in a securitized pool" — meaning a group of mortgages held in trust as collateral for the issuance of a mortgage-backed security — "and you're dealing with a trustee, good luck."