HOA foreclosure auctions are one potential source to buy houses to flip. What is a HOA foreclosure auction and how do they work?
Owners of houses, condominiums and town homes that belong to a homeowner’s association (HOA) must pay monthly HOA fees and assessments. These fees and assessments can lead to a HOA foreclosure auction if not paid in a timely manner.
Understanding the HOA
A homeowner’s association (HOA) is a legal entity that is meant to manage and maintain the property and surrounding neighborhood for the good of the community.
The original member of the community or neighborhood is usually the one to create the HOA. Community rules are then developed which HOA members must follow.
HOAs have a board of directors who produce a budget for the community. Each member is required to pay the amount that the board has agreed upon. The budget is used to maintain the common areas of the property, including sidewalks, landscaping, roof, parking garage, security fences, snow removal, garbage service, pool maintenance, etc. These standard items are listed, along with the HOA budget, in the HOA documents that buyers must agree to and sign as part of their home purchase.
The HOA is also responsible for planning and budgeting for major non-recurring repairs and investments by means of “special assessments”. Examples include repaving the parking lot, building a new community center, or termite remediation. To pay for these assessments, special fees are added to the monthly HOA bill and set aside for long-term repairs and replacements. The HOA then contracts to implement the improvements and repairs.
When HOA Payments are Not Made
Homeowners in the HOA are responsible for paying their regular monthly dues and special assessments. When these are not paid, the HOA falls behind on its budget, may run low on cash, and fail to deliver common services. As a result, the community as a whole will suffer with poorly maintained or unsafe grounds.
Homeowners may fall behind in their HOA dues for a number of reasons, including illness, divorce, loss of a job or simple refusal to pay. This negatively affects the welfare of the neighbors. It can also cause financial issues for the HOA.
HOA Liens and How They Work
To understand HOA foreclosures, we must first understand HOA liens.
HOAs have the power to place a lien or foreclose on the homeowner’s property if the monthly HOA dues or special assessments are not paid.
Liens “attach” to the homeowner’s property title and are normally recorded at the County Recorder’s office. The homeowner is responsible for paying the back HOA dues along with any charges including late fees, assessments, fines and interest. Once the HOA places a lien on a property, the homeowners will have a harder time selling or refinancing it, because the title is now defective.
In most (if not all) states, it is essential for the HOA to obtain a lien judgement and record the HOA lien for it to be effective. However, even if a lien is not obtained and recorded, the homeowner is still required to pay past HOA dues. So it is possible for the HOA to take legal collection action going down the lien-foreclosure process.
In many states an HOA Lien takes precedence before any mortgages the homeowner used to buy the property. In this case, the HOA can foreclose even if there is a mortgage on the property. The court will enter a final judgement of foreclosure in favor of the HOA, from which a foreclosure auction date will be set to sell the property.
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If the HOA lien is not “cured” (fixed) by the homeowner by paying it back and getting the lien lifted, he or she risks having their property foreclosed and sold to satisfy the debt. This is called a HOA foreclosure.
HOAs may pursue judicial foreclosures (through the courts) or nonjudicial foreclosures (direct) depending on state law. The HOA Declaration of Covenants, Conditions, and Restrictions (CC&Rs) may also address the process of handling nonpayment of HOA dues and foreclosures.
A key fact to note is that the HOA is only able to recover the past HOA dues and assessments, any interest and penalties, the legal costs of foreclosing, and the auction costs. A homeowner’s association cannot profit from a HOA foreclosure. This means any amount from the auction that exceeds the HOA’s legal claim generally goes to the homeowner (unless other lien holders have a superior claim).
Pre-Requisites for a HOA Foreclosure
In certain states there may be pre-requisites before a homeowner’s association can legally initiate a HOA foreclosure.
For example, in California one of two thresholds must be met before an HOA foreclosure can occur:
- The homeowner has incurred HOA assessment debts of $1,800 or more that are exclusive of assessment charges, or
- The HOA assessment debt is older than 12 months delinquent, no matter the amount owed.
There are also state-specific rules about partial vs. whole payments and other factors that can affect the ability for the HOA to recover through foreclosure. It’s essential to understand state and local laws.
As an investor or buyer, you can look for public notices of default filed by the HOA take advantage of the potential foreclosure opportunity.
What to Expect from HOA Foreclosure Auctions
HOA foreclosure auctions are an unconventional form of acquiring houses to flip. However, they may prove to be a worthwhile investment for a buyer who can purchase an HOA foreclosed home for significantly less than the property is worth.
Since the HOA cannot make a profit and are only able to collect the money that is owed to them, there is no incentive for the HOA to try and maximize the price at auction. This means HOA foreclosure auctions are often less competitive than bank foreclosure auctions because the HOA has no incentive to postpone the auction or hold out for a high minimum bid.
If such a case led to the HOA selling at auction for simply the amount that they were owed, that could mean that the money the homeowner had paid towards the house is gone. The homeowner would still owe any remaining amount left to pay off the lender for a house he or she does not own anymore.
Buying a House at a HOA Foreclosure Auction
What if you purchase a property at a HOA foreclosure auction and the price is below the amount due to the HOA? In this case you are still be required to pay off the remainder of the HOA lien. The auction does not extinguish an HOA lien.
It is also essential to understand that in many states you will still be liable for any superior liens on the property, such as a first mortgage or tax lien. It is essential, like any home foreclosure auction situation, to do a thorough title search and do your math to ensure you walk away with a profit, not a loss.
This provides a good summary for the question what is a HOA foreclosure auction.
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