Can an HOA foreclose on properties for delinquent dues and/or assessments?  Yes (delinquent fees and penalties is a different story).  They normally do this only to perfect their lien position in case of a sale, and the don’t actually snatch the properties.  But their can be some unintended consequences.

It is important to understand the order of liens on a property.  The mortgage / deed of trust is NOT necessarily in 1st position.  Liens for delinquent property taxes or special assessments are actually the 1st lien.  HOA liens are in 2nd, and the bank loan is in 3rd.

There are a growing number of properties being purchased at HOA Trustee’s Sales by 3rd parties.  A $1.5M ArrowCreek home recently sold for $166,000 on the steps, bid up from the $18K owed on delinquent assessments (10750 Renegade).  There was never a NOD filed by the bank on their loan, and it is possible the loan was still performing.  But the bank loan is now wiped out, and the new owner will make a killing.

Buying HOA TDs used to be pretty rare – the banks usually step in to cure the defaults to protect their lien positions.  But right now, we have institutional investors as well as the local usual suspects buying up all the HOA TDs they can get their hands on, leading to the prices getting bid up on the steps.

I can’t really comment on the legality of it all, or why the banks are letting this happen.  Without a NOD, they may not even know the properties are in play, though I believe that ALL lien holders are required to be notified of an impending Trustee’s Sale.  I can see a potentially huge “creative default” market here – stay current on your mortgage to hide it from your bank, let the HOA foreclose,  let your assigned straw buyer buy the property at the Trustees Sale, and take a back end cut on the deal.

Cynical much?  Sure.  But I have always been amazed at how low the real estate industry will stoop to find a new profit streams.  This is one to watch.

 

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