BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Q: I am a buyer’s agent for a buyer buying an REO condo. I have learned that the prior owner, who was foreclosed upon, owed the HOA dues from when that owner owned the property. Who is responsible for the prior owner’s dues? What if the HOA had recorded a lien on the property for the unpaid dues; does that stay with the property?
A: Basically, the person who owns the condo (or other type of property which is in an HOA) is responsible for the dues and assessments during the time that they owned the property. But, the HOA can record a lien against that unit for unpaid dues, penalties, etc. And that lien will stay with the property until the amount due is paid, or until a foreclosure wipes it out.
REGULAR
SHORT SALE: In a short sale, if the HOA has recorded a lien, then that lien must be paid off as a part of the short sale, and should be listed as a closing cost on the net sheet sent by the listing agent to the bank. Most banks will allow this as a part of their short payoff. Some banks, however, will try to push this back on the seller to come up with the money.
Even if the HOA hasn’t recorded a lien, it would be a good idea for the listing agent to list on the net sheet the amount due to the HOA (or an estimate of the amount due in a few months when a sale actually closes, if the seller is unable to continue to make the payments) so that the seller’s lender, when considering the amount of the short pay-off, will hopefully allow enough money for escrow to pay off the amount due by seller to the HOA. Otherwise, the HOA would have the right to come after the seller after COE for the amount of unpaid HOA dues, etc., incurred while the seller owned the property.
FORECLOSURE: If the HOA has recorded a lien and then the seller’s lender forecloses, the foreclosure will wipe out the HOA lien IF the HOA lien was recorded after the deed of trust securing the loan which was foreclosed upon was recorded.
So, if, for example, Tarp National Bank recorded a deed of trust two years ago, and the HOA recorded their lien one year ago, then when the Tarp National Bank forecloses the HOA lien is wiped out. But, if the HOA recorded their lien prior to the Bank deed of trust recording, then the Bank foreclosure would not wipe out the HOA lien – because foreclosures do not wipe out senior (earlier in time) liens.
This latter event would almost never happen because all institutional lenders require all senior liens to be paid off because they do not want to be in a position junior to other liens (unless, of course, they are agreeing to be a second loan for example.)
REO SALES: Once the bank owns the property, the bank becomes responsible for payment of the HOA dues from the time they take title until the day they transfer title to the next buyer/owner.
However, REO bank/owners are notorious for not paying HOA dues during the time they own the property. They do pay the HOA dues, for the time that they owned the property, at the time of COE to the REO buyer, but, as a result, many HOA’s are suffering cash flow problems.
See Weekly Practice Tip entitled: “Buyers Should Check HOA Financials”
So, once a buyer buys an REO property, there should be no valid lien for dues on the property; and the new property owner does not owe for any prior unpaid HOA dues.
Occasionally, however, an HOA, usually out of ignorance, may attempt to collect the unpaid dues of the prior owner from the new owner. They may even record a lien under the mistaken belief that they can do so, or simply be unaware of the transfer of title. If this occurs, the new owner may have to fight with the HOA to straighten out the record. If the HOA is intransigent, the new owner may even have to retain counsel to clear up the matter.
HOA RIGHTS TO LIEN IN GENERAL
An HOA has the authority to record a lien against the property of a member who fails to pay regular or special assessments. But, penalty assessments for violation of association rules cannot become a lien.
An HOA must provide a 30-day notice to the member before recording the lien. When an HOA is seeking to recover less than $1,800 (not including accelerated assessments and certain late charges and fees), the HOA can either file a small claims court suit, or record a lien; but the HOA is prohibited from foreclosing on this lien until the amount equals or is greater than $1,800, or the assessments are delinquent for more than 12 months.
For further information see the CAR Legal Memo entitled: “Homeowners Associations: A Guide for Realtors” at:
http://www.car.org/legal/2007articles/homeowners-associations/