BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIPS
HOA Liens and Assessments in Short Sales
Q: I am the listing agent on a short sale. The seller’s lender approved the short sale and, just before we were ready to close, an HOA lien was recorded against the property. Now the HOA wants full payment of the lien amount or they will not release the lien. Can they do that? I need to know more about HOA liens and how they work.
A: Yes, an HOA has the power to record a lien against the unit when the owner is delinquent in paying the monthly HOA dues and other assessments. In a short sale, this HOA lien must be dealt with just like all other liens in that the HOA must agree to an amount to be paid to the HOA before they will release the lien. This can be the full amount or hopefully a lesser, negotiated amount.
But first, it is important to understand HOA assessments and liens. Assessments can be in the form of the monthly HOA dues, or they can be a one-time assessment, usually for some capital improvement or repair. An assessment is the debt of the unit owner at the time it is due, and is a personal debt of that unit owner even after they sell the unit. The HOA can add penalties, fees and interest in amounts as allowed by the Civil Code (CivC Sec. 1366.e)
The HOA can also sue the owner or former owner in Small Claims Court, even if the HOA has recorded a lien against the property.
The HOA Board of Directors can record a lien against the delinquent owner’s unit after giving the owner the statutorily required 30-day notice. (CivC Sec 1367.1) That lien can be enforced by a nonjudicial foreclosure (if allowed by the CC&R’s) or a judicial foreclosure. The lien can be recorded for any amount due, but the HOA may not foreclose on that lien unless (a) the total amount owed is $1,800 or more; or (b) the assessments are more than one year old.
If an owner is foreclosed upon by nonjudicial foreclosure, that owner has a 90-day right of redemption, meaning that the owner may buy back the property from the HOA for the amount of liens, costs and other allowable charges. If there is a judicial foreclosure, the owner has a 90-day right of redemption, but that is extended to a one-year right of redemption if the HOA is pursuing a deficiency judgment against the foreclosed owner. This rarely happens because of the relatively small amount due versus the cost of filing a lawsuit against the owner who owes the debt.
In almost all cases, an HOA lien is junior to existing lender liens on the property. This is because almost no lender will want to place a deed of trust on a property junior to an HOA lien. So, if an HOA does foreclose, the HOA takes the property subject to all senior liens (i.e., those recorded earlier in time). If one of those senior lienholders then forecloses (as is likely because the unit owner probably is not paying the mortgage payments either), the HOA’s ownership interest (acquired by way of the foreclosure) is wiped out. Clearly this is not a good result for the HOA.
If an HOA does foreclose on a unit, thereby becoming its owner, and decides to rent the property out, the HOA is required by law to use that rent money to pay the existing lienholders (CivC. Sec 890). So, this is not really a good reason for an HOA to foreclose on a lien either.
PRACTICE TIPS:
LISTING AGENTS:
1. In a short sale where there is a HOA, listing agents should discuss with the seller the status of any unpaid HOA dues and assessments. Also, ask to see any notices from the HOA. Look for the statutory 30-day notice from the HOA indicating that they intend to record a lien against the unit.
2. Because short sale escrows usually take longer than 30 days, tell the seller to advise you if a 30-day notice of intent to record a lien is received. This means you will likely have to deal with the HOA’s lien in order to close the short sale escrow.
3. If the HOA agrees to accept an amount less than the full amount due from the seller in a short sale in order to remove their lien and allow the short sale transaction to close, advise the seller, and/or short sale negotiator, to attempt to get a full release from the HOA in exchange for payment to them. This is because HOA’s are not subject to the statutory limitation (SB 458, CCP 580.e) on deficiencies after a short sale as are mortgage lenders.
4. For this same reason, the seller is not prohibited from entering into an agreement with the HOA to pay the amount due to the HOA at a later date in consideration of the HOA removing their lien from the property. But, this arrangement MUST be fully disclosed to all short sale lenders.
BUYER AGENTS:
5. Generally, buyers are not liable for the HOA debts of the prior owner. However, some HOA’s have added provisions in their CC&R’s purportedly holding any new owner of the unit liable for the debts of the prior owner. It is not clear if these provisions are enforceable.
6. Advise buyers to review the CC&R’s for any such provisions. If found in the CC&R’s, buyers’ agents should inquire of the listing agent to obtain information about any unpaid HOA debts and attempt to negotiate a full payment and release. If this is not possible, advise your buyer to consult with their attorney regarding the enforceability of such provisions against them after COE.
For further information, and arguments as to why an HOA is better off taking a partial payment of the amount due in a short sale, see CAR Legal Memo entitled: “Foreclosure and Short Sale Issues: HOA Liens & Assessments”
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2012 08/17/12