Understanding Homeowners’ Associations
To fully understand HOA liens and how they work, you must understand the basic terms involved in covenanted communities.
Homeowners’ Association (HOA). An HOA is a legal entity set up to manage and maintain the neighborhood. Its members usually consist of homeowners in the community. The original developer of the community typically creates the HOA. The rules of the community are ordinarily set forth in what is called the Declaration of Covenants, Conditions, and Restrictions (CC&Rs). The main functions of the HOA are:
- to collect assessments and fees, and
- to enforce the rules of the community.
HOA communities may consist of single-family homes, townhomes, or condominiums, though separate state laws might govern homeowners' associations in subdivision communities and condominium owners' associations.
HOA Fees. Homeowners that live in the community will often be required to pay a periodic fee to the HOA to cover maintaining the community. The HOA will collect fees to pay for things like landscaping, security, snow removal, as well as repairs and maintenance for common facilities, like pools, tennis courts, workout rooms, and clubhouses. The fees also pay the salaries of HOA employees. To determine the amount that each homeowner must pay, the HOA will usually develop a budget and divide the total expenses by the number of homes in the community. Homeowners must pay their share on a monthly basis or other fixed schedule throughout the year.
HOA Special Assessments. At times, the HOA might levy special assessments for one-time expenses if the HOA's reserve funds will not cover the cost of a major repair or improvement. For example, an HOA could levy a special assessment to pay for a new roof for the community clubhouse or to pay for a new road.
How HOA Liens Work
Almost all HOAs have the power to place a lien on a homeowner’s property if he or she becomes delinquent in paying the monthly fees or any special assessments (collectively referred to as “assessments”). Once any HOA homeowner becomes delinquent on the assessments, a lien will usually automatically attach to that homeowner's property, typically as of the date the assessments became due. In some cases, the HOA will record a lien with the county recorder to provide public notice that the lien exists, regardless of whether recordation is required.
Depending on the terms in the CC&Rs, the homeowner might be liable for charges like:
- the unpaid assessments
- late charges
- reasonable costs of collecting (for example, attorneys’ fees)
- fines (in some cases), and
- interest.
Not only will an assessment lien cloud the title to the property, thus hindering the homeowner’s ability to sell or refinance, but it can also be foreclosed and the property sold to satisfy the debt.
Foreclosure of HOA Liens
If an HOA has a lien on a homeowner’s property, it may foreclose on that lien—even if there is a mortgage on the property—as permitted by the CC&Rs and state law.
The HOA can foreclose either through judicial foreclosure or a nonjudicial foreclosure, depending on state law and the terms in the CC&Rs. To judicially foreclose an assessment lien, the HOA must file a lawsuit against the homeowner and obtain a judgment from the court granting permission to sell the home to satisfy the HOA’s lien. To nonjudicially foreclose, the HOA does not have to go through state court, but rather follows specific procedures as dictated by state law, as well as the CC&Rs.
What Happens to a Mortgage if the HOA Forecloses?
Often, the CC&Rs or state laws contain a provision that the HOA lien has priority over all liens and encumbrances recorded after the recordation of the declaration of CC&Rs except a first mortgage (or deed of trust) that was recorded before the date the assessment became delinquent. If this is the case, the first mortgage lien will remain on the property following the HOA foreclosure. (HOA super liens are a different story.)
The borrower remains liable for the debt. The HOA is not obligated to pay the first mortgage holder if it obtains title to the property as a result of the foreclosure, even though the first mortgage lien remains on the property. This is because the HOA did not sign the promissory note—the borrower did. So, the personal obligation to pay the debt remains with the borrower.
An HOA's options after foreclosing. Assuming that the borrower stops making payments to the first mortgage holder if the HOA forecloses (or maybe the borrower is already in default on mortgage payments), the HOA can then choose to:
- pay the first mortgage holder to prevent it from foreclosing (though it has no obligation to do so and probably won’t), or
- let the first mortgage holder foreclose. HOAs do this sometimes so that the home will turn over to a new owner at the foreclosure sale, either to the first mortgage holder or a third-party purchaser, who will then pay the assessments.
In the meantime, the HOA might rent out the home on a short-term basis until the first mortgage holder’s foreclosure is complete. Though it might be guilty of rent skimming if it does not pass the rent along to the senior mortgage holder. (Learn more about what happens to a mortgage if the HOA forecloses its lien.)
Second Mortgage Liens in an HOA Foreclosure
Following an HOA foreclosure, all liens that are junior to the HOA’s lien—such as a second mortgage—are extinguished and the liens are removed from the property title. While the collateral for the debt has been eliminated, the borrower's obligation to pay remains in place because the borrower signed a promissory note. The second mortgage holder might then sue the borrower to collect the debt. (Learn more in What Happens to Liens and Second Mortgages in Foreclosure?)
Limitations on HOA Foreclosures
State laws often place particular due process requirements on HOAs regarding how and when they can foreclose an assessment lien. For example, in California, the delinquent assessments must equal or exceed $1,800 or the delinquency must be at least 12 months old before the HOA can initiate foreclosure proceedings (Cal. Civ. Code § 1367.4). To learn about the laws governing HOA foreclosures in your state, review your state’s statutes. (To find out how to do your own legal research, see Nolo’s Laws and Legal Research section.) Or talk to a local real estate or foreclosure attorney.
While states often restrict the circumstances under which an HOA can foreclose, the bottom line is that, in most cases, an HOA can eventually foreclose if you default on assessments in much the same way a lender would foreclose a defaulted mortgage.
Getting Your Home Back After an HOA Foreclosure
If your state provides a right of redemption after the foreclosure sale, you can repurchase the property.
Redemption laws vary widely from state to state. In California, if the HOA forecloses using a nonjudicial foreclosure process, you get a 90-day right of redemption. This allows you to effectively buy the property back after the foreclosure by paying the amount of the lien, plus costs, fees, and other allowable charges. California law also requires you to reimburse the purchaser for any repairs made to the property. In Texas, the redemption period is 180 days from date an HOA mails written notice of the sale to the homeowner. (Tex. Prop. Code Ann. § 209.011). (The laws for condominium associations in Texas are different though.)
The redemption time frame might be longer or shorter depending on which state you live in. And some states don't provide a right of redemption at all.
Talk to an Attorney
If an HOA initiates a foreclosure against you, consider talking to a foreclosure attorney to learn about different options that might be available to you.