I was behind on my HOA dues and my mortgage. In order to avoid a foreclosure, I did a short sale. The HOA agreed to remove its lien for less than what I owed in order to complete the short sale. Can it now sue me for the deficiency?
Maybe, it depends the terms of the lien release agreement.
How Short Sales Work When There's an HOA Lien on the Property
Let’s back up and review how the short sale process works if there is an HOA lien on the property. A short sale is when you sell your home for less than the total debt balance remaining on your mortgage and the proceeds of the sale pay off a portion of the mortgage balance. (Learn more about short sales to avoid of foreclosure.)
In order for the short sale to go through, the HOA will have to release its lien, just like the other junior lienholders, such as a second mortgage holder. (Learn more in Nolo’s article Short Sales With Multiple Mortgages).
To induce the HOA to release its lien, your mortgage lender will have to give up a portion of the short sale proceeds to the HOA. (Usually in an amount that is considerably less than what you actually owed to the HOA.)
Understanding HOA Lien Releases
A lien release is a document where the HOA agrees to release its lien against the property and let the short sale proceed. Even though the lien may be released, this does not necessarily mean that the debt is satisfied. The deficiency (the difference between the total amount owed to the HOA and the amount the HOA receives in the short sale) often remains as collectible debt after the short sale has been completed.
The HOA May Be Able to Get a Deficiency Judgment After the Short Sale
The HOA can file a lawsuit against you to collect the deficiency unless you obtained a written agreement that states that it considers the debt fully satisfied upon completion of the short sale and that it waives all rights to attempt to collect any additional amounts from you.
As you can imagine, it is much easier to convince an HOA to agree to a lien release that does not include a waiver of its rights to pursue a deficiency judgment. This is because it'll most likely get all of its money after suing you later on. Some realtors will simply accept this type of lien release from the HOA in order to quickly complete the deal. (Convincing the HOA to waive its right to sue you for the remaining balance usually takes much more effort than obtaining a release without such a waiver.)
How to Avoid a Deficiency Judgment
Generally speaking, you’d want to be sure that your realtor, attorney, or whoever is negotiating the short sale on your behalf is diligent in pursuing the waiver before the short sale is completed. Unfortunately, that ship has sailed in your case. Since your short sale was already completed, you’ll need to read the agreement that the HOA provided when it agreed to release its lien to find out if it can now sue you for the deficiency.