When you buy a home that's part of a planned community with covenants, you'll most likely pay fees and assessments (often collectively called "assessments") to a homeowners’ association (HOA). Based on the HOA’s Covenants, Conditions, and Restrictions (CC&Rs) and state law, most HOAs have the power to get a lien on a property if the homeowners become delinquent in paying these monthly fees or any special assessments.
The lien usually automatically attaches to the property, typically as of the date the assessments became due. In some cases, the HOA will record its lien in the county records to provide public notice that the lien exists, even if state law doesn’t require recordation. Once the HOA has a lien, it might decide to foreclose it to force the sale of the home to a new owner.
An HOA is a legal entity set up to manage and maintain a particular 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 CC&Rs.
The main functions of the HOA are to:
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 (COAs).
Homeowners who live in the community are often required to pay a periodic fee to the HOA to cover maintaining the community. The HOA collects these fees (or "dues") 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 usually develops a budget and divides the total expenses by the number of homes in the community. Homeowners generally must pay their share on a monthly basis or another fixed schedule throughout the year.
At times, the HOA might levy special assessments for one-time expenses if the HOA's reserve funds won't cover the cost of a major repair or improvement. For example, an HOA might levy a special assessment to pay for a new roof for the community clubhouse or pay for a new road.
Again, once a homeowner becomes delinquent on the assessments, an HOA lien will usually automatically attach to that homeowner's property. The lien attaches 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:
Not only will an assessments lien cloud the title to the property, which hinders the homeowner’s ability to sell or refinance the home, but the property can also be foreclosed. In an HOA foreclosure, as in a typical home loan foreclosure, the property is sold to satisfy the debt.
If an HOA has a lien on a homeowner’s property, it may foreclose—even if the home already has a mortgage on it—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 assessments 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.
Often, an HOA’s CC&Rs or state laws contain a provision that says an 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 assessments became delinquent. In this scenario, the first mortgage lien remains on the property following an HOA foreclosure. (HOA super liens, on the other hand, are a different story.)
The borrower remains liable for the debt. Because the HOA didn’t sign the promissory note (the borrower did), the HOA isn’t obligated to pay the first mortgage holder if it gets ownership of the property as a result of the foreclosure, even though the first mortgage lien remains on the property. 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:
HOAs sometimes let a mortgage holder foreclose 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 doesn’t pass the rent along to the senior mortgage holder.
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.
State laws often place particular due process requirements on HOAs regarding how and when they can foreclose an assessments 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. 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.
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. During the redemption period, you may get 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 the 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 your state’s laws. Even if your state law doesn't provide a specific right of redemption after an HOA foreclosure, your state might have another law allowing a redemption period following the foreclosure of a mortgage lien, which could apply to an HOA foreclosure, too. But some states don't provide a right of redemption at all.
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.