When you buy a single-family home, townhome, or condominium 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) or condominium owners' association (COA). If you fall behind in the assessments, the association will likely initially try to collect the debt using traditional methods. For instance, the association will probably call you and send letters.
But if those tactics don't get you to pay up, the association could try other ways to collect from you. The association might take away your privileges to use the common facilities or file a lawsuit for a money judgment against you.
Most HOAs and COAs also have the power to get a lien on your property if you become delinquent in assessments. An assessments lien clouds the title to the property, hindering your ability to sell or refinance the home. Once a lien is attached to the home, the property can also be foreclosed to force a sale to a new owner—even if the property has a mortgage.
If the HOA or COA initiates a foreclosure, you might have a defense to the action, or you might be able to negotiate a way to get caught up on the overdue amounts and save your home.
In North Carolina, if your home is part of an HOA or COA and you fall behind in paying the assessments:
In North Carolina, an HOA or COA is entitled to a lien for unpaid assessments and related charges once the amount due is 30 days late. The lien becomes effective when the HOA or COA files a claim of lien with the clerk of the superior court in the county where the property is located. (N.C. Gen. Stat. § 47F-3-116(a), § 47C-3-116(a)).
State law and the HOA or COA's governing documents will usually set out the type of charges that may be included in the lien. In North Carolina, an HOA or COA is permitted to include charges like the following in its lien unless the governing documents provide otherwise:
No fewer than 15 days before filing the lien, an HOA or COA must mail a statement of the assessment amount due to the property owner and property address by first-class mail. (N.C. Gen. Stat. § 47F-3-116(b), § 47C-3-116(b)).
An HOA or COA is entitled to recover the reasonable attorneys' fees and costs incurred in connection with the collection of any sums due but first must notify the homeowner in writing of the association's intent to seek payment of attorneys' fees, costs, and expenses. (N.C. Gen. Stat. § 47F-3-116(e), § 47C-3-116(e)).
Contents of the notice. The notice must include the outstanding balance due as of the date of the notice and give the owner 15 days from the mailing date to pay the outstanding balance without the attorneys' fees and court costs. (N.C. Gen. Stat. § 47F-3-116(e), § 47C-3-116(e)).
Payment plans. The notice must also give the owner the opportunity to contact a representative of the HOA or COA to discuss a payment schedule for the outstanding balance, as well as provide the name and telephone number of the representative. (N.C. Gen. Stat. § 47F-3-116(e), § 47C-3-116(e)).
Before the HOA or COA files the actual claim of lien, it must serve or mail a copy of the claim of lien to the property owner by personal service or first-class mail. (N.C. Gen. Stat. § 47F-3-116(c), § 47C-3-116(c)).
In North Carolina, an HOA or COA may foreclose a claim of lien in the same manner as a mortgage or deed of trust under a power of sale. The assessment must remain unpaid for 90 days or more before a foreclosure can start. Also, the association can't foreclose the claim of lien unless the executive board votes to begin the proceeding. (N.C. Gen. Stat. § 47F-3-116(f), § 47C-3-116(f)).
Before starting a nonjudicial foreclosure, the association must give the owner notice of the association's intention to foreclose. (N.C. Gen. Stat. § 47F-3-116(f)(5), § 47C-3-116(f)(5)).
If the lien consists solely of fines, interest on unpaid fines, or attorneys' fees incurred solely associated with fines, an HOA or COA can't use nonjudicial procedures to foreclose the lien. Instead, it must foreclose judicially by filing a lawsuit. (N.C. Gen. Stat. § 47F-3-116(h), § 47C-3-116(h)).
In a nonjudicial foreclosure, the borrower may redeem the property before the expiration of the upset bid period. North Carolina law provides an upset-bid period that initially lasts for ten days after the report of sale is filed. So, after the foreclosure sale, another buyer can buy the home by making a higher bid than was bid at the sale. This kind of bid is called an "upset bid."
Once an upset bid is made, it starts a new 10-day upset-bid period. During the upset-bid period, the borrower has the right to pay the debt in full and redeem the property. (N.C. Gen. Stat. § 47F-3-116(f)8), § 47C-3-116(f)(8)).
To redeem, you'll have to satisfy the debt and pay all expenses and costs incurred in filing and enforcement of the lien, including but not limited to advertising costs, attorneys' fees, and the foreclosure sale costs. (N.C. Gen. Stat. § 47F-3-116(f)8), § 47C-3-116(f)(8)).
A lien for unpaid assessments is extinguished (eliminated) unless proceedings to enforce the lien are begun within three years after the claim of lien is filed. (N.C. Gen. Stat. § 47F-3-116(c), § 47C-3-116(c)).
A common misconception is that the association can't foreclose if you're current with your mortgage payments. But an association's right to foreclose isn't dependent on whether you're up to date on your mortgage. Instead, lien priority determines what happens in a foreclosure.
The priority of liens establishes who gets paid first following a foreclosure sale and often determines whether a lienholder will get paid at all. Liens generally follow the "first in time, first in right" rule, which says that whichever lien is recorded first in the land records has higher priority than later recorded liens. A first-lien has a higher priority than other liens and gets the first crack at the foreclosure sale proceeds.
If any proceeds are left after the first lien is paid in full, the excess proceeds go to the second lienholder until that lien is paid off, and so on. A lien with a low priority might get nothing from a foreclosure sale.
But state law or an association's governing documents might adjust lien priority.
Under North Carolina law, an HOA lien or COA lien has priority over all liens and encumbrances except for:
This law doesn't affect the priority of mechanics' or materialmen's liens.
So, a foreclosure by an HOA or COA usually won't eliminate a first mortgage because the association's lien is normally lower in priority.
If you're facing an HOA or COA foreclosure in North Carolina, consider consulting with a foreclosure attorney to discuss all legal options available in your particular circumstances.