A lien is a right to hold a piece of property belonging to another person until a debt owed by that person is paid. Associations have a lien – sometimes called a statutory lien – against all properties in the community. An assessment lien is an automatic claim that the HOA attaches to a property when a homeowner becomes delinquent on any HOA assessments.
Liens and Delinquent Assessments
A lien is automatically assigned as soon as the homeowner becomes past due on their assessments, and the homeowner cannot sell or refinance the property until the lien is satisfied. When a homeowner becomes severely delinquent on their payments, it is generally recommended that the HOA file a public “Notice of Lien”. Recording the lien creates a public record of the homeowner’s debt.
Liens and Foreclosures
A lien could potentially result in a foreclosure. The association cannot, in most cases, begin the foreclosure process until the homeowner is at least one year past due in assessments. An HOA can foreclose on that lien, even if there is a mortgage on the property. This can be done either judicially, by filing a lawsuit and obtaining judgment from the court to sell the home to satisfy the lien, or non-judicially, by following procedures dictated by state law and the association’s CC&Rs.
Bank Foreclosures
Another possibility, after a lien is left on a property, is that the bank forecloses on the property. The HOA has a right to redeem the property if the lender initiates a foreclosure. The association must pay either the lender or the highest bidder at auction. This allows the HOA to sell the property in order to repay assessments and cover costs due to the HOA. When the association doesn’t own the house, the lien becomes extinguished upon the bank’s foreclosure, and the association is only entitled to six months’ worth of assessments, regardless of how much was owed.
Assignable Liens
The best-case scenario for the HOA is when the association has an assignable lien.
With an assignable lien, the association can sell, or ‘assign’, the lien to any third party. Investors are attracted to association liens because they can eventually purchase the property in foreclosure, typically at a discounted rate. This is the preferable option for the association because it can sell the lien to an investor for the full amount that it is due, including unpaid assessments, attorney’s fees, and any other sums due on the account, rather than just six months’ worth of dues that the association will receive if the lien is extinguished.
If the property has a large of amount of equity, the lien can be assigned for even more than what was owed in the first place. If the lien is sold, the association receives payment and the investor receives the rights associated with the association’s lien. Usually, they are able to rehab and resell the property fairly quickly; however, before the resale, the investor is considered the owner and is therefore subject to the same rules and regulations of the other owners, including payment of assessments. Another benefit of assigning a lien is that investors want to maximize their profit on the property and are therefore likely to make all necessary repairs and restore the property completely, whereas banks tend to let their properties stay in disrepair until resale.
Assigning a lien is done at no cost and with no liability for the association. The HOA attorney should prepare a contract for the assignment of the lien. This contract should state that the investor only owns the lien and is not receiving any guarantee that he will end up owning the property as a result of the foreclosure.
All HOA’s should have a written policy that dictates the process for collecting unpaid assessments, filing liens, and what to do once a lien is in place. A written policy makes it easy and consistent for both the HOA and the residents in the community to know what to do in these tricky types of situations.
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