Public Auction for HOA liens

Started by DavidH4 • 15 replies • 2439 views

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DavidH4 (South Carolina)
Posts: 5

Posted:

If there is a HOA in South Carolina that is willing for transfer one of their HOA liens over to me, is it better to request them to sell it to me:

(a) through through own public auction OR
(b) assign the lien to me first, and foreclose myself (culminating in a public auction)

One of the advantages to just getting the lien assigned over to me is that they do not need board approval to do that. The advantage to having them do a public auction (which probably needs to happen no matter which option is chosen) is they take care of the trustee, the auction...etc ...perhaps less hassle for me.

(Note: the question is which route is better, not whether I should do this in the first place)

TimB4 (Tennessee)
Posts: 21,059

Posted:

David,

Are you saying that you are buying a note that is owned by the Association or from a private individual?

If the note is owned by the Association, it can only be sold by a majority vote of the Board. Failure to do this could result in validity of the sale (which I would expect everyone would want to avoid) and may cause issues in a title search.

DavidH4 (South Carolina)
Posts: 5

Posted:

I would be purchasing the lien note directly from the HOA.

TimB4 (Tennessee)
Posts: 21,059

Posted:

In my opinion, this would require a majority vote of the Board.
Ideally, the Board would solicit three bids for the purchase of the note.

LarryB13 (Arizona)
Posts: 4,099

Posted:

David:

Are you contemplating the purchase of a lien for unpaid fines or a lien for delinquent assessments or is there no distinction between the two in SC?

Do you intend to offer face value or are you planning on purchasing at a discount price?

Do you intend to foreclose on the lien and acquire possession of the property?

The HOA is entitled to collect the amount of the lien. If the HOA had a public auction and the lien sold for more than face value the excess would normally go to the homeowner, so the HOA has little incentive to conduct an auction. Similarly, the association has a duty to its members to collect the full amount and therefore has no incentive to accept less. In fact, accepting less than the full value establishes a precedent for settling that future delinquents could exploit. Therefore, a sale of a lien for anything over or under the face value is of no benefit to the HOA.

I am not familiar with SC law, but in AZ an HOA foreclosure must go through the courts, where a public auction is held. I would think one public auction should be sufficient protection for the homeowner and the HOA.

If I was on the board of an HOA that you approached with an offer to buy our liens I would be very skeptical of you. I have heard of situations where people purchase a home through HOA foreclosure even though there is also a lender lien pending. They then rent the house out and pay no HOA assessments until the lender forecloses and boots them out. Since banks are overloaded with foreclosures, they tend to pend in court much longer than the HOA foreclosures allowing the investor to rack up a tidy profit. I am not saying this is what you are up to, I am just saying that if I was a board member I would want some strong evidence that you are not going to cause more harm than good.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Not sure this is worth the effort. Best to wait until the HOA or the bank forecloses and buy at open auction. Just set up an arrangement with the HOA that if they do foreclose on the property, that you are at the auction. The first bid goes to the HOA and then whoever else shows up to the courthouse square. If the HOA does foreclose, keep in mind it's not that simple. The bank will get paid FIRST and FOREMOST for any monies owed to them. Meaning if the owner is behind in their house payments the HOA's foreclosure money will go to cover that. The HOA could be SOL of ever collecting their intended dues and doing the work of the bank. It just stops the bleeding for an HOA.

If the bank is foreclosing then you need to go to the bank and talk to them. You then could pay off the HOA lien and pick up the mortgage through the bank. This most likely your best bet. The HOA may be disorganized and not be fully capable of handling this type of transaction.

You do NOT get the property for the cost of paying off a lien. That is "Info Commercial" fantasy/misinformation. You have to pay the bid price at the foreclosure AND pick up the money owed on the house if there still is a mortgage. Plus there is a right of redemption issue to deal with. Each state varies on this but here in Alabama it's a YEAR. The owner can come back and pay up their debt plus property improvements to get the property back. So you may have to keep the property for up to a year before it's free and clear.

You may want to rethink your infocommercial dreams and look at the reality. Plus those infocommercials deal with TAX liens and NOT HOA liens...It's more complicated than just buying the property once it's available.

Former HOA President

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Just wanted to add why do you think a HOa has a lien on a property? It could be more complicated than just unpaid dues. This could be a disgruntle member who is NOT paying due to "Protest". these can be VERY unstable people. You want to buy their lien and kick them out? As a former landlord to a bad renter and a HOa President who foreclosed against a member...Be prepared to lawyer up and buy a gun...Hence why it is best for it to go PUBLIC and be there when it does. It is printed in the local paper in the LEGALS section when it will go up for foreclosure or lien...

Former HOA President

SteveM9 (Massachusetts)
Posts: 3,699

Posted:

Why would you want an HOA lien?

Lets say the house is going into foreclosure. You buy the lien and take 6 months or so to foreclose. Now you own the house but the bank still has a lien. A few months later the bank forecloses on you and you get nothing.

Is this the scenario you have in mind? Or is there another way you expect to make money?

DavidH4 (South Carolina)
Posts: 5

Posted:

Let's refocus back to the original scenario. The idea is to eventually take title to the property. (i.e. please leave all "why would you want to do that?" questions for a different thread)

First route you could take is:

a) You have to talk the HOA into holding a foreclosure auction on their existing liens...as the liens are just sitting there collecting dust

OR

b) You buy the liens from the HOA directly, turn the liens over to a trustee who start the process to collect on the lien, culminating in a foreclosure auction, that you will bid on at that auction.

Both scenarios end up in a public auction or the debt is settled by the owner.

Are there fatal flaws with either scenario? Or do they both work equally well?

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Fatally flawed...Several reasons. A HOA lien does NOT work like your typical lien. Not that it is NOT the same legal process but how it's handled. Each HOA is different. They most likely aren't even in a position to sell a lien to anybody. A HOA is a corporation and represents all the owners. The board is the assigned representative for all those members. Which means in order to file a lien in the first place takes a voting process, policy, and approval. Our policy was 6 months behind on dues we would place a lien unless payment arrangements. Many HOA's don't have a timeline or priority to lien. A few don't even approve of the foreclosure process and would never pursue it.

The process for an HOA to foreclose is basically doing the job of the bank. They have to pay all the expenses of hiring a lawyer and filing the paperwork. The end result still is the bank gets paid first and foremost. It won't be any different for you. Holding a lien on a property that owes money to a bank pretty much wipes out everything. Remember a HOA foreclosure is SEPARATE than a bank foreclosure. Meaning that it could be the owner owes nothing to the bank and it is just the HOA foreclosing. Which is indeed extremely rare. The most likely scenerio is that the HOA has a lien on a property the bank is foreclosing on. They have to wait in line for the bank to finish their process and hope there is left over money to pay off their lien.

The best of all chances is to indeed wait until the bank gets the property or wait for the HOA to finally foreclose. You have a better chance of negotiating a sale or getting a "Short sale" from the bank/owner. Which would be the option I would take if I truly wanted a property. There's just no money to be made in any scenerio you describe not for the HOA, the bank, or for yourself. It's just not going to happen. So wait for public auction and stop trying to circumvent the system...

Former HOA President

LarryB13 (Arizona)
Posts: 4,099

Posted:

In my state, the first scenario could only be accomplished by the HOA first obtaining a judgment for the money owed and then filing a foreclosure action in the Superior Court. Only the court can conduct a foreclosure auction and anyone could bid. Biggest problem is that if there is a first mortgage/deed of trust/sales contract, their lien is superior to the HOA. Anyone who acquires title through the HOA auction has 30 days to pay off the lender's lien. And if the lien is in the form of a deed of trust, the lender can foreclose without going to court in as little as 90 days. Since most properties today are "under water," there is no incentive to purchase a property at an HOA foreclosure auction and, therefore, no incentive for the HOA to pursue that course of action.

The problem with pursuing scenario two would be that you could sue to collect the money owed but only the HOA has the authority to file a foreclosure action. If you sued, won and did not collect, you would be limited to filing a lien on the property just as any other judgment creditor could do. The HOA can assign the debt to you but it cannot assign you the authority to pursue a foreclosure action.

The above answers will vary by state as each one has slightly different laws.

DavidH4 (South Carolina)
Posts: 5

Posted:

Thanks for your reply Larry. Are the HOA's the only ones who could foreclose by law? If I have bought and been assigned the lien, what is stopping me from going through the same foreclosure process that the HOA would be doing otherwise?

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By DavidH4 on 06/16/2012 5:48 PM
Thanks for your reply Larry. Are the HOA's the only ones who could foreclose by law? If I have bought and been assigned the lien, what is stopping me from going through the same foreclosure process that the HOA would be doing otherwise?

If you were in Arizona, the fact that you are not an HOA would stop you from foreclosing on the real estate. Legally, you would be just the same as any other judgment creditor. You could file a lien or garnish wages, even sieze personal property, but you would have no legal authority to foreclose on the real estate itself. The legislature, in its infinite wisdom, allows only certain parties under certain circumstances to take title to real estate. The laws in your state may vary.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Since you want to hear what you want to hear...Hear is how your proposal could work...Let us say you spend $1K on buying a HOA lien that they have for $800. They want to make a profit in the sale so $200 sounds reasonable. Considering that a lien keeps accumulating the dues owed, interest, and late fees for them as long as they have it. (Plus their legal fees for filing are rolled up in there). You are out $1K. Now you decide to foreclose on the lien. Giving them the 90 days notice and hiring your own lawyer to file the paperwork. (We will forget these are REAL people with a possible family who have fallen bad times). That is atleast $1K for the lawyer and paperwork etc...Your now out $2K on a $800 lien.

It goes out to the Public auction stage which can be up to 6 months later after buying the lien. A few people show up. The FIRST bid is going to be the amount owed of $800 or $1800. It depends if your lawyer fees get included. The second would be $801 or $1801. The SAME money you have already shelled out of your pocket. So now you are at $2801 or $3801 IF no one out bids you. A good possibility some one might since it is PUBLIC.

You now own the title right? Free and clear? Well no...Considering that most homeowners are now 10 - 25% or more UNDERWATER on their mortgages chances are this house is not worth as much as is owed. You will have to pick up the mortgage on this home which could be valued at $100K but owner's owe $120K on. Keep in mind angry foreclosed owners tend to destroy the homes before they leave. So figure in atleast another 10 - 20K in repairs/upgrades before moving in.

You also have to factor in you are now a member of that HOA. Which means YOU must pay the HOA dues or be liened against...Would you approve of the HOA then selling your lien to a complete stranger and allowing them to foreclose against you? They did it for you so they can also do it against you...

It is better to go for a short sale with the bank/owner or wait for public auction. You won't be out as much money and be in better standing with the HOA. Not alot of member may be happy to know how you bought that property. Which they will know if they attend the meetings or it's in their notes...The HOA could have held onto that lien longer and gotten more money in the end.

Keep in mind that even the above scenerio most likely isn't even feasable in most states. It's just that you wanted to know the best option of buying a lien or waiting for a public auction. Here it is...

Former HOA President

DavidH4 (South Carolina)
Posts: 5

Posted:

I would not be out any money at the public auction because the opening bid would be for ALL fees/legal paid out. The rest of your points (whether valid or not) were outside the parameters of the discussion.

Thanks to everyone who submitted a response!

MelissaP1 (Alabama)
Posts: 13,836

Posted:

As someone who has done a foreclosure and been there...Hope you realize it's best to wait...

Former HOA President

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