Does tax lien trump HOA lien?

Started by JohnM63 • 19 replies • 2554 views

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JohnM63 (North Carolina)
Posts: 21

Posted:

Hi all. We have a situation in North Carolina where we had filed a lien on a vacant lot for past due HOA fees. The county subsequently foreclosed for nonpayment of taxes, but never sent us any remaining proceeds after satisfying the taxes. We sent the new owner a notice for the unpaid amounts along with mentioning that an HOA lien was in place and were informed that the tax sale negated any HOA lien and that we were in violation of the Fair Debt Collection Practices Act. It is my understanding that NC is not a super lien state. Any thoughts would be appreciated and thanks in advance.

SheliaH (Indiana)
Posts: 6,964

Posted:

I don't live in NC, but unfortunately, tax liens DO trump HOA liens (and mortgage company liens, for that matter). The owner will be responsible for HOA dues from the day he or she takes the title.

That's the risk with liens - usually the lienholder has to be paid off before the property changes hands, but the pecking order is government,, mortgage company, HOA and junior liens. If there isn't enough money from the sale to pay everyone off, you may have no choice but to write it off.

And yet, filing liens seems to be the only way most HOAs can get even a little money from a delinquent homeowner - before filing one, always talk with your attorney to see what the best option is. In Indiana, you have a year after the tax sale to take the property back (after paying the new lienholder, who could make a 10% - 15% profit on the whole thing if he/she's lucky), The previous owner is still responsible for fees owed up to the tax sale, but if property taxes weren't being paid either, you're probably SOL and will need to move forward.

We had two situations like yours this year. We'd filed the liens long before the tax sale - for house #1, the mortgage company actually walked away from its interests - probably because the place has been boarded up for over four years and the inside is in such bad shape, a buyer will have to gut it and start over. The owner is a first class deadbeat and wasn't paying the mortgage, the HOA - or the banks with which he'd taken out a second and then a third mortgage.

We talked about finding a buyer who specializes in distressed property so we could do a foreclosure and then immediately sell the property for our costs. But then the tax sale came along and that was that. House #2 had a lien filed against it, then the owner declared bankruptcy, the mortgage company decided to do its own foreclosure (after nearly two years) - but the tax sale trumped them and the owner died. Incidentally, the tax lien was purchased by the same entity who took house #1.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By JohnM63 on 12/28/2013 12:49 PM

We sent the new owner a notice for the unpaid amounts along with mentioning that an HOA lien was in place and were informed that the tax sale negated any HOA lien and that we were in violation of the Fair Debt Collection Practices Act.

Who informed you of this? Your attorney? The new owner's attorney? Or the new owner himself?

The reason I ask is that the reference to the FDCPA is nonsense. Your HOA is the original creditor and your association is not a third-party debt collector. The Fair Debt Collection Practices Act is inapplicable to this matter and even the dumbest first-year law student knows that. This leads me to believe that the new owner himself, rather than an attorney, raised this issue. And since one part of his response is nonsense you would be wise to get a legal opinion regarding the issue of whether you still have a valid lien.

Before going any further let me make it clear that I know nothing of NC law. With that said, your association may have made a mistake in not foreclosing on its lien when it had the chance. Filing liens is cheap and passive. Foreclosing cost money but actively resolves the issue of the unpaid debt. In this case, your association sat passively on its lien while the county tax assessor actively pursued his case. It's a case of you snooze, you lose.

You most likely still have a claim against the former owner but you will need to file a lawsuit to collect. Check with your attorney to see what remedies you have.

JohnM63 (North Carolina)
Posts: 21

Posted:

Thanks for the helpful replies Shelia and Larry. It sounds like as I feared regarding possibly losing our lien status. We are a small HOA and only are new at this whole collection thing. In the past, those who felt like not paying just did not and there was never any recourse. I will check with our attorney as to the lien status and be more proactive in checking with the county about any planned tax foreclosures.

As to the FDCPA, the new owner's attorney sent that threat to us when we sent a bill mentioning the lien. I don't know if it is a case of not knowing or if she is just used to using the FDCPA as a routine threat. I agree that it should not apply since we were collecting as the board of the HOA and not through a third party. Maybe we should just sell the liens and let some investor go through the hassle? LOL.

SheliaH (Indiana)
Posts: 6,964

Posted:

Quote:

Posted By JohnM63 on 12/28/2013 3:11 PM
Thanks for the helpful replies Shelia and Larry. It sounds like as I feared regarding possibly losing our lien status. We are a small HOA and only are new at this whole collection thing. In the past, those who felt like not paying just did not and there was never any recourse. I will check with our attorney as to the lien status and be more proactive in checking with the county about any planned tax foreclosures.

As to the FDCPA, the new owner's attorney sent that threat to us when we sent a bill mentioning the lien. I don't know if it is a case of not knowing or if she is just used to using the FDCPA as a routine threat. I agree that it should not apply since we were collecting as the board of the HOA and not through a third party. Maybe we should just sell the liens and let some investor go through the hassle? LOL.

When our county has tax sales (once or twice a year), it publishes an announcement in the newspaper listing all the homes involved. As you can imagine, the print can be a wee bit small, but if they have it divided up some way (here it's divided by township), you can go to your area and use a magnifying glass (!) to see if a home in your community is listed.

I've often wondered about selling the liens, but since Indiana has such a problem with foreclosures, I don't know if anyone does that and from what I have heard, you're lucky to collect pennies on the dollar for them.

If your association had a habit of letting things drop if people didn't pay, it's time for your board and the attorney to come up with a collection policy. There are all sorts of tips on how various HOAs approach collections on this website, but I'd say the most important things you can do is

1. let all the homeowners know what's going on and why
2. apply the policy consistently and quickly - the longer a debt remains unpaid the harder it becomes to collect.
3. don't be afraid to use payment plans - some people really do have financial setbacks and aren't trying to be deadbeats. believe me, you'll find out soon enough who the chronic late payers are and can deal with them accordingly.
4. make sure your budget has a line item for bad debt - your property manager and/or accountant can explain how that works

Good luck!

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

SteveM9 (Massachusetts)
Posts: 3,699

Posted:

A tax lien foreclosure sale typically wipes all liens. You can go after the new owner since the day he took ownership, but you cannot go after back dues from the new owner.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By JohnM63 on 12/28/2013 3:11 PM

As to the FDCPA, the new owner's attorney sent that threat to us when we sent a bill mentioning the lien. I don't know if it is a case of not knowing or if she is just used to using the FDCPA as a routine threat.

A lawyer who has a substantial defense can usually state it in 25 words or less. When they start threatening extraneous nonsense they are, at best, shooting from the hip. (I once threatened to sue one of my neighbors for shooting my cat with a pellet gun. His lawyer threatened to have me arrested for extortion if I filed a lawsuit! Yeah, right. I wish I could say I won but I never could amass enough evidence to take the guy to court.)

Have your attorney review the situation and then decide what to do. I would not base my decision on this lawyer's threat nor her interpretation of the law.

If it was me, regardless of what my lawyer told me I would sue the new owner just out of spite and I would make sure he knows that it is all because of his lawyer's threats.

BTW, I am beginning to understand and appreciate that Florida statute that says no matter how a person acquires title, he and the previous owners are all jointly liable for unpaid assessments.

DavidW5 (North Carolina)
Posts: 565

Posted:

I am not a lawyer but I am a member of our association's Delinquency Review Board (DRB) which consists of three board members. We review all delinquent accounts monthly and decide when it makes sense to refer a case to our attorney or whether to pursue direct discussion with the delinquent owner. Incidentally, this procedure has significantly reduced both our total delinquencies and our legal fees.

Based on this experience it is my understanding that the HOA's lien remains a personal debt of the owner even after a foreclosure or tax lien sale. The only action that relieves the owner of the debt is filing and being granted bankruptcy status. Until that occurs the HOA can seek payment of the debt, for example, by garnishing the wages of the debtor.

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By LarryB13 on 12/28/2013 6:37 PM
When they start threatening extraneous nonsense they are, at best, shooting from the hip.

Amen to that.

I have a friend who is a lawyer and he once told me that's how lawyers work; they threaten and bully hoping you will yield to their client.

I once had a situation where I received threatening letters from a layer. I was certain that what this lawyer was spouting was nonsense. I knew, as a layman, that I would not be able to make this lawyer go away, so I consulted a lawyer whose practice was in this particular issue. All it took was a letter from my lawyer and the threatening letters stopped.

BanksS
Posts: 403

Posted:

Quote:

Posted By JohnM63 on 12/28/2013 12:49 PM
Hi all. We have a situation in North Carolina where we had filed a lien on a vacant lot for past due HOA fees. The county subsequently foreclosed for nonpayment of taxes, but never sent us any remaining proceeds after satisfying the taxes. We sent the new owner a notice for the unpaid amounts along with mentioning that an HOA lien was in place and were informed that the tax sale negated any HOA lien and that we were in violation of the Fair Debt Collection Practices Act. It is my understanding that NC is not a super lien state. Any thoughts would be appreciated and thanks in advance.

Just curious. Does your HOA have a different fee structure for vacant lots vs. improved property? Are the back dues worth the trouble and expense of a lien and foreclosure on a vacant lot? I'm asking because my neighborhood has many vacant lots that are not even maintained. I mean the weeds get waist high and trees and bushes just grow. The HOA board enforces no maintenance on these lots. I don't know if they collect dues on them. I assume they don't because not worth the trouble but I don't know this for sure. IMO a vacant lot vs. an improved lot is a different scenario and not worth lien and foreclosure option.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Dues on vacant lots can vary quite a bit. Typically if owned by the original developer then dues do not begin until one takes possession of the home. I have seen situations dues commence upon purchase of the lot. I have also seen everything in between.

Whatever the policy, it is critical that a plan of action to be taken when dues are delinquent. Typically we let our dues fall 6 months behind before we commence legal action. Prior to that, we beg, cajole, threaten, etc.

JohnM63 (North Carolina)
Posts: 21

Posted:

Thanks for all of the helpful comments everyone! The lot in question was unimproved and our dues were only $150 per year per lot. The buyer in this case was the developer who, along with his attorney, has been a thorn in our hide and likely did this to aggravate the HOA. The lien we placed was for three years of back dues, i.e. $450. Obviously, dues are not a priority for out of state owners who have never built on their lot and may be experiencing financial difficulties in these times. We do give a break for those who own multiple lots but have never distinguished between improved or unimproved. It sounds like we need to be more aggressive with those who are chronically overdue and beat the county to any foreclosure action.

JohnB26 (South Carolina)
Posts: 1,569

Posted:

to answer your question: YES

reason for the common law: public taxes are more important than private fees

KellyM3 (North Carolina)
Posts: 2,239

Posted:

John,

I'm a member of an NC-based HOA board of directors and your hunch is correct.

1. The tax foreclosure erased the HOA's lien on the property so the HOA can't seize the property from the new property owner for non-payment of dues from the previous owner. One possible remedy is to continue chasing the previous owner to pay up, but there will be no lien to fall back upon.

1a. Tax liens will always trump HOA liens in North Carolina.

2. Regarding the dispersement of post-auction proceeds: If you didn't receive funds, then liens that were higher in priority (mortgage company, Home equity loan) received the remaining funds, as is legal as North Carolina is a "Get in Line" state for paying off liens after a foreclosure auction.

3. The attorney's accusation of your HOA's violation of federal collections law may or may not be legally accurate, but it's a not-so-nice way of telling you to back off and forget it. Your board should...and will.

4. North Carolina is not a super-lien state.

My HOA experienced this process in 2010. At day's end, you realize you will never collect HOA dues from a person who lost their home to a higher-priority lien. The process, no matter whether a bank, government or HOA forecloses, is to remove a non-payer and have a diligent payer obtain the property and restore the monthly cash flow to that account. There is no other positive attributes and it's not a happy experience for any parties.

OH.............since the lawyer has threatened your board (and revealed himself as someone to contact), double check that the new owner knows all the rules of HOA payment, how to pay and payment methods heading into future months IF there are lingering questions.

Regarding the new owner, he/she owes you nothing except a commitment to fund the HOA through regular payments.

JohnM63 (North Carolina)
Posts: 21

Posted:

Very helpful information from you all and thanks. We will need to change our procedures going forward to make sure we are not routinely stiffed on HOA dues, though with instituting liens we are collecting from some who never paid in the past. The odd thing here is that the county rarely bothers to foreclose for taxes on an unimproved lot as it is probably not worth their cost as well. I suspect they did it here at the urging of the buyer. It is like a game of musical chairs!

JohnB26 (South Carolina)
Posts: 1,569

Posted:

no ..... it's called operating a not-for-profit corporation

as far as changing your procedures; yep, you need to actually and AGGRESSIVELY pursue the member's debts to the association including, imo, foreclosure at 6 months

if people who CHOOSE to own stuff can not pay for the stuff - the stuff needs to be removed from their possession

I, personally, refuse to pay for my neighbor's luxuries, ie. private roads, clubhouse, pool, gate house, rec. area, etc.

They can always sell out and move down the road into an affordable apartment.

If they are 'underwater, they bought on a shoestring and have (in effect) merely paid more rent than they could afford

If they are STILL hungry after disposing of ALL their non-essentials THEN I will find them food and shelter, not before THEY make an attempt.

TOUGH LOVE is love nonetheless

HAPPY HOLIDAYS

SheliaH (Indiana)
Posts: 6,964

Posted:

I'll drink to that! Happy New Year everyone!

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

SteveM9 (Massachusetts)
Posts: 3,699

Posted:

Quote:

The odd thing here is that the county rarely bothers to foreclose for taxes on an unimproved lot as it is probably not worth their cost as well.

Its always worth the cost. Unless your in Detroit. Towns typically dont like to foreclose because its bad public relations and they are guaranteed to get paid when the property changes hands. Lets say the back taxes are $5,000. Any bid over $5,000 get the property. Its always a win for the county.

JohnM63 (North Carolina)
Posts: 21

Posted:

Okay - for 2014 may my resolutions include adequate spine to provide some tough HOA love? I have learned a lot from this forum. Happy New Year everyone!

KellyM3 (North Carolina)
Posts: 2,239

Posted:

John,

You don't need to develop a stronger spine. Your board needs to - and this is simple - follow the collections procedures of NC law, which are simple and collaboration with a collections attorney is worth the couple hundred dollars investment. In NC, the board or its management company sends letters by 1st class mail and when ignored, turns over the account to the attorney for liens and possible foreclosure (at the board's discretion and vote) - which is the most simple method. The non-payer pays the attorney fees, which are capped at $1,200 maximum for the entire legal process.

Most importantly, you'll bring uniformity to the collections process, bring unity to your board when confronted by non-payers, be legal about your collections efforts and be ethical in treating all dues payers equally in collecting dues. In fact, the process takes out debate and verbal altercation or potential altercation. After all, the non-payer holds all the cards and it's not personal. The board must vote and literally sign off on the end-stage collections actions, by law. But even that requires the board to go "on the record," something of which I have no problem.

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