What Happens After an HOA Foreclosure?

Homeowners Associations (HOAs) and Condominium associations don’t exist to foreclose on delinquent homeowners in the association. Boards of directors do not sit around looking for ways to take an owner’s house or condo unit.

But when a homeowner is delinquent in paying assessments, the association needs to look for ways to recover the money that is owed to them. For many associations, this means turning the delinquent owner’s account over to an HOA collections attorney to start the process of placing a lien and eventually foreclosing on the property.

But what happens after an HOA foreclosure? Once the attorney forecloses, How does the community association actually recover delinquent funds?

The HOA does not want or need a house or condo unit

For a homeowner behind on HOA or Condo assessments or common fees, the community association can seem like a soulless organization with no care for the people who live there. To the displaced homeowner, it’s personal. After all, it is possible for a person to lose their home or condo over just a few thousand dollars in past-due HOA assessments or common fees. 

To the HOA or Condo boards, it’s a business decision. The simple truth is, community associations don’t actually want a house or condo unit. What they want, what they need, is the money owed to them. 

Community Associations are non-profit organizations with very tight budgets. Their primary source of income is the monthly assessments from the units or homes in the association. With no significant additional income source, the assessments coming in from every home in the community are critical to keeping up essential services like insurance, grounds maintenance, trash pickup, and water & sewage. (Oh, you thought the city or county paid for that? Think again. Many municipalities force HOAs and Condo associations to lease those services from them as a way to mitigate costs.) 

Any shortfalls in this income can wreak havoc on the association’s budget, which may lead to a number of potential results, including increased assessments, decreased services, special assessments, and even a reduction in property values.

HOAs have been misled on the best way to collect delinquent fees

The association needs money; not houses or condo units. Unfortunately, community associations have been misled for decades about the best way to recover delinquent fees. 

You see, collection attorneys love doing collections for HOAs and Condo associations. It’s an easy job for them because the debt is guaranteed in the form of the house itself. They don’t have to cajole or convince or trick homeowners to pay past due assessments, they simply need to file a lien and then initiate foreclosure proceedings. If the lien doesn’t scare the homeowner into paying what they owe, the foreclosure kicking them out into the street will.

But what happens after the foreclosure is complete? The attorney’s job is done. They successfully foreclosed on the non-paying homeowner. But the association still has not gotten the money they need. In fact, the association gets a bill from the attorney for their services.

How HOAs recover after an HOA foreclosure

The result of an HOA or Condo lien/foreclosure is that the association gets a limited title, called a Certificate of Title to the house or unit. The title is limited in the sense that a Certificate of Title is merely a transfer of the title from the previous owner to the new owner. It is not a change of deed. That means that the new title owner is responsible for any encumbrances, such as a mortgage or tax lien that is attached to the property.

At any point in time, the bank or mortgage company may decide to foreclose on the mortgage. This foreclosure would mean that the new owner loses the title to the home, and it reverts back to the bank.

In order to recover the money for the lost assessments, plus the attorney fees, plus the continuing assessments, plus other encumbrances on the title, the association has two options: 

  • They can sell the home at a foreclosure auction (and dump all of the above responsibilities on the new owner) or 
  • They can attempt to leverage the time in between the HOA foreclosure and a future bank foreclosure and rent out the home.

Many community associations choose to sell the home in a foreclosure auction. In these cases, the HOA or Condo association is able to recover the amounts owed to them in past assessments and possibly legal fees, and the new homeowner is responsible to pay the maintenance fees going forward. In fact, this process is how many outside investors, home flippers, and short-term rental operations acquire homes at drastically reduced rates, causing potential future problems for the association.

However, if the auction fails to attract a buyer, or the association opts not to sell, the association becomes the owner of the Certificate of Title for the home, and will need to rent it out to attempt to recover the funds it is owed. Prior to even being able to rent it out, the HOA will need to do any necessary repairs to the home, pay for upkeep (such as landscaping) and purchase any appliances that are needed to be able to rent the property. Finally, the HOA will need to spend advertising dollars to find a renter, and dedicate resources to maintain the property once the renter is moved in. (And thus the board of directors becomes a landlord.)

By the time the renter moves in, the community association has put even more money into this property before recovering a single cent of what it was owed. And remember that at any point in this process, the bank can foreclose on the mortgage and unless the association negotiates to pay off the mortgage themselves, the whole property reverts to the bank.

So even with a successful lien and foreclosure, the HOA or Condo Association can be left with far more debt than they started with, and nothing to show for it.

Staying focused on the goal: to collect delinquent assessments

Community associations do not initiate collection proceedings because they want to recover a unit. They do it because they need to recover the funds that are owed in order to keep the community running smoothly. Before your board sends a delinquent homeowner to the collections attorney, consider if the lawyer is focused on that shared goal of fund recovery, or on getting the title to the unit? If your board members wanted to be landlords, they would probably be doing it for their own profits, not to take on the hassle on behalf of the community.

Axela Technologies is a licensed community association collection agency focused on recovering the money the association is owed. Our fees are based on the fees and fines outlined in your governing documents, and we only get paid when we recover funds for you. We believe that HOA foreclosure should be the last resort. We work with delinquent homeowners to help them get right with the association without resorting to foreclosure. 

Contact us today for a free analysis of your association’s collections process.

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