The HOA is Foreclosing? You're Kidding, Right??

Real Estate Agent with Humphrey Home Connections Realty, Reno, Nevada

The HOA is foreclosing? You're Kidding, Right?? Why would they do that?

Foreclosures by home owners' associations (HOAs) in Northern Nevada are becoming an increasingly common Vacant housephenomenon. Makes no sense, you say? They will acquire the property with at least one (huge) lien attached. Are they nuts? The bank will just laugh at them.

As the president of the board of my own Reno, Nevada HOA, perhaps I can shed some light on the thinking behind this apparent foolishness. For starters, HOAs are required by both their governing documents (the CC&Rs) and Nevada State Law to perform certain functions. For example:

  1. They are expected to maintain a reserve account, monies set aside for anticipated maintenance or replacement of portions of the common areas. There must be a reserve study done at regular intervals to ascertain the adequacy of those funds. If funding has fallen behind, then a plan must be created to bring the funding up to an acceptable percentage in a reasonable time frame.
  2. They have ongoing day-to-day operating expenses: management company fees, utility bills, grounds maintenance, etc.
  3. They are charged with the duty of maintaining property values within the association by assuring that architectural guidelines are met and homes are maintained in a manner that benefits all homeowners in the development.

None of these items comes cheaply. Given the current state of affairs in Nevada, it is regrettably common for strapped homeowners to be unable to pay their mortgages, let alone their HOA dues. I feel badly at a personal level for people who are in these dire straits, but is it fair to expect the remainder of the homeowners in the development to pick up the slack? Perhaps through a special assessment? Gee, thanks, but no thanks. Times are tough for all of us.

The Nevada State Legislature has seen fit to allow HOAs to have a superpriority lien representing unpaid HOA dues for up to nine months. That means that up to nine months' worth of back dues must be paid to the HOA at the time of short (or not) sale or sale as an REO in order to transfer clear title. That would be great if either short sale or foreclosure of these properties had some hope of being accomplished in that time frame.

Instead, HOA Boards often watch banks file Notices of Default (NODs) on these properties, and then do nothing, sometimes for years. I would not presume to guess what they are thinking, but it leaves the HOA in a bind. They can only count on nine months reimbursement, but the bills are accumulating. The homes and yards in question are falling into disrepair, a blight on the neighborhood. Many HOAs are now taking matters into their own hands, filing liens and then foreclosing on them. Yes, the title transfers with the first lien attached (possibly also delinquent sewer, trash, and real estate taxes). But once the HOA holds title, clean up can be accomplished and the property can be rented. There is no requirement that any of the other liens be cleared as long as the status is disclosed to the new renters. Now the home is occupied, the yard looks nice again, and some of the loss is being mitigated. Ordinarily, the first lien holder continues to pay the real estate tax so as not to lose the home to the tax man for a (relatively) small amount.

What is the endgame of all this? Presumably, the first lien holder will eventually get around to wanting to foreclose. In the meantime, I would argue, they benefit from care, maintenance, and even upgrading of their eventual REO. They cannot foreclose on the HOA, with whom they have no contract. Our legal counsel suggests that what will ensue is that the backlog of HOA debt (plus late fees and expenses) will be reimbursed by the bank, in exchange for the property being quitclaimed back to the original homeowner, on whom they CAN foreclose. Have not experienced that part yet, but it makes sense to me.

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Linda S. Humphrey, M.D., CDPE, e-PRO, EcoBroker, GREEN

Broker/Owner - Humphrey Home Connections Realty, LLC

cell: 775-287-4665

office: 775-232-8515

Reno, NV

Linda.... this was so much FYI on HOA's.  I still own property in a So. NV that is within a HOA.... thanks for this post.  Hope the fire is OUT by now... didn't see any national coverage, only info from friends on Facebook that were dealing with it....

Nov 19, 2011 03:12 PM
Linda Humphrey
Humphrey Home Connections Realty, Reno, Nevada - Reno, NV
CRS, Broker/Owner HHC Realty

Hi Teri - I think we are good, fire chief says it is 80% contained, but I think it must just be smoldering hot spots left. Sadly, somewhere around 40 homes are damaged, about 32 uninhabitable, including some personal friends' home. Very depressing...I thought we had made it through this fire season relatively unscathed. :(

Nov 19, 2011 03:24 PM
Lisa Orme
The Master's Key Realty LLC -Windsor, CT - HARTFORD COUNTY - Windsor, CT
Broker/Realtor, ABR, CRS,GRI, PSCS, SFR, Notary Pu

Informative & interesting post.  I know Nevada has had a much higher number/percentage of this situation than most areas of the'll be interesting to see if your proposed "endgame" is going to be the overriding solution...

Nov 19, 2011 03:27 PM
Linda Humphrey
Humphrey Home Connections Realty, Reno, Nevada - Reno, NV
CRS, Broker/Owner HHC Realty

Thanks Lisa - It isn't exactly "my" proposal, I'm not smart enough to think of these things, lol! But you are very right, it will be interesting to see how it plays out.

Nov 19, 2011 03:34 PM
Christine Cumming
Real Estate Portfolio Acquisition - Santa Cruz, CA
California Real Estate and Business 831.588.7767

That's alot of information on HOA's - Thanks for the education.  We don't have a lot of developments here, mostly condos, still something to watch for and good knowledge to have. 

Nov 19, 2011 03:55 PM
Craig Cooper
Chase International Real Estate - Tahoe City, CA
Creating-Preserving-Growing Wealth in Real Estate

Thanks Linda, that is very interesting info. I know we occasionally run into HOA problems at the lake but I haven't heard of an HOA having that much influence up till now.

Nov 19, 2011 07:14 PM
Insurance Solutions
Insurance Solutions Unlimited, LLC - West Palm Beach, FL

good information, we are seeing that here in FL with the HOA's forclosing on properties

Nov 20, 2011 12:49 AM
Linda Humphrey
Humphrey Home Connections Realty, Reno, Nevada - Reno, NV
CRS, Broker/Owner HHC Realty

Hi Christine - Thanks for stopping by and commenting! We have a lot of older homes that aren't in HOAs, but during the boom, many new developments were built, all with HOAs. And of course those are the homes most likely to be in foreclosure.

Hi Craig - Interesting. We will see if that trend spreads to your neck of the woods.

NIS - I'm not surprised that similar foreclosures are occurring in Florida, you guys have many of the same issues we do in Nevada.

Nov 20, 2011 02:26 AM
Chris Ann Cleland
Long and Foster Real Estate - Gainesville, VA
Associate Broker, Bristow, VA

When I was teaching a Short Sale class on the local REALTOR® association this past week I had a student pop up with the real world example of a Virginia HOA foreclosing.  Took the HOA 13 years of missed payments to decide to go that route.  Who doesn't pay an HOA fee for 13 years?


Nov 20, 2011 03:05 AM
Linda Humphrey
Humphrey Home Connections Realty, Reno, Nevada - Reno, NV
CRS, Broker/Owner HHC Realty

Wow, Chris Ann, that's crazy! Who would let their home go over HOA dues? Unless they were so upside down they just didn't care, but it seems less likely they were that upside down 13 years ago. And what took the HOA so long? Hope springs eternal, I guess, they just kept hoping the homeowner would make it good.

Nov 20, 2011 03:24 AM
Leslie Ebersole
Swanepoel T3 Group - Saint Charles, IL
I help brokers build businesses they love.

To my ActiveRain friend,
I wish you all things bright and beautiful
at this holiday time and throughout the year. 

Dec 24, 2011 05:07 AM
Connie Harvey
Pilkerton Realtors - Brentwood, TN
Realtor - Nashville TN Real Estate

Linda, I just stopped by to wish you and your family a very Merry Christmas!

Dec 24, 2011 06:20 AM
Roy Kelley
Retired - Gaithersburg, MD

Very interesting post.  Home owner associations and condo owner associations are in deep trouble in many parts of the country.  Creative measures need to come into play to protect thems and the association members during foreclosures.  Thanks for sharing the process in your area.

Happy Holidays!  Happy New Year!

Longwood Gardens IMG_2136


Photograph by Roy Kelley using a Canon PowerShot G11 camera.

Roy and Dolores Kelley Photographs

Dec 27, 2011 02:46 AM
Linda Humphrey
Humphrey Home Connections Realty, Reno, Nevada - Reno, NV
CRS, Broker/Owner HHC Realty

Hi Leslie and Connie, thanks so much for the Christmas wishes. Hope your Christmas was magical.

Thank you Roy, you are absolutely right about HOAs; the choice is raise the dues, let things go to pot, or take the bull by the horns and foreclose. We chose door number three. And thanks for brightening up my post with the beautiful flowers.

Dec 31, 2011 10:45 AM

Oh my God, what pathetic scumbags you are! Foreclose on your neighbor? You are the neighbor from hell!

Jan 30, 2012 08:41 PM
Linda Humphrey
Humphrey Home Connections Realty, Reno, Nevada - Reno, NV
CRS, Broker/Owner HHC Realty

Mike - I realize I am probably wasting my time trying to have a discussion with someone whose idea of debate is to ignore the issues in favor of namecalling. However, as others may read this and sympathize with what they think is your point, if not your method of expressing it, I will attempt to respond to your hissy fit comment.

People live in neighborhoods with homeowners' associations for a variety of reasons. Some people would rather poke their eye out than deal with an HOA, and I get that. But if you choose to live in one of these areas, you had better thoroughly read through and understand the CC&Rs that attach to your property. The board of directors (volunteers, by the way) is charged with enforcing the CC&Rs to maintain property values within the development, and they don't have the luxury of picking and choosing which ones they would like to enforce. Furthermore, they are required by state law to maintain reserve accounts sufficient to fund repairs and maintenance to common areas, and the money for that does not materialize from neighborhood bake sales.

I would be interested to know what alternative you propose. Perhaps you think the rest of the neighbors should pay a special assessment in order for the neighbor in question to pay nothing? Would you feel differently if I told you that this "neighbor" waltzed away from loans pushing two million dollars? In any event, the "neighbor" that was foreclosed upon was long gone, packed up and left, and left behind a home falling apart and a yard that was becoming an eyesore in an otherwise upscale neighborhood. And it is just a matter of time before the home returns to the bank, we were merely attempting to avoid having it drag down the neighborhood in the interim.

Feb 07, 2012 06:45 AM
Curtis Van Carter
Better Homes & Gardens Wine Country Group - Yountville, CA
Your Napa Valley Broker Extraordinaire


Being a past president of my HOA for about 7 years, I can relate. The one question I have, how did you make it pencil? With home price probably much higher here in the Napa Valley, I can't think how it could benefit the HOA. In my HOA the least expensive townhome sold at $450,000 with $278/month dues. 

cheers cvc

Mar 14, 2012 03:38 AM
Linda Humphrey
Humphrey Home Connections Realty, Reno, Nevada - Reno, NV
CRS, Broker/Owner HHC Realty

Hi Curtis - The house in question had loans totalling over 1.5 million; hard to say what it is worth now, as not much is selling in the neighborhood (or any other neighborhood locally at that price point). HOA dues run $340. But the reason it pencils is because we aren't paying for much of anything. It can be rented for around $3500/mo, and we are only out for landscape maintenance, which we provide for the sake of the neighborhood rather than taking a chance on the tenants keeping things up, a couple of utilities, liability insurance but not structural insurance (not our loss if it burns down), and a property management fee of 10%. We did make some repairs, but added that cost to our deficit that the bank will eventually negotiate with us when they want the property back. At $3500, we net something on the order of $2000 - 2200/mo, a bit more in the winter with no yardwork, and depending on repairs. A no-brainer, really.

Mar 14, 2012 11:13 AM
Dennis Scarberry
The problem with the banks is that they do NOT have the intact chain of title to prove in court that they are a Party of Standing. With MERS & manufactured paperwork they cannot prove their standing when compelled to do so. That is why investors are buying these homes for past HOA fees & outstanding taxes. I have seen examples where $300,000 homes are being purchased at auction for under $20,000. The investor receives a "cash" paid invoice, a deed of trust in their name only, & the signature of a judge to consumate the purchase. Banks do come forward but are unable to support their position as a Party of Interest. These investors then renovate & lease the properties. The margins are so great that they NEVER sell & continue to lease while taking benefit of appreciation & a monthly cash cow. I recently managed a portfoliio for this type of investor. We had 43 homes in one portfolio alone.
Dec 31, 2013 10:41 PM