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 
phenomenon. 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:
- 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.
- They have ongoing day-to-day operating expenses: management company fees, utility bills, grounds maintenance, etc.
- 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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