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Home Owner’s Associations: Getting Paid During Foreclosure

February 9, 2011

When a home falls into foreclosure, quite often the homeowner quits paying home owner’s association (HOA) dues long before a bank takes over the property and long before a new owner resumes paying regular monthly dues.   What happens to the obligation to pay HOA dues when a home is foreclosed?

Assuming the HOA is subject to the Minnesota Common Interest Ownership Act (“MCIOA”), which applies to most condominium associations, most town home associations formed after June 1, 1994, and any other associations that have “opted in” to MCIOA, the HOA will have a lien for dues second in priority only to the first mortgage/lien on the property. This meansif the first mortgage is foreclosed, the HOA lien will be wiped out unless the HOA redeems through the foreclosure.

Most HOAs I have dealt with choose not to redeem because the amount of the lien is too small for the HOA to want to incur the expense/time/energy to potentially take ownership of a property and then sell it.  You still should discuss these options with your attorney.  I have seen some interesting options where HOAs have found ways to creatively redeem.  Moreover, it is worth speaking to an attorney to understand where your HOA specifically falls within priority with respect to the lien that is actually being foreclosed.

Assuming a first lien was foreclosed and the HOA’s lien has been wiped out by failing to redeem–What happens next? If the HOA is subject to MCIOA, the party who takes title of the property after the redemption period (often a foreclosing bank) will take title to the property subject to a lien in favor of the HOA for certain amounts that became due after the redemption period (usually a six month period commencing on the date of the sheriff’s sale including installments of the annual assessment, special assessments, maintenance and repair charges and certain other amounts.  This lien does not include late fees, fines or legal fees or costs that came due during the redemption period.

Once the redemption period has expired, the owner who took ownership after the sheriff’s sale becomes responsible for all additional amounts that come due with respect to the property, late fees and costs of collection included.

Unfortunately, it still can take a long time for the HOA to recover these amounts. Depending on how long it takes for a particular property to sell, the HOA could be waiting until the a property sells before receiving any payment, especially when a bank is the owner.  That does not mean it isn’t owed and shouldn’t be timely paid. Because the bank will typically own the property free and clear of any encumbrances, the best option for collection can be to accelerate the assessments (if allowed) and file a lien statement to ensure that the assessments are paid at closing. In some circumstances, it may even be appropriate to foreclose the lien. Once again, an attorney’s assistance can be helpful in analyzing the HOA’s options.

See also this article which discusses collection of HOA dues in more general terms.

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