Why do investors buy HOA liens at auction?

Rehabbing and House Flipping 281 Replies

I constantly see investors buying up HOA liens at the foreclosure auction and wonder what is the reason? If they had no mortgage or a low balance on the mortgage, I would understand. Most times they are way under water and still get bought.

Am I missing something? Do they evict the owners and hope they can rent it out long enough to make a profit, while the bank forecloses? Do they try to negotiate with the lien holder for a low settlement?

Doesn't seem logical.

Stupidity knows no bounds.... There is no secret, they either did not do their homework and do not understand what they just purchased, or they intend to rent the property out until the senior lender takes it back.

With the latter, I cannot imagine a more diabolical and risky strategy. The new owner would have to evict the former owner(s) or tenant(s) and hope to rent the property out quickly in order to make your money back. That is why I believe the reason to be ignorance in most cases.

Might be ignorance in some cases, but I sometimes see the same bidder buying them on multiple occasions.

That is why I figured they were betting on collecting enough rent to cover their investment plus a profit.

One just went through today that someone paid $19,500 for. This unit would most likely rent for $2500+, the lender initiated foreclosure in 2009 for the unpaid balance of $609k and the current value is $250K. Considering that most contested foreclosures in this can take from 2-3 years to complete, I don't think they have much time to collect rent.

HOA liens are "super liens"! They go in front of first position mortgage, so they can foreclose the bank out, so the bank has a choice, pay off the lien with interest or loose their lien. Same with back property tax liens. Hope that helps. :mrgreen:

Rob Gillespie, Rob The House Guy, LLC | [email protected] | 330‑800‑9090

Rob,
Can you please elaborate on that? I am on a Condo HOA Board and we have an issue with one of our owners not paying. We have a judgment, but hesitate to foreclose.
No hurry....Have a great holiday weekend!
Bill

Originally posted by Rob Gillespie:
HOA liens are "super liens"! They go in front of first position mortgage, so they can foreclose the bank out, so the bank has a choice, pay off the lien with interest or loose their lien. Same with back property tax liens. Hope that helps. :mrgreen:

I like to see a source on this because it is completely contrary to my understanding.

1. There is more than one reason why you would want to control a house.
2. There is more than one way to negotiate with junior liens once you are on title.
3. There are more reasons.

Originally posted by Rob Gillespie:
HOA liens are "super liens"!

In many instances Ron is correct.... HOA liens can be superior, but only when purchasing the lien rights to collect the outstanding debt. If you were to purchase that debt from the lienholder, you will be repaid for the face value of the debt plus an lawful interest and legal fees.

However, in Florida for instance, when a successful bidder buys a HOA lien at a foreclosure auction, they get title subject to the existing mortgages and other junior encumbrances. This is a good thing when the sum total of the outstanding liens are less than market value of the property. However, the OP clearly states the properties are underwater. Therefore, it would not make sense for the purchaser to payoff the existing mortgages.

Superior liens or not, when an HOA lien is paid of at a foreclosure auction, the successful bidder now owns the property subject to the inferior lien-holders. Since these are paid off, they cease to be a lien and therefore are no longer superior. Plus, you cannot put a lien on something you now own, so that money used to purchase the lien is now gone.

This is why both Eddie and me believe the investor buying these up must be renting out the property in order to make a profit. He may also have inside information which allows to take such a large gamble.

Originally posted by Jason S.:
Originally posted by Rob Gillespie:
HOA liens are "super liens"! They go in front of first position mortgage, so they can foreclose the bank out, so the bank has a choice, pay off the lien with interest or loose their lien. Same with back property tax liens. Hope that helps. :mrgreen:

I like to see a source on this because it is completely contrary to my understanding.

1. There is more than one reason why you would want to control a house.
2. There is more than one way to negotiate with junior liens once you are on title.
3. There are more reasons.

The investor purchasing the liens must be working some sort of settlement angle, figured a way to delay foreclosure or has inside information that allows him to vet his risk by inserting a renter. Perhaps the owner is cooperating in some way.

When negotiating with mortgage companies, you need to have the seller's cooperation or at least authorization to even speak about the loan.

Is this investor you speak of targeting a specific 1st position lender?

I would track a purchase, determine the name he takes title in, go back in assessor records, see what he has done historically - let us know what you find.

I have done this before, when in doubt, investigate. You may learn something new and powerful.

I for one, would be interested in what he is doing.

Better check your state laws. In the states I done business in they were not superior liens, so you were actually buying subject to and if you were dumb enough to think they were like property taxes you just took a life education class and it wasn't free.

I agree with Brian, HOA liens are not normally senior in CA. Perhaps in some other states they are.

Its my understanding that when I buy a 1st trust deed position from a trustee in a CA non-judicial foreclosure, the HOA lien is discharged.

The HOA may attempt to collect from the prior owner but not from me.

This is a strategy very popular in Fla the past couple of years. It is def a rent out til the senior lenders foreclose deal. The can control a property for say $5K and collect $1K a month for a couple of years til the mortgage lender completes foreclosure.
There are lots of techniques in Fla to slow down foreclosure and many can last much longer than 2 years.
As with many unethical business strategies, this is very profitable.

Can someone please tell me if there is any validity to this:
I've heard that people (in FL) have gone to these auctions to pay the off the lien (which is some unpaid HOA fees that have accrued over a year or so). They are then given the title, and as long as they continue to pay the HOA fees, they could live in the unit themselves. At some point the bank will either write the property off, and you receive full ownership, or worse case scenario, they don't write it off, and you simply move out. You would have essentially gotten a very cheap (HOA fees) rental property for that period of time. I know that it would be better for the HOA, because they could at least collect the HOA fees that they were otherwise losing. Any thoughts?

In Florida you can pay off the HOA lien and take a dirty title subject to the existing mortgage. A common scenario is to simply rent the property back to the previous owner until the bank finally comes calling and then you can either walk away or negotiate. This is pretty shady, but not that uncommon.

The bank is not going to write off the property. They'll eventually get around to foreclosure.

In Nevada, these liens are "super priority liens". They wanted it to be special and add a super to the name of it. I can understand buying them for 3-5K but 20K for one is a little excessive, unless there is some laws preventing foreclosures at this time.

Originally posted by @Eric Michaels :

As with many unethical business strategies, this is very profitable.

Eric Michaels - How is this strategy unethical? Past due debts are bought and sold every day. There is nothing illegal or unethical about that.

Medium memphis invest logo 2015Chris Clothier, Memphis Invest, GP | 901‑751‑7191 | http://www.memphisinvest.com

Originally posted by Chris Clothier:
Originally posted by Eric Michaels:

As with many unethical business strategies, this is very profitable.

Eric Michaels - How is this strategy unethical? Past due debts are bought and sold every day. There is nothing illegal or unethical about that.

Chris, I think Eric is talking about renting the property that they don't own, but have a lien against, until the lender can foreclose on it. Probably the tenants don't know until it is foreclosed. I see his point!
Bill

If one discloses, there is no problem. Also when you buy an hoa lien, you get a deed to the property.

Originally posted by Eric Michaels:
This is a strategy very popular in Fla the past couple of years. It is def a rent out til the senior lenders foreclose deal. ....
As with many unethical business strategies, this is very profitable.

For those who are questioning what is unethical, I believe that it comes from the following: the purchase of these liens is being done with the intent to NEVER gain clear title, and with the expectation that the property WILL be foreclosed sometime in the future by the senior lien holders. So the tenant is being given occupancy for an uncertain duration.

Now, the lease might be month-to-month, so the tenant knows they might have to go at any time, but calling it unethical is probably based on the purchaser's intentions at the time of purchase.

The lender should probably cover the HOA lien to protect their collateral - think about the condition of that rental when it does eventually go to foreclosure by the lender. The HOA lien purchaser is unlikely to do any repair or maintenance of significant costs, and is also less likely to get irate over tenant caused damages.

Varies by state. This is how it works in CO:

1. I find a property in foreclosure with what looks to be a low remaining mortgage balance, and has a HOA lien.

2. I approach HOA, offer to buy out their lien (not a super lien state, so this is a 2nd or 3rd place lien) for $100 (or whatever) based on the fact that their $4k lien will get wiped out at foreclosure anyways.

3. CO is a 15 day redemption state for JR lienholders only. Property goes to auction, I redeem it from whoever bought it (even if the bank bought it back).

Why? Well, it avoids the rampant collusion going on at our county auctions. If Jack and Bob work out a deal where Bob wont bid up this property, and Jack will return the favor on the next one Bob wants, I can swoop in and take it for the same price Jack bought it for plus my HOA lien $$.

Or I approach Jack and ask for $3k to NOT redeem. Often times, both.

Risky game, but I know 2 guys doing it.

Medium anson property group copyAnson Young, Anson Property Group | 303‑475‑9999 | CO Agent # 14161n

I encourage the OP to track the properties in question over the next year or so. Here in CA, getting title to a property via HOA foreclosure (or any junior lien), and subject to senior liens is nothing remarkable. If the senior liens make sense, you attempt reinstatement or payoff. If the the senior liens are overencumbering the property, there are choices. Could be a pure cash flow play. If the newly deeded owner has reason to believe that the lender won't get around to foreclosing for a year or two, it makes sense to collect rents and keep the HOA paid off. Nothing unethical about that. CA foreclosures take 4 months, so that's plenty of time to give notice to a tenant on a month to month lease.

The other option is a short payoff. Nothing is preventing the new owner from attempting a short pay, now or in the future, in order to discount the payoff to current FMV or better. The lender will either accept a short pay or not. Doesn't even seem that risky if you get in for the right amount.

OK, some of you are in states where your plan to rent out the property until the senior liens foreclose, might be in for a suprise. Check the rent skimming statutes in your state, I know one lender that is taking a serious look at this in order to pull in a few more bucks.

I am the OP. I haven't done any research on this, but I can tell you they continue to sell every day. last week I counted 9 in one day. Anyone who would like to look into this can go to the auction site miami dade real foreclosure.

Brian P Good point. Every borrower and/or buyer taking a property subject-to should have at least a cursory understanding of their state's "rent skimming" laws (if any). The CA rent skimming code applies only during the first 12 months of the loan and has several exemptions. Hardly a threat to most subject-to purchases/cash flow plays.

So you talk about on here about if they have a mortgage. We have an auction coming up where we don't think there is a mortgage, and the foreclosure is for the HOA liens.

So if we win the auction does that mean we get the title and own the property?

It looks like he has paid the county taxes, but for some reason has not paid the HOA fees.

Thanks for your advice!

Dan