We own a non performing note NPN where the HOA is foreclosing upon next week. This was known ahead of time before being purchased as there was a court order granting the HOA right to foreclose, subject to the 1st mortgage. The borrower just came out of BK which stayed the previous HOA foreclosure that they are continuing with, and we are now starting FC as the 1st lien holder.
I had an epiphany today, and confirmed with our attorney but just wanted others feedback to double check. Can we, as the bank/lender, bid on the HOA foreclosure and take title? Is there anything illegal in doing so? The plan was to hopefully pay less than what would cost us in foreclosure fees and take the property over much quicker than going the whole FC route. This is in OH which is not an HOA super lien state.
AFAIK there is nothing to preclude you from protecting your interest in the property as lien holder.
The question is why go through the auction? Pay off the HOA and have them release back to you.
Better yet, negotiate to take over their position. Right now you own the mortgage, let's call it LLC #1. You buy the HOA's position (their right to foreclose) in another LLC, Lets call that LLC#2.
Once you have LLC#2 situated, LLC#2 buys the position of LLC#1 in a paper transaction (remember, you own both LLC's). You then complete the foreclosure on the HOA time schedule, with LLC#2 owning both parts of the debt (HOA + HOA fees + Note + Note fees + other charges).
This is FAR superior to going to a foreclosure auction. Now, if you can get your borrower to start paying you based on the whole thing, now you're in a position to make some cash. FWIW, you may not have to use two LLc's, but it might be safer. You could even use a 3rd, which buys LLC#1 & LLC#2 to keep it even cleaner.
This is one of those situations where trying to save a buck (by going to the auction) will end up costing you more in the long run.
This only works if you can get in touch with the HOA. This should be a no brainer, since you are on (or should be) the HOA notification list, since you are a lien holder.
Hope that helps.
In Ohio, if the HOA forecloses, does the winning bidder take title still subject to the 1st lien or do you get all the money owed you first and then the HOA gets theirs, if any and the overage goes to the original owner? Point being is if you are in first position, then let the HOA incur the foreclosure cost for you and you get any money due you. The problem with this approach is you do not have any control over the auction. You may be able to bid with your lien to drive the price up, but then you may not. Check with your RE atty.
@Chad Urbshott Is your goal to keep the property or flip it? Either way, I think title would look a little bit messy. On the one hand, you could buy the property at the HOA foreclosure auction, assuming you would pay less for it than what your FC costs would be. If you want to sell the property, you'd have to release your own mortgage from your NPN to convey clear title.
In my experience, it's difficult to find title companies that will insure title on HOA lien foreclosures. Most of them will tell you that you need to go through a Quiet Title Action. Others might want you to own the property for several years before they do so with the idea that, if the previous owner had a problem with the HOA foreclosure, they would have done something about it within the first few years of the sale. If you search long enough, you might find a title company that will insure title for you.
If it were me, I would let the HOA foreclose and follow up right behind them with your own foreclosure. Title is much cleaner for you that way and you won't have a problem with title insurance. Plus, fewer headaches....
Thanks @James C. @Mick Michaud @Andreas Mirza for all your advice! Turns out a 3rd party bidder just won this auction this morning for MORE than the appraised value and far more than the HOA Lien. In this case there was a court order by the magistrate that stated the HOA foreclosure is subject to the 1st and not extinguished. Unfortunately for this 3rd party he will be unpleasantly surprised when we file for FC now. Too bad he bid so high as we could have made an agreement for a short payoff since we bought this note for a fraction of the UPB.
Ouch for the new owner! You're still good, though :)
Let us know how the FC goes on this. Very interested in the outcome.
Chad, just out of curiosity.....does the surplus from the HOA auction go to the owner like it does here in FL or does it go to you as the 1st mtg holder?
@Wayne Brooks Haha wishful thinking, I did try to claim but my local attorney advised otherwise. Too bad it didn't or I would have had a nice little pay day. . No, the rules are that if the property sells to a 3rd party subject, then the superior lien remains in place.
Once the sheriff issues the certificate and deed is conveyed we'll be issuing a demand letter to the new owner.
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