HOA Lien Exuberance

In Las Vegas, where most mortgaged homeowners remain underwater, and many mortgage holders don’t have the paperwork in order that would allow them to foreclose, another form of real estate speculation has popped up.

People have walked away from thousands of homes in Vegas, so homeowners association liens are piling up. This presents an opportunity. As Hubble Smith writes in the lvrj.com,

Savvy investors in Las Vegas are buying up small home­owner’s association liens at auction and making money by renting out homes they don’t actually own until the mortgage-holder comes knocking, in some cases as long as two years later.

Community associations can collect up to nine months of unpaid HOA assessments through “superpriority” liens, plus up to $1,900 in collection charges, according to Nevada law. While liens can amount to several thousand dollars when collection fees and other charges are applied, they’re dwarfed by mortgages and in the past have received little notice.

But a 2010 change in state law aimed at preventing improper foreclosures has dramatically expanded the length of time between a mortgage default and the bank taking possession.

The homeowner association (HOA) is very prevalent in Nevada. Covenants, Conditions and Restrictions (CCRs) are created when a subdivision is developed. The CC&Rs are governing documents for the development, enforced by the HOA, that have been copied over and over until illegible. Of course all homeowners sign a document confirming they have read and understood these illegible documents.

Homeowner’s associations are sold to people as a way to maintain properties values by keeping homeowners from doing what they want with their properties. After all, your property values will plummet if your neighbor is allowed to use his front yard to change the oil in his pickup.

What ends up happening is the CC&Rs call for a governing body to enforce the ticky tack rules like you can only paint your home colors approved by the association, or you will be fined if you leave your garage door open. HOAs assess homeowners fees to enforce these rules and maintain common areas and whatnot. If the fees aren’t paid, HOAs lien the property with hopes of collecting when the property changes hands.

Investors will buy the HOA liens and foreclose gaining control of the property subject to the mortgage debt. But the mortgage holders are taking a number of months to start their own foreclosures so in the meantime, the HOA lien buyer can rent the place out and hopefully earn more in rent than what was paid for the lien.

When the mortgage holder forecloses they should get back what they paid for the liens and other charges. However, as Smith explains in his article, investors are paying large premiums for these liens.

Danny Garcia, an agent who goes to trustee auctions on behalf of a private client, said he’s seen bids for HOA liens increase from about $6,000 to upward of $30,000 in the past two years. The highest he ever paid was $20,000.

So, an investor could pay too much if he or she can’t get the place rented out and/or the mortgage holder forecloses right way, keeping the investor from earning rental income to pay back whatever the premium paid for the lien was.

Now, the law that created the foreclosure quagmire in Nevada is being negotiated by lawmakers and banks. So the lay of the land may change soon, most likely in the lenders’ favor.

But, that is what entrepreneurial risk is all about.

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