Why the Supreme Court Decision on HOA Foreclosures Is Good News for Everyone
Lenders and investors are squaring off in Las Vegas over the recent Supreme Court ruling that stated that Homeowners Associations (HOAs) have the authority to foreclose on properties and sell them at auctions to recuperate delinquent dues without needing to go to court for permission. The Supreme Court ruled that the super priority lien that the HOA holds on the property for unpaid assessments trumps the first trust deeds held by mortgage lenders. The HOAs are allowed to sell these delinquent properties to recuperate unpaid dues. These properties are often listed for sale at the auctions at prices equal to the total amount of dues owed to the HOA plus collection costs and late fees, which usually equals only a couple thousand dollars.
This means that investors at these HOA auctions can purchase these delinquent homes for a fraction of the cost of their real value, making these properties an excellent investment opportunity. After purchase the property is transferred over to the investors via a quit claim deed or a foreclosure deed which gives them title to the property and allows them to live in, resell, or rent (depending on HOA rental restrictions) the properties. According to the recent supreme court of Nevada ruling the first trust deed held by the mortgagee (the bank) is completely wiped out.
The super priority lien held by the HOAs allows the associations to foreclose on the properties and any delinquent dues to the HOA are paid back. Any overage from this sale will go in lien priority, with the bank being next in line in most cases, to recover any overage from the HOA foreclosure sale. This September 18th 2014 ruling has, of course, put many lenders in an uproar as lenders now potentially can lose their security to the property if they choose not to foreclose themselves before the HOA does or if they choose not to pay the back HOA dues to prevent an HOA foreclosure.
The Nevada Supreme Court and the HOAs have no sympathy, however, for the lenders. Since the bank foreclosure process has been taking a very long time (sometimes years!). HOAs are often left with empty homes and delinquent dues with no possibility of re-payment through the existing owners. Lenders are given the opportunity to pay for the HOA liens to prevent the property from being foreclosed upon by the HOA, but if lenders choose to not pay the liens they run the risk of losing out on possession of the properties that they could foreclose on themselves.
Some lenders claim to be unaware of HOA liens on the property or state that the HOA will not allow banks to pay the liens. In this case the issue of timeliness comes into play. If lenders foreclosed on properties quicker there is less of a chance of the properties remaining vacant for so long and thus acquiring further delinquent dues. If a new owner was allowed to move in quicker the current dues could be consistently paid preventing the HOA from needing to foreclose on the property in the first place.
There has been a definite shift in the real estate market with this new Supreme Court ruling, and some agents are already beginning to notice the difference in how short sales and foreclosures are being handled. Some agents are reporting short sales that are being approved in less than a month, a process that usually drags on for months or even a year or longer in the recent past. Why the sudden quick decision from banks regarding short sale approvals? Banks and lenders are trying to recuperate their losses before the HOAs foreclose first and thus prevent them from losing their security against the homes.
It will be interesting to see how the lenders handle the new ruling and whether it will affect mortgage rates or the ability to get a loan in Nevada. While the banks have stated that HOA foreclosures may be bad news for them in reality it is a great situation for the banks. The delinquent properties sold at HOA auctions are selling at about 70% of retail value and will actually get the bank their money faster than if they waited to foreclose themselves. Remember that any overage of the HOA auction is paid to the bank. This is the same way it works with a normal trustee sale.
This decision is also good news for real estate agents and short sale buyers and sellers who may see quicker short sale approvals and re-listing of foreclosed and short sold properties. Residents who live in HOA communities will also benefit as the HOAs will be better able to service and maintain their associations with the recuperated dues.
Local Las Vegas Investors will reap the most rewards, however, especially those who took advantage of the HOA foreclosures prior to the Supreme Court decision. Millions of dollars of equity was created with the Supreme Court ruling and investors who purchased many of these properties are now sitting on a real estate gold mine.
For more information on HOA foreclosures and how you can still take advantage of this investment opportunity contact Glenn Plantone today!