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HOAs Beat Lenders to the Punch

HOAs BeathLenders To the Punch

In the real estate world, homeowner’s associations are almost universally loathed. Their pitched battles with homeowners who put out the wrong lawn decorations or paint their houses an inappropriate color have made news in cities across the country.

But in a recent Nevada court case, one such HOA has gone toe to toe with Bank of America over who gets the right to conduct a foreclosure. And in that battle of equally unlikeable antagonists the HOA won – with unexpected benefits for investors.

Homeowners associations are the regulatory bodies for housing communities around the country. Anyone who buys a house in a community managed by the HOA is bound by its regulations – which can include stipulations about everything from the color a home can be painted to the number (usually zero) of allowable lawn decorations. Members can be prohibited from parking cars in certain areas, flying flags or having too many Christmas lights.

However draconian, though, the regulations of the association are binding if the homeowner/member has signed the association’s agreement – a requirement for living there. And HOA fees need to be paid on top of monthly mortgage payments and other expenditures. More fees may apply too, for things like the use of facilities and parking. And, as a new ruling in Nevada reveals, your HOA can seize your home if you don’t pay up.

That’s in addition to the usual threat of foreclosure instituted by a lender if a home owner doesn’t keep up with mortgage payments. Either in or out of court, depending upon the state, a lender can foreclose on a delinquent owner and put the property up for sale to recover its losses. But if the house in question is part of an HOA community, the association’s right to recover its fees may leave a lender empty handed.

According to a recent post to the Bryan Ellis Investing Newsletter, a surprising case heard by the Nevada Supreme Court, allows HOAs the right to foreclose on the house of an association member for delinquent association fees or other penalties – without a court order. And that, says the court, trumps the bank’s right to foreclose on a delinquent mortgage.

The test case in question involved a HOA that foreclosed on a member’s house and sold it at auction to recover $6,000 in delinquent fees and other penalties. The house, which carried a mortgage of $855,000, was happily snapped up by an investment group.But the original note was held by megalender Bank of America, which moved to start its own foreclosure proceedings on the property.

The investors brought suit, saying that the HOA’s seizure and auction extinguished the loan and that BofA was owed nothing. And in an unexpected twist, the Nevada Supreme Court agreed, observing that if BofA didn’t want to lose the loan, it should have paid the outstanding HOA fees an taken the property in its own foreclosure action.

But it turns out that homeowners associations aren’t obligated to accept a lenders’ payment of outstanding fees. What’s more, they don’t’ even have to disclose the amounts of those fees. Without a court proceeding, they can simply foreclose and sell the property themselves. Lenders might be able to collect on proceeds that exceed the amount owed to the HOA.

Not surprisingly, the mortgage lending industry is crying foul. The Nevada Supreme Court’s ruing sets a precedent that could spell disaster for lenders, say industry representatives. If local HOAs have the right to foreclose on properties themselves and sell them for ridiculously low rices, they say, lenders stand to lose millions in mortgages that cat be recovered through seizing and selling the properties themselves.

Mortgage lenders aren’t the only ones concerned by the court’s ruling. Housing industry watchers point out that the new powers given to HOAs by the Nevada courts could open doors for abuses and manipulation. HOAs haven’t typically been known for their generosity and flexibility – and it wouldn’t be much of a stretch to expect some bending of rules in these kinds of cases, just like the well documented fraudulent behavior of mortgage lenders.

Still, the Nevada decision represents a boon for investors large and small, who can snap up highly desirable homes at bargain basement prices from HOA sponsored auctions. Once the property is sold under this arrangement, the lender loses the right to lay further claims on it.

If Nevada’s decision is duplicated in other states, it could also open a new avenue for acquiring quality investment properties at prices even individual investors can afford. And while the percentage of homes involved in those kinds of transactions is relatively small, HOA auctions could have a substantial impact on the handling of foreclosures in markets nationwide.

Jason Hartman advises investors to keep educated about real estate and investing. The Nevada court’s decision could represent a fist step in a direction that changes the lending game for good. And for investors hoping to build wealth in income property, this HOA vs BofA battle may be one worth watching.

Ellis, Carole Van Sickle. “Evil vs Evil: Lenders Battle HOAs.”  The Bryan Ellis Investing Letter. investing.bryanellis.com. 20 Oct 2014.

Read more from Heroic Investing:

Will Easy Lending Help Housing-Or Hurt it?
Are Megalenders Grabbing All the Houses?

The Heroic Investing Team

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