As a note investor, we are always performing due diligence when we are preparing to bid on assets. We at Bike Homes, have a comprehensive process we use when we do our due diligence process. I recently read an article on DSNews about Home Owner’s Associations (HOAs) that are taking advantage of mortgage servicers that really got me thinking. As part of the due diligence process, most people are checking the typical items such as unpaid balances, property values, taxes, judgments, liens, and code violations, but one might forget about HOA fees and what can actually happen if they aren’t paid.
The article, “Are HOAs Taking Advantage of Mortgage Servicers,” served as a reminder that we must make sure we check for unpaid HOA fees while performing our due diligence process. One would like to think that HOAs abide by the laws, but there are unscrupulous associations that try to trick lenders into paying for fees that they aren’t responsible for paying rather than potentially losing a sale.
The article mentioned that sometimes HOAs will try to add line items for special assessments, attorney’s fees, late changes, interest and more that may not be the responsibility for a lender to pay. An example was provided for Minnesota where, in that state, they provide a pretty clear outline of charges that must be paid by a foreclosing lender. In Minnesota, the lender is not responsible for late charges or attorney’s fees assessed during or prior to a six-month look-back period.
However, there is nothing to stop those HOAs who add all unpaid dues, fees, etc. to bills regardless of timing. Often these charges are paid because the lender is too busy to challenge every line item of a bill.
Lenders need to be careful to ensure property records are consistent with the senior lien as well. This is particularly critical in non-judicial foreclosure states where the senior lien could potentially foreclose and wipe out junior liens without notice. If an HOA forecloses and has a sheriff’s sale, all junior mortgage liens that fail to redeem from the HOA’s foreclosure could become wiped out in some states.
As you are going through your due diligence process, make sure you include checking HOA fees and liens as part of your checklist. If you find HOA fees or liens due, consider reviewing the details of charges and challenge the HOA if necessary so that you do not get stuck paying fees and charges that are not legally required to be paid by a lender or in our case the note holder. You want to make sure that you check the laws in the State that the asset is located in since every state is different.
We decided to do a little research into Home Owners Associations. Did you know that every HOA must register with the Secretary of State? In order to find out who the HOA is for a property you could ask a neighbor, check with the Secretary of State, or with the Title Company. This would allow you to reach out to confirm HOA fees or liens for a particular asset.
If you are interested in learning more about due diligence in note investing, we have put together several videos about our due diligence process available on our YouTube channel.