Foreclosures and Liens - Some Basics
I recently worked with a client who had purchased a property at the sheriff's sale on a homeowners association lien. We frequently take properties through this kind of judicial foreclosure, and so from my perspective, everything was pretty cut and dry. The client had a lot of questions, and I found myself discussing some basic rules of real property law. Today, I found this article about a purchaser of a property foreclosed on by an HOA, and decided it might be appropriate to set out some general information about liens and the effect of foreclosure.
- In an HOA foreclosure, what happens to the first mortgage?
If the HOA lien foreclosed was the six month "superlien," the first mortgage itself may be wiped out. This is not common. Most of the time, the HOA lien being foreclosed is for amounts owed beyond six months worth of assessments. The superlien is senior to the first mortgage. The amounts owed beyond the superlien are junior to the first mortgage. Foreclosure of a senior lien wipes out junior liens. In all likelihood, if you have purchased a property at the foreclosure of an HOA lien, you are going to have to pay the first mortgage. The holder of the first mortgage may be in the process of foreclosing its lien, as well, so do your research.
- What happens to the second mortgage, or other liens such as judgments?
The second mortgage and other liens are wiped out by the foreclosure of the senior lien. An exception to this is when the second mortgage or other liens are not given proper notice of the foreclosure. Make sure to obtain title information to verify that all parties received proper notice.
- Why is the HOA lien senior to the second mortgage? It was recorded after the date of the second mortgage.
Colorado requires that any party claiming an interest in real property record evidence of that interest in the real property records of the county in which the property is located. When the Declaration creating the homeowners association is recorded, it automatically creates a lien for assessments. The association doesn't even have to record a lien later, when an owner fails to pay assessments, but it's a good idea to do so to protect the association's rights.
Because the Declaration was recorded long before any owner took out a first or second mortgage, it is technically "senior" to those interests. The Declaration, however, as well as Colorado law, subordinates the association's lien (beyond the superlien) to the first mortgage. This is to ensure banks are willing to finance properties within associations. Second mortgages are not treated with the same deference and are junior to the association's lien.
- I won my auction! I'm going to sell the property immediately!
Not so fast, my friend. While you may win an auction, the second mortgage holder and other junior lien holders have at least eight business days after the sale to file a notice of intent to redeem. If they do this, you will receive payment for your bid, but they will end up with the property.
- How do I get rid of the tenants?
If the parties residing in the property were the owners who were subject to foreclosure, they can be removed with a simple eviction. Keep in mind that evictions are often not simple. If the parties in the property were bona fide tenants, paying fair market value rent, and not related to the prior owners, you may have to allow the tenant to reside in the property for the longer period of 90 days, or the end of the lease. Contact an attorney to learn the proper procedures in these cases.
Each individual foreclosure has its own idiosyncrasies, and this information is extremely general. If you're looking into investing in a foreclosure, make sure you do your due diligence and don't get surprised with an unexpected mortgage payment, or worse, an unexpected foreclosure!