People who own houses in a subdivision, common interest development (CID), or planned unit development (PUD) are often part of the development’s homeowners’ association, known commonly as the “HOA.” The HOA manages the community, by enforcing the restrictions and requirements that come with living in a planned development, and by implementing the association’s bylaws. Most people who live in HOA properties have to pay assessments (dues) to help maintain the common areas and cover the cost of community services. But if you don’t pay the assessments, the HOA could sue you for a money judgment or foreclose your home.
Read on to learn the basics about HOA assessments, what happens if you don’t pay them, how HOA foreclosures work, and what you can do to avoid a foreclosure.
What Is an HOA?
A homeowners’ association (HOA) is a non-profit corporation that a developer creates when a community is in the planning stages. The HOA is responsible for managing and maintaining the community.
If you buy a home that has an HOA, you automatically become a “member” of the association—you can’t opt out. By purchasing your home, you agree to obey the terms and conditions set out in the HOA’s governing documents, including the Declaration of Covenants, Conditions and Restrictions (CC&Rs). The CC&Rs describe the requirements and restrictions on how homeowners use their properties. For example, the CC&Rs might say that you can’t paint your house a particular color, hang a clothes line, or decorate your lawn with garden gnomes. The CC&Rs also set out the rules for collecting assessments.
An HOA ordinarily collects regular and special assessments from each household or unit in the community.
Regular assessments are periodic payments that homeowners must make to the HOA to cover routine maintenance and repairs in the neighborhood. Each household or unit pays its share on a monthly basis or other fixed schedule, such as quarterly or annually.
To figure out how much to charge each household in regular assessments, the board (the group of elected HOA members that runs the HOA) sets an operating budget and a reserve budget each year. The operating budget pays for everyday functions in the HOA—like general maintenance of common areas, trash removal, and security services. The reserve fund covers any unexpected repairs that come up. For example, the HOA will use reserve funds to pay for fixing potholes or a damaged sidewalk.
A special assessment is a one-time charge for an unexpected cost that the HOA's reserve funds won’t cover. For example, if the community needs to build a new parking structure or convert landscaping so that it is drought tolerant, the HOA might make a special assessment.
Normally, the board can charge relatively small special assessments—for example, less than $5,000—without getting approval from the members of the HOA. But, most CC&Rs require a majority vote of the members before the board can make a large special assessment.
What Happens If You Don’t Pay the Assessments
If you don’t pay the assessments, the HOA will probably charge fees and interest on the unpaid amounts. The HOA might prohibit you from using any common areas until you catch up on the amounts you owe.
The HOA could also sue you for a money judgment. Once a court issues a judgment in favor of the HOA, the HOA can usually take money from your bank account or garnish your wages to collect the amount owed. But that’s not the only avenue the HOA might choose in order to satisfy your debt.
In most cases, the HOA has a right to a lien on your home. If the CC&Rs allow it, the lien automatically attaches to the property, usually as of the date the assessments become due. The lien is automatically created once you’re late in paying the assessments—the HOA doesn’t have to go to court to get a judgment first. The HOA will then prepare a Notice of Lien (or a similarly titled document) that describes the property and the amount you owe the HOA. Under some states’ laws, the HOA has to record the Notice of Lien at the county recorder’s office to make the lien valid. In other states, the HOA doesn’t have to record the lien.
Usually, the HOA will record the lien even if state law doesn’t require it, just to get it on the public record. You could then have problems if you try to refinance or sell your home, because any potential lender or buyer, when examining your title to the home, will see it. It puts them on notice that, if they lend you money using the house as collateral, or buy the house with this lien on the title, they are lower in priority than the HOA lien. Priority determines the parties’ rights after a foreclosure. So, a potential lender will be concerned that the HOA may foreclose and the lender could lose out on some or all the money it’s owed. (After a foreclosure sale, the liens are paid off in order of their priority. But, sometimes a foreclosure sale doesn’t bring in enough money to pay off all of the liens.) A potential buyer will be concerned that he will lose his rights to the home if the HOA forecloses. Because of these consequences, liens are appropriately known as a “cloud on title.”
The HOA Might Foreclose
Rather than suing you for a money judgment, the HOA might instead foreclose the lien and sell your home to pay off the debt. If the HOA thinks you don’t have any funds in your bank account or from a job to pay a money judgment, it will likely choose a foreclosure because the proceeds from the foreclosure sale go towards paying off the amount you owe.
The mechanics of foreclosing on the lien depend on state law. In some states, the HOA will file a lawsuit in court to foreclose (this is known as a judicial foreclosure). If successful, the HOA sells your house and uses the proceeds to pay off the debt (you keep the balance, as long as other creditors aren’t also in the picture). In other states, the HOA can choose to use an out-of-court process (a nonjudicial foreclosure) rather than going through the court. Here, the HOA follows procedures described in the state statutes and the CC&Rs, such as mailing you a notice of foreclosure and publishing the notice in a newspaper.
In some states, the HOA can’t foreclose until you’re a certain number of months or a certain amount of money behind in assessments. For example, a California HOA can’t start a foreclosure unless the assessments are more than 12 months delinquent or the past-due assessments equal $1,800 or more.
Avoiding a Foreclosure
If you can’t afford to get caught up on overdue assessments, you might be able to negotiate a payment plan with the HOA. That way, you can pay the amounts you owe in installments.
If you aren’t able to work out a payment plan and the HOA starts a foreclosure, consider contacting a foreclosure lawyer to learn about different options. If you can’t afford an attorney, a HUD-approved housing counselor might be able to help you.