Mountain Law: Understanding HOA liens

This article is reproduced from the Summit Daily News, December 23, 2009, by permission of author Noah Klug.

Colorado homeowner's associations have the power to assess their owners for common expenses. If an owner fails to pay a required assessment when due, the HOA can enforce a lien as discussed in this article.

An HOA lien begins to encumber an owner's unit as soon as an assessment becomes due without the necessity of the HOA filing a notice of the lien in the public records. Nonetheless, many HOAs regularly record a notice of their lien in the public records.

HOA liens are given special priority under Colorado law, which has significant implications in the foreclosure process. An HOA lien is senior to all other liens except a first deed of trust and the county's lien for property taxes. A portion of an HOA lien “equivalent” to six months' worth of dues is senior to a first deed of trust. This portion is often referred to as the “priority portion.” The priority portion of the lien need not actually represent monthly dues. For example, if an owner is current on monthly dues of $100 but fails to pay a special assessment of $600, the priority portion of the lien is still $600 (the equivalent of six months' worth of dues).

A senior lien will continue to encumber the property after foreclosure of a junior lien, but a junior lien will cease to encumber the property after foreclosure of a senior lien unless the junior lienholder “redeems” the property by paying the amount of the high bid at the foreclosure sale plus the amount of any lien senior to it that also redeemed.

For example, say that a property is encumbered by a first deed of trust of $100,000 that is in foreclosure, a second deed of trust of $25,000, and an HOA lien of $5,000. The HOA dues are $100 per month, the property is worth $150,000, and the high bid at the foreclosure sale is $100,000.

The liens can be ranked from most senior to most junior as follows:

1. Priority Portion of HOA Lien ($600)
2. First Deed of Trust ($100,000)
3. Non-Priority Portion of HOA Lien ($4,400)
4. Second Deed of Trust ($25,000)

The priority portion of the HOA lien is most senior; it will continue to encumber the property after the foreclosure sale (and could then be foreclosed by the HOA). The non-priority portion of the HOA lien is junior to the first deed of trust being foreclosed; it will cease to encumber the property after the foreclosure sale unless the HOA redeems the property by paying the amount of the high bid at the sale ($100,000). The second deed of trust is junior to every other lien; it too will cease to encumber the property after the foreclosure sale unless its holder redeems the property by paying the amount of the high bid at the sale ($100,000) plus the amount of the HOA's non-priority lien ($4,400) if the HOA redeems first.

In deciding whether or not to redeem, the HOA will have to determine (1) if it has funds available to redeem; and (2) if it is worth paying $105,000 (the amount to redeem plus the amount the HOA is owed) for a property worth $150,000 after taking into account the cost of holding the property (insurance, taxes, HOA dues, maintenance) and the cost of reselling the property (real estate broker commissions, closing costs). Whether or not to redeem is ultimately a business decision for the HOA to make after reviewing the numbers.

If the HOA is not in a position to redeem by itself, it could sell its redemption rights and the purchaser could then redeem the property. If an HOA loses any portion of its lien, it still typically has the option of suing the owner personally for the debt.

If you understand the principles given in this article, you are well on your way to understanding how HOA liens work. This article is written from the perspective of an HOA; in a future column I will write about options available to a homeowner in dealing with an HOA lien.

Noah Klug is principal of The Klug Law Firm, LLC, a general law practice in Summit County emphasizing real estate, commercial law and litigation. He may be reached at (970) 468-4953 or Noah@TheKlugLawFirm.com.