What Happens When a Homeowners’ Association Forecloses on a Claim of Lien?

North Carolina General Statutes allow a homeowners’ association to file a claim of lien against property located within its neighborhood when a homeowner does not pay assessments as required by the restrictive covenants.  Once a lien is filed it is a cloud on the title to the property and the owner may not sell the property free and clear of the lien without paying the homeowners’ association.  The claim of lien remains on record for three (3) years.  If the owner does not pay, the homeowners’ association can foreclose on the claim of lien in the same manner as a bank foreclosure.  The process is governed by the restrictive covenants of the homeowners’ association and N.C. Gen. Stat. § 47C/F-3-116.

Process of Homeowners’ Associations Foreclosure on a Claim of Lien

First, the board of directors must vote to proceed with foreclosure of the claim of lien.  This can be done by an affirmative vote by the percentage required for board action by the governing documents at a board meeting with the required quorum or by unanimous consent without a meeting.  Written proof of the vote by either minutes from the meeting or a signed resolution must be provided to the clerk of court as part of the foreclosure file.  Next the board of directors must appoint a trustee to file the foreclosure. The attorney hired by the board for collection matters may be appointed as the trustee.  North Carolina law requires the trustee to act in a neutral role, so if the foreclosure becomes contested, the attorney can appoint a substitute trustee and act solely as the attorney for the homeowners’ association.

The foreclosure is generally filed with the clerk of court; however, there are certain exceptions to this such as when the money owed consists solely of fines. The Notice of Foreclosure Hearing is served by sheriff, FedEx, and/or certified mail.  If the owner cannot be located, the Notice of Foreclosure Hearing is also posted at the property at least 20 days before the hearing.

At the hearing, if the clerk finds that there is a valid debt, a default, and proper notice of the hearing was provided, the clerk will enter an order authorizing the sale of the property.  The property can then be sold at public auction to the highest bidder.  Prior to the sale, a Notice of Foreclosure Sale must be mailed to the owner, posted at the courthouse, and published in the newspaper.

At the foreclosure sale, the highest bidder will be required to give a cash deposit of $750.00 or 5% of the amount of the bid, whichever is greater.  The trustee will then file a Report of Foreclosure sale with the clerk.  That bid will be held open for ten (10) days for upset bids.  If an upset bid is filed, the ten (10) upset bid period continues until there are no more bidders.  Once the upset bid period expires with no upset bids, the highest bidder will be required to pay the remaining amount of the bid and the property will be transferred by deed to him or her.

Restrictions and Rights of the Property Owner

The owner of the property can stop the foreclosure by paying in full, including costs and attorney fees, at any time up to when the upset bid period expires.  An uncontested foreclosure will generally take a minimum of 90 days to complete depending on the hearing date and cost approximately $2,250 though that can vary depending on the county and number of owners.

Most homeowners will not allow the association’s claim of lien to be foreclosed if there is equity in the property, and will generally pay what is owed before the foreclosure is completed.  However, if the property is foreclosed, the property will be sold subject to any superior liens.  Therefore, if the association has the first or only lien on the property, the property will likely be sold and the association will recover the money owed.

Why Homeowners’ Associations Foreclose on a Claim of Lien

In most cases, however, there is a superior bank lien on the property.  Often the property is “underwater” and there is no equity.  For example, if the property is worth $200,000 and there is a first deed of trust to a bank for $225,000 there is no equity in the property.  If the homeowners’ association files foreclosure on the claim of lien, the property would pass to the highest bidder subject to the $225,000 bank lien.  In most cases, no one is going to bid on the property.  If that happens, the homeowners’ association spent money to foreclose and will recover nothing.

If this is the case, why do homeowners’ associations ever foreclose on a claim of lien?  It can be a good way to get the owner’s attention when a lien did not.  Ideally the foreclosure will be stopped before it ever gets to the sale because the owner will respond and pay in full or work out a payment arrangement with the homeowners’ association.  Unfortunately this is not always the case.  If the owner has abandoned property, they are not likely to respond to a threat of foreclosure  The board of directors of the homeowners’ association needs to be prepared for this scenario before beginning the foreclosure process.  If a homeowners’ association begins the foreclosure process in an attempt to get the attention of the homeowner and then  chooses to not complete the sale the association will have spent money and time trying to collect on the account and will not accomplish anything.

Another option for the homeowners’ association is to hold the sale and place a bid on the property.  No money is actually exchanged and the property is transferred to the homeowners’ association subject to the superior lien(s).  This does not mean the homeowners’ association is liable for the money owed to the bank or superior lien holders (with the exception of property taxes).  Rather, the homeowners’ association will hold title until the first lien holder eventually forecloses.  The homeowners’ association can lease the property to recover some or all of the money owed while waiting for the bank to foreclose.  This, however, does require the homeowners’ association to act as a landlord and take responsibility for the property including maintenance, taxes, and insurance.  There is also a risk that the superior lien holder will foreclose quickly and the property is never leased or is not leased long enough to recover the costs of the foreclosure.  For some boards of directors this is not worth the risk and they do not want to take the responsibility of holding title to the property.

Foreclosure on a Claim of Lien as a Last Option

Prior to filing foreclosure, the board of directors of a homeowners’ association needs to carefully consider the possible scenarios.  Some of the factors the board should consider:  Is the property occupied?  Is there equity in the property?  Why is the owner not paying?  For example, if the property is an empty lot with no equity, there are not likely to be any bidders and if the homeowners’ association does take title, the property cannot be leased.  It can “stop the bleeding” and sometimes cause the first lien holder to move forward with foreclosure more quickly but this is not always the case.  Generally the first lien holder does not base the decision to foreclose on the actions of the second lien holder so this should not be the sole motivation for filing foreclosure. On the other hand, if the property is occupied by either the owner or a tenant, they are more likely to respond because they do not want to lose the property.

Foreclosure can be a very useful tool for collection of assessments for homeowners’ associations, but it is a serious remedy that should only be done after considering all of the options and possible outcomes.  A homeowners’ association should speak with an attorney before proceeding with a foreclosure to discuss the association’s different options and the possible consequences of a foreclosure.

If you find yourself in a claim of lien situation and have more questions, please feel free to give us a call at (910) 815-0085. As experts in property law, we are the Wilmington, NC attorneys to call when you have questions.