Homeowners Association

A homeowners association (HOA) is a private governing body that manages a planned residential community, subdivision, or condominium complex. HOAs collect periodic dues from property owners, maintain common areas, enforce community rules (CC&Rs — covenants, conditions, and restrictions), and can impose special assessments for major expenses. For mortgage note investors, HOAs matter because unpaid dues can result in liens against the property — liens that, in certain states, can take priority over your mortgage.

How HOAs Affect Note Investors

When a borrower stops paying their mortgage, they often stop paying HOA dues as well. This creates a compounding problem: the unpaid balance grows with monthly assessments, late fees, interest, and collection costs. The HOA's primary enforcement tool is placing a lien on the property for the delinquent amount.

Super-Lien States

In most states, HOA liens are junior to recorded mortgage liens. However, approximately 20 states and the District of Columbia have enacted super-lien statutes that give a limited portion of the HOA's claim priority over even a first mortgage. The super-lien amount is typically limited to 6 months of unpaid assessments (though the exact amount varies by jurisdiction).

In a super-lien state, an HOA foreclosure on the super-priority portion can potentially wipe your mortgage lien from the property — a scenario similar to a tax lien foreclosure. This makes identifying whether your collateral property is in a super-lien jurisdiction a non-negotiable part of due diligence.

Due Diligence Checklist for HOA Properties

When evaluating a note secured by property in an HOA community, confirm the following:

• Is there an HOA? Check the title search and property records for recorded CC&Rs or HOA liens.
• What is the delinquent amount? Request an HOA estoppel letter or payoff statement showing the current balance, including late fees, interest, and legal costs.
• Is the state a super-lien jurisdiction? If yes, determine whether the delinquent amount has triggered super-priority status.
• Has the HOA filed a lien or initiated foreclosure? Check county records for recorded HOA liens and any pending foreclosure actions.
• What are the monthly dues? Factor ongoing HOA costs into your property valuation and borrower workout calculations — high dues reduce the property's effective value and the borrower's ability to sustain payments.

Managing HOA Exposure After Acquisition

Once you own the note, unpaid HOA dues continue to accrue and threaten your collateral. Consider these strategies:

• Pay the delinquent HOA balance. In super-lien states especially, advancing funds to cure the HOA delinquency protects your lien position. Add the amount to the borrower's outstanding balance as a corporate advance.
• Negotiate with the HOA. Some associations will accept a reduced payoff or payment plan, particularly if you demonstrate that resolving the mortgage default will also resolve the HOA delinquency.
• Accelerate your resolution timeline. The longer a non-performing loan sits, the more HOA debt accumulates. A faster workout or foreclosure limits your exposure.