HOA and Property Tax Liens: How They Can Wipe Out a Note

A first-position note is only first until a lien with legal priority shows up. Unpaid property taxes generally rank ahead of every mortgage or deed of trust, whenever it was recorded, and in states with HOA super-lien statutes part of a homeowners association’s claim can rank ahead too. If either is enforced by a sale and you do nothing, your lien can be wiped out, so check both before you bid and keep watching after you buy.

Why recording date is not the whole story

Liens are normally ranked by the order they were recorded: first in time, first in right. That is what first lien versus second lien means in most deals. State law carves out exceptions, though, and the two that matter most to note buyers are property taxes and, in some states, homeowners association assessments. Both can jump ahead of a mortgage that was recorded years earlier.

When a senior lien is enforced through a sale, junior liens are generally cut off. So a lien that leaps to the front does not just stand in line ahead of you. If its holder forces a sale and you have not protected your position, the buyer at that sale can take the property free of your mortgage, and your note is left unsecured.

Property tax liens

In nearly every state, unpaid real property taxes become a lien that takes priority over private mortgages by statute. How the county collects varies:

• In tax lien certificate states, the county sells the unpaid tax debt to an investor, who earns interest and penalties and can eventually apply for a deed if the debt is not paid.
• In tax deed states, the county sells the property itself after a period of delinquency.
• Some states use a mix, or a redemption period during which the owner or a lienholder can still pay and keep the property.

Many states require notice to recorded lienholders before a tax deed issues, but the notice goes to whoever the record shows. If the lien chain was never updated into your name, the notice may go to a previous owner. That is one more reason to fix any gaps in the chain of title as soon as you buy.

Some other local charges, such as certain municipal utility or code enforcement liens, can also carry priority in some places. The county title search should show them.

HOA liens and super-lien states

An association that is owed dues and assessments usually has a lien on the unit or lot. In many states that lien is junior to a first mortgage recorded before the delinquency. Super-lien statutes change that for part of the debt.

The model is the Uniform Common Interest Ownership Act, which gives a limited portion of unpaid assessments, typically a set number of months of regular dues, priority over a first mortgage. Nevada is the best-known example. Its supreme court held in SFR Investments Pool 1 v. U.S. Bank (2014) that a properly conducted HOA foreclosure on the super-priority portion can extinguish a first deed of trust, and later Nevada decisions held that tendering the super-priority amount before the sale preserves the lender’s lien. Several other states have super-lien statutes of their own, and the size of the priority amount, the notice rules and whether a sale can wipe out the mortgage all differ. Confirm the rules with an attorney in the property’s state.

Even outside super-lien states, an HOA problem costs money. Assessments keep running, late fees and attorney fees add up, and if you foreclose and take the property, you will usually owe the association going forward.

What to check before you bid

Treat taxes and HOA status as part of the core review on any note, alongside the items on the due diligence checklist for note buyers.

1. Get the tax status from the county treasurer or tax collector: years unpaid, the payoff with interest and penalties, and whether a certificate has been sold or a sale scheduled.
2. Order an ownership and encumbrance report or title search to see recorded liens, including HOA liens and any tax certificates of record.
3. Find out whether the property is in an association at all. Condos, townhomes and planned communities usually are, and the recorded declaration will name it.
4. Ask the association for a status or estoppel letter showing what is owed. Some associations will only release this to the owner or with the owner’s consent.
5. Read the security instrument for the holder’s right to pay taxes and assessments and add them to the debt, often called protective advances.
6. Check whether there is an escrow or impound account and whether it is current. Escrow accounts and note value go hand in hand for this reason.

Pricing the risk: an illustrative example

Illustrative round numbers. Real amounts, priority rules and costs depend on the state and the property.

A performing first-position note has an unpaid balance of $60,000, secured by a condo worth about $110,000. Clean, you might bid $50,000. The checks show $4,000 of delinquent property taxes and $3,000 owed to the association, part of which may be super-priority under that state’s statute.

If you will have to pay those amounts to protect the lien, they come straight off your bid: $50,000 less $7,000 is $43,000. Then allow something for the chance it happens again and for the borrower’s evident cash strain, perhaps another $2,000, for a bid near $41,000. You could instead ask the seller to clear the arrears at closing from the proceeds, and bid closer to the clean number. A borrower who has let both bills slide while still paying the note is worth a closer look in any case.

After you buy: keep watching

Lien risk does not end at closing. Practical habits that protect a note:

• Check tax status each year after the due date, or have your servicer do it.
• Make sure your name and address are on the recorded lien chain so notices reach you.
• Ask the association to send you notice of any delinquency, where the declaration or state law allows it.
• If arrears appear, act before a sale is scheduled: notify the borrower in writing, then advance the payment if your documents allow it and add it to the balance.

Holders already facing a tax delinquency can follow the step-by-step approach for a borrower who did not pay the property taxes, which also applies, with adjustments, to unpaid HOA dues.

Where this leaves a buyer

Taxes and HOA dues are among the few things that can erase a first lien without the borrower ever missing a note payment, which makes them easy to overlook on a performing loan. Price them in, insist on current figures before closing, and confirm the local priority and notice rules with a real estate attorney in the property’s state; this page is general information, not legal advice. Investors who want to look at notes we broker, with these checks in mind, can join the buyer list.

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