Investing in HOA foreclosures to build wealth is a viable strategy. To be successful, you will need a carefully crafted and executed strategy and an understanding of the landscape. For every success story, there are many more who have lost their capital because they did not understand current Texas laws.
The number one misunderstanding about HOA auctions is how the HOA lien being foreclosed on affects what is commonly referred to as a purchase money loan. It is probably no surprise that the owner being foreclosed on probably received a loan to purchase the property; i.e., a purchase money loan. This loan has a higher priority than the HOA lien that is being foreclosed, and the purchaser at the HOA sale takes the property subject to the original purchase money loan. Not only are there many challenges in uncovering the origin and amount of the purchase money loan, but even if you can uncover this information the amount still owed on the loan may make purchasing a property by way of an HOA foreclosure unprofitable. For purposes of illustration, buying a property worth $100,000 for $10,000 at an HOA sale is not a good deal if the property is encumbered by a $150,000 purchase money loan.
To avoid issues of the type discussed above, buyers should do research prior to making a purchase. Most items sold at auction don’t undergo a title search until after the sale. This is a potential risk to any investor as it opens up the door to many unknowns. A best practice is to perform a title search prior to the sale.
Investors should also be aware of the homeowner’s right of redemption following a foreclosure sale. If the home is undergoing foreclosure sale by the HOA, you need know that the homeowner has the “right of redemption” to get the home back within 180 days from the date the HOA mails the post-foreclosure notice. Tex. Prop. Code § 209.011(b) (West 2015). During this 180 days, a person or entity that purchases the lot at the foreclosure sale may not transfer ownership unless it is to the redeeming owner. Tex. Prop. Code § 209.011(c) (West 2015).
For condominiums, another set of rules will apply. First of all, the homeowner has the “right of redemption” to get the home back within 90 days from the date of the foreclosure sale. Tex. Prop. Code § 82.113(g) (West 2015). Only the former unit owner could potentially have this right, and it does not apply to lien holders. Id. Finally, the Condo Association, unlike the HOA for lots in subdivisions, is not required by law to send a unit owner a post-foreclosure notice advising the unit owner of their rights. Tex. Prop. Code § 82.113(e) (West 2015).
In either a subdivision lot foreclosure or a condominium foreclosure, the redeeming owner must generally pay the amount paid at the sale and carrying costs of the purchaser. The exact computation of the redemption price varies according to type of sale and type of purchaser. Note that unlike tax sale foreclosures, there is no redemption premium paid to the purchaser. Tex. Prop. Code § 209.011(d) & (e) (West 2015); See also Tex. Prop. Code § 82.113(g) (West 2015).
In the event that either the purchaser, HOA or Condo Association has collected any income from the foreclosed properties after the sale, but before the deadline of redemption, these amounts must be credited to the amount owed by the former unit owner upon redemption. In both the case of the HOA subdivision lot foreclosure and the Condo Association Foreclosure, if all terms are met within the deadlines, the associations or purchaser must execute a deed conveying ownership of the foreclosed property back to the redeeming owner. Tex. Prop. Code § 209.011(f) and (i) (West 2015); See also Tex. Prop. Code § 82.113(g) (West 2015).
If you’ve recently purchased an HOA foreclosure sale property at auction and are afraid the homeowner will employ their right of redemption, please contact a trusted attorney.
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