This article briefly describes the benefits of and process involved in assigning an association’s lien to a third party during a pending foreclosure action.
Associations in Colorado have a lien against properties for all unpaid assessments, late fees, fines, interest, and attorney fees and costs. Colorado’s Common Interest Ownership Act (“CCIOA”) provides that associations have a “statutory” lien against each property in the community for these unpaid amounts, and recording a lien with the county is not necessary.
However, recording an assessment lien serves as notice to third parties that the property is encumbered by a debt for delinquent assessments and other charges. Recording the lien creates a public record of debt, and serves as a reminder of the debt to title companies who are preparing for closings. Recording a lien against a property owned by a delinquent owner is always recommended.
The association’s lien also provides the association with the right to redeem the property if a foreclosure is subsequently initiated by the lender. To redeem the property, the association would need to pay the lender, or high bidder, what it bid at sale plus interest. However, most associations have neither the financial resources, nor the desire to own properties within their communities. When an association does not redeem, its lien is extinguished through the bank’s foreclosure. The association would only be entitled to receive six months worth of assessments from the new owner, regardless of the existing amount owed on the property.
However, when there is equity in the property, there may be a third party investor who is interested in purchasing the association’s lien. As the owner of the lien, the association is free to assign or sell that lien to any third party. Investors are attracted to association liens because liens provide them with the opportunity to redeem or purchase a property in foreclosure, usually at a discounted rate in comparison to the property’s fair market value.
Why would the association choose to sell its lien? First, rather than allow its lien to be extinguished and collect only 6 months of assessments, the association can usually sell its lien to an interested investor for the full amount due, including all unpaid assessments, fees, and attorney fees and costs due on the account. If a property has a large amount of equity in it, the association’s lien can often be assigned for more than what is even owed on the account.
Another reason an association benefits by assigning its lien is the investor’s motive to maximize his or her profit on the property. Investors are much more likely to protect and preserve the property, make necessary repairs, and prepare the house for resale than to sell banks, which often let their properties sit in disrepair until resale. The current trend is for banks to sell their foreclosure properties at large discounts just to “move the inventory.” When banks let properties wither away, and sell them months or years later at below market prices, the owners in the community lose and property values go down.
Assigning the association’s lien is done at no cost and with no liability to the association. A contract for assignment of the association’s lien should be prepared by the association’s attorney and should state the investor is merely purchasing the lien, and is not receiving any representation or guarantee that he or she will end up owning the property through the foreclosure. The cost of preparing this document should be added to the price of the lien and paid for by the investor.
The timeframe for negotiation and assignment of the association’s lien has been shortened by passage of HB 07-1157, which made substantive changes to Colorado’s foreclosure laws. Most importantly, an association (or its assignee, the investor) has only 8 business days following the foreclosure sale to file an intent to redeem the property.
If your association is approached by an interested investor, please contact Altitude Community Law for more detailed information and guidance. Also, please feel free to visit www.hoaliensforsale.com for more information.