With property values rising, many investors have moved away from the fix and flip market because the profit margins are no longer wide enough to invest the time and money. With interest rates remaining low, the average rent prices continue to be higher than the average mortgage payments; however, for an investor to buy a property to keep as a rental, it can tie up their cash.
Recently, we have seen a rising trend in HOA foreclosures in Colorado. The HOA laws give the associations power over the properties governed by the HOA and the law firms hired to support the HOAs are doing more to convince the associations that under the right circumstances, foreclosure is a viable collection method.
As an investor, if you understand the HOA foreclosure process, these foreclosures can represent an investment opportunity!
The Super Lien Law in Colorado makes any HOA lien superior over other liens. This means if the 1st or 2nd mortgage lender forecloses on a property with an HOA lien against the property, the HOA is paid first. When another lien holder forecloses, the HOA is paid the equivalent of six months past due assessments, plus interest, late fees, penalties and legal costs. If an HOA files a Lis Pendens against the property, it typically means they intend to pursue their right to foreclose on the property.
Foreclosure action is particularly attractive to an HOA if no other lien holder has initiated foreclosure proceedings. If the HOA forecloses before another lien holder initiates foreclosure proceedings, the HOA can foreclose on the property for the total amount due, including interest, late fees, penalties and legal fees and potentially wipe out other liens on the property.
In recent weeks, we have seen properties foreclosed on by their respective HOAs with bid figures ranging between $9K and $25K. The news of HOA foreclosures is not published through the Public Trustee Foreclosure process. The properties are foreclosed on through the Judicial Foreclosure Process and a Sheriff’s Sale.
As the HOA trend to foreclose on properties continues to rise, we see a prime opportunity for investors. With a little investigative research and due diligence, there is the opportunity to pick up a property at a price that can either yield a good fix and flip margin or warrant keeping the property as a rental.
In Colorado, HOAs looking to foreclose on a property will file a lawsuit in the district court where the property is located. A Lis Pendens is recorded and all defendants (homeowners and all interested parties) are notified. Each person and/or entity with an interest in the property must be served and process must be obtained. The defendants have a specific amount of time to respond to the court. If no response is given, the court issues a default judgment and the process moves to the Sheriff Sale Process.
Once the foreclosure order is issued by the court, the HOA attorney sends the order to the County sheriff and a sale date is scheduled. This date must be at least 110 calendar days from the date the original Lis Pendens was recorded. Once scheduled, the Sheriff publishes the sale notice in a local newspaper and sends a copy of the notice to each defendant.
Prior to the sale, the HOA submits a bid to the Sheriff. The bid amount is typically for the total amount due to the HOA, including all attorney fees and fees incurred in the foreclosure process. The highest bidder at the sale receives a ‘Certificate of Purchase’, not a Deed to the property. If there are other lien holders and they want to redeem the property, they must file their intent to redeem within 10 days of the sale. If no other lien holder redeems the property, the Sheriff issues a Confirmation Deed to the holder of the ‘Certificate of Purchase’.
The El Paso County Sheriff’s Department holds their judicial sales on Thursdays at 10am at the Sheriff’s office. You can contact the Sheriff’s Department for a list of the properties for sale on a given Thursday. The only information they provide is the property address, the owner’s name(s) and the amount of the bid. It would be up to the investor or other interested persons to do any other investigative due diligence to determine if the property is of further interest to them. Further details on both the Judicial Foreclosure Process and Sheriff’s Sale Process can be found in our previous HOA article titled, ‘HOA Super Lien and Colorado Foreclosure Laws’.
The HOA complaints in Colorado are high, with Colorado Springs and El Paso County issuing the highest number of complaints. Many of the complaints are serious and have the Colorado Attorney General considering changes. As a result, we could see the current trends change in the future. However, until there are changes, the current trend does provide opportunities for real estate investors.