Nevada HOA Liens Extinguish First Deed of Trust

Las Vegas real estate investors and mortgage lenders are squaring off in Nevada in a dispute that could ultimately be decided by the U.S. Supreme Court.

On Sept. 18, the Nevada Supreme Court ruled that a  lien held by a homeowners association (HOA) can override a deed of trust involving a first mortgage on the property. Going forward, the decision will likely make prices at HOA auctions equal or similar to prices at lender foreclosure auctions. Additionally, thecase could have far-reaching implications nationwide.

InSFR Investments Pool 1, LLC v. U.S. Bank, the court ruled that the Nevada HOA lien statute is based on the Uniform Common Interest Ownership Act of 1982, reasoning that an HOA “super-priority lien” was superior to a first deed of trust, extinguishing the latter.

The case involved a Las Vegas home purchased in 2007 with an $885,000 mortgage originated by Bank of America in Southern Highlands, a well-known common interest community in Las Vegas. In 2012, the homeowner defaulted on the mortgage and the HOA dues. So both groups — U.S. Bank (the trustee) and Southern Highlands Community Association — moved to seize the property.

But the HOA — Southern Highlands Community Association — foreclosed on the home and sold it at auction in September 2012 to SFR Investments, a private company that owns 300 properties in the city. SFR bought the home for just $6,000, the amount of HOA dues that were owed by the defaulted homeowner.

The buyers, SFR, then sued U.S. Bank in a pre-emptive strike, arguing its purchase wiped out U.S. Bank’s $885,000 first mortgage on the home. U.S. Bank challenged the super priority foreclosure and won in Clark County District Court, causing SFR Investments to appeal.

Bank of America won the lower court case, but the state Supreme Court reversed it and sent it back to the lower court. The case will return to District Court in Clark County but only on the issue of whether the bank received proper notice.

Homeowners associations can place liens on properties within communities for unpaid fees. Unpaid association dues land in a super-priority that must be paid off first when a foreclosed home is sold.Homeowners can lose their house if they owe just a few hundred dollars in HOA dues.

Nevada and some 20 states give homeowners associations “super lien” priority over first trust deeds held by banks and private label investors, meaning the HOA can collect unpaid dues before a bank can foreclose. In the other 30 states, HOAs are wiped out by a foreclosure.

Justice Kristina Pickering, writing for the majority, said Nevada law lets HOAs foreclose without having to sue first. If changes to the law are needed, “they are for the Legislature to craft, not this court,” she wrote.

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