HOA Assessments and Utility Arrears on a Claremont REO

A bank-owned purchase has a category of cost that has nothing to do with the roof, the kitchen or the price. It is the pile of obligations that accumulated while nobody was paying anything, and the question that decides who pays them is not always intuitive.

The short version: some obligations attach to the person who owed them, and some attach to the property. The second kind is your problem.

Why the arrears exist at all

A household that stops paying a mortgage has usually stopped paying other things first or shortly afterward. Association dues, water, power, gas, refuse. Then the property sits vacant through a foreclosure process, and during that period charges may continue to accrue whether anyone is living there or not.

By the time an REO is listed, the ledger can be long. It is also frequently incomplete in the seller's own records, because an institutional seller has never lived there and may not have investigated.

Association assessments: the ones that follow the property

Regular assessments, special assessments, late charges, collection costs, fines and interest can all sit unpaid on a unit in an association.

An association's ability to secure and enforce those amounts against the property itself is the reason this matters. California's statutory scheme governing common interest developments sets out how assessments are collected, how a lien is created and enforced, and how a foreclosure of the association's claim interacts with other liens. Those provisions change and the details are consequential, so VERIFY CURRENT LAW with an attorney rather than relying on a summary.

How much of the accrued balance survives a mortgage foreclosure, and how much is extinguished, depends on priority and on the specific facts. This is exactly the point where guessing is expensive. The article on association foreclosures explains how a comparatively small debt gets teeth in the first place, and it is worth reading before you assume the amount is trivial.

What to actually request

Do not accept a number from a listing remark. Order the association documents and a written statement of the account, through escrow, in writing.

Ask specifically for: the current assessment amount and payment schedule; any delinquency attributed to the unit; any special assessment already levied or approved; any special assessment under discussion but not yet levied; the reserve study and current reserve position; pending or threatened litigation; transfer, document and move-in fees; and any architectural approval requirements or outstanding violations recorded against the unit.

That last one catches people. A violation notice attached to the unit becomes yours to cure, and on a distressed property it is frequently something visible from the street that nobody attended to for a year.

The approved-but-not-yet-levied special assessment is the other quiet one. It does not show as a balance and it will arrive after you own the place.

Utilities

Utility balances usually belong to the account holder rather than to the property, and the account holder was the former owner. In most cases you will not inherit their bill.

What you will inherit is the practical situation. Accounts closed. Service disconnected. New accounts requiring deposits. Reconnection appointments that take time to schedule and sometimes require an inspection or a permit before service is restored - particularly where a meter was pulled, where wiring or gas piping has been altered, or where work was done without permits.

Municipal charges are the exception worth checking. Where refuse, sewer or water service is billed by a public agency, some of those charges can be handled differently from a private utility bill, and in some arrangements they attach to the property or reach the tax roll. Ask the specific provider about the specific address rather than assuming.

Two practical consequences. First, no utilities means a limited inspection, which is the central constraint described in the distressed-property inspection guide. Second, reconnection sits on the critical path of any renovation schedule, and it belongs in the budget alongside the other non-construction costs rather than being discovered later.

The recorded picture is a separate question

Association claims, tax liens and other recorded encumbrances show up in the title work, and which ones survive a foreclosure is a technical question with real money attached. The survey of title problems on foreclosed property is the companion to this article; treat the account statement and the title report as two different investigations, because they are.

Property taxes deserve their own line. They run on the county's track, not the lender's, and their status should be confirmed directly rather than inferred from the sale.

Who pays what, and when to settle it

Allocation is a matter of contract and of law together. The seller's addendum on an REO commonly assigns these costs in ways that differ from the standard purchase agreement, and it usually supersedes it. Read the addendum, and read it before writing the offer rather than during escrow.

Escrow is where the amounts get demanded, verified and paid or prorated. The mistake is treating that as a formality late in the transaction. On a property with a year of unattended obligations, the demands can materially change the arithmetic of the purchase, and they should be resolved while you still have the ability to renegotiate or withdraw.

The general shape of dealing with an institutional seller is covered in the guide to buying bank-owned homes, and the same principle applies throughout: the seller will not investigate on your behalf.

The reasonable posture

Assume there is a ledger. Ask for it early, in writing, from the association and from each provider. Price what you find, and price a margin for what nobody could confirm.

And remember why the arrears exist. They are the paper trail of a household that ran out of money. That is not a reason to overpay, and it is a reason to conduct the purchase without commentary about the people who left.

The foreclosures guide covers the process from both sides.

Legal questions belong with an attorney. Tax consequences belong with a CPA. Anthony Grynchal has been licensed in California since November 2009.