HOA Foreclosures Reduce Nevada Home Values by $1 Billion

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According to a new report from the Nevada Association of Realtor, foreclosures by local homeowner associations have reduced property values in the state's two most populated counties by more than $1 billion.

This was just one of the findings in a report released this week by NVAR about issues surrounding foreclosures by homeowner associations and so-called super priority lien laws that allow HOAs to foreclose on homes in a way that places a higher priority on repaying late HOA fees than repaying the mortgage when these homes are sold following a foreclosure.

As part of its report, NVAR worked with the Lied Institute for Real Estate Studies at UNLV and with a research firm called SGS that surveyed more than 500 registered voters throughout Nevada to measure their views on HOAs, super priority liens and related issues. The report concluded that "HOA foreclosures in Nevada cause an enormous impact on home values."

According to the report, HOA foreclosures in Washoe County sold for "a remarkable 90 percent discount" compared to comparable home sales in the area, accounting for a loss of nearly $254 million in property sales value. In Clark County, the hundreds of homes sold through an HOA foreclosure in recent years sold for an average discount of 42 percent, leading to a loss of about $840 million in property sales value.

"So, in our two most populated counties, these HOA foreclosures had a negative impact of more than $1 billion on local property values," NVAR President Greg Martin said. "That's a real eye-opener."

Martin further commented, "NVAR spent months preparing a comprehensive and revealing report on a fairly complex issue" that has had a significant impact on local homeowners and communities, as well as on Nevada's economy.

The report explains that a super priority lien is a category of lien that, under Nevada law, is given a higher priority than all other types of liens. When it comes to HOA assessment liens, a super priority lien refers to that portion of a homeowner association lien that is given higher priority than even the holder of the first mortgage, placing the interest of the HOA in front of the first mortgage. When an HOA forecloses via a super priority lien, it may, in some cases, eliminate the first mortgage on the home.

For example, in Nevada, the state Supreme Court has ruled that an HOA super priority lien can extinguish a first deed of trust in a foreclosure. An example of this would be a scenario involving a homeowner who defaults on HOA dues, and instead of the lender initiating foreclosure proceedings, the HOA does so, and typically sells the property at auction as a bank would. Because the HOA has super priority status, the winning bidder for the home pays the HOA its back dues. Then, under Nevada law, all the remaining debts are extinguished. The lender who financed the mortgage on the home gets nothing, the report explains. Losses endured by the lender usually far exceed those of the HOA.

NVAR's report found that 77 percent of all Nevadans surveyed oppose HOAs having the power to foreclose on homes over unpaid association dues. In addition, 82 percent of all respondents think that the mortgage lender should be paid first, not the HOA.

According to the survey, 44 percent of all Nevadans had an unfavorable view of HOAs, compared to 29 percent who had a favorable opinion.

The report examined 611 HOA foreclosures recorded in Clark County between Jan. 1, 2013 and June 30, 2016, plus another 71 HOA foreclosures recorded in Washoe County during this same time. It found that HOA foreclosures spiked following a landmark 2014 lawsuit between U.S. Bank and SFR Investments before starting to decline in December of 2014. Since then, the report said HOA foreclosures in Nevada "have settled at around 10 per month."

Unlike past NVAR reports on issues important to the state and its homeowners - such as NVAR's award-winning "Face of Foreclosure" series released to coincide with past sessions of the Nevada Legislature - Martin said this NVAR report is not recommending specific changes to state law. Instead, he said NVAR leaders hope this year's report educates and informs state lawmakers, government leaders and others about this complex issue.