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Dear Real Estate Adviser,

I’m in the process of buying my first home, a short sale. Less than 2 weeks before closing, my agent tells me that there’s a lien on the property from back homeowners association (HOA) fees totaling $13,000! I’m not sure what to do here.

— M. Way

Dear M.,

Your course of action hinges on the cooperation of the seller’s lender or HOA, or both, in settling these fees, unless the deal is so good that you can afford to swallow an extra 13 grand. (So much for your “discounted” short-sale purchase!)

HOAs don’t care about your money

Often, back-owed HOA fees are paid out of the closing proceeds, whether in a short sale or a foreclosure. For the lender, this is a better fiscal alternative than a foreclosure, even with that added HOA arrearage tacked on. But the HOA lien is separate from the mortgage holder’s lien. The HOA isn’t bound to honor your purchase agreement. But some associations agree to compromises with the seller’s lender to help grease a deal.

HOA liens sometimes kill sales, especially when arrearages are in the 5 figures. That’s one reason so many short sales get so close to the finish line only to collapse at the last minute.

What happens now?

It’s incumbent on you and your agent to determine how the lender plans to settle the HOA issue. Do it quickly to avoid wasting your time. Hopefully, your agent is well-versed in such short-sale nuances.

If the HOA refuses the lender’s offer, you can make a higher offer. That’s inadvisable unless you really, really want that home. While some HOAs will waive late fees and attorney fees, don’t expect the association to bend too much, especially if it is strapped for cash.

What to do next

Either way, go back and add a clause to your purchase contract that reads something to this effect: “The buyer’s performance is contingent on the satisfaction of the HOA lien at the time of closing.” You can always back off from this a little in negotiations.

Lots of obstacles

There are other issues to consider, too: A title insurer typically won’t sign off on a deal with outstanding liens. Your lender likely won’t fund a purchase if the title isn’t free and clear of liens. Plus, in some states, the title can’t even change hands until it’s free of liens.

Get some protection

As you can see, this transaction could get complicated in a hurry and you may need an attorney to fully protect you, as well-meaning as your agent, who I assume dutifully ordered a “preliminary title report” to find that lien, appears to be.

By the way, readers who are quietly jockeying to buy a short sale/pre-foreclosure should know that HOAs have been chasing past-due fees aggressively in recent years and will file a lien at the first sign of a short sale.

It would be easy to suggest here that you cut and run and seek other digs, but if you’re still intent on closing, then proceed — but with caution. While you’re at it, be extra prudent in researching the fiscal health of the HOA and its member requirements. HOAs tend to limit the colors, materials, landscaping and other elements of your property.

Good luck on buying your first home. As you’ve discovered, it can be a monumental exercise in frustration and complexity, mitigated by the happy result of homeownership.

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