Buying HOA Liens at Sheriff Sale: The Senior Mortgage Trap

Buying HOA liens at sheriff sale gets you a deed, not a clean title. An association lien sits near the bottom of the priority stack, so the property taxes and mortgages recorded ahead of it survive the sale — and you inherit a property you can be foreclosed out of at any time.

Zhanna Kelley, a CPA and New Jersey landlord who invests in tax liens, tax deeds and association foreclosures, learned this on a $26,000 HOA lien purchase. She knew a mortgage existed. She assumed 20-plus years of elapsed time meant the $200,000 balance was mostly paid down. It had instead grown to roughly $400,000, and the lender — the USDA — had never foreclosed and still hasn’t.

Below: what the deed actually conveys, why senior balances grow instead of shrink, why some lenders sit on non-performing loans for decades, and the pre-bid diligence sequence Kelley now runs before she bids on anything.

From the Real Estate Pros Show

This article draws on an interview with Zhanna Kelley on the Real Estate Pros Show, hosted by Micah Johnson.

What You Actually Buy When You Win an HOA Lien

You buy a deed that sits at the bottom of the priority order. Kelley describes an HOA foreclosure deed as “the lowest level deed” — property taxes are above it, mortgages are above it, and those senior positions are not disturbed by the association’s foreclosure.

That is the whole trap. The sheriff sale is real, the deed records, you can take possession and collect rent. None of that touches the first mortgage. The senior lender retains the right to foreclose and take the property from you, and your $26,000 or $40,000 or $80,000 goes with it.

This is a different instrument from the two positions most investors know better:

• Tax lien — you buy the municipality’s claim, earn interest, and most of the time you get redeemed. Kelley notes she rarely acquires the asset; redemption happens something like 95% to 97% of the time. Her first actual tax lien foreclosure has been running three years and counting.
• Tax deed — in states like Florida, you own the property coming out of the sale, without the multi-year wait and carrying costs.
• Association lien — you get a deed, but it is junior. Everything senior survives.

So the question to answer before you bid is not “what is this house worth?” It is “what is the current payoff on everything recorded ahead of me, and can I clear or absorb it?” If you cannot answer that with a number you verified, you are not bidding on a property. You are bidding on a guess.

The $26,000 Deed With a $400,000 Mortgage Behind It

Kelley bought an HOA lien on a New Jersey property carrying roughly $26,000 in unpaid association dues at a sheriff auction and received a deed. Her research had turned up a mortgage. It originated around $200,000, and the loan was more than 20 years old.

Her conclusion at the time: “by this point it’s probably mostly paid off, because it’s kind of hard to know what stage a mortgage is.” That reasoning is the error, and it is worth naming precisely — she inferred the balance from elapsed time rather than verifying it.

The actual balance was roughly $400,000. Not paid down over two decades — doubled. The borrower had never made a single payment on the loan. Everything that accrues when nobody pays had been accruing for 20 years on top of the original principal.

Run the math on what that does to a junior bid. Kelley’s all-in was $26,000 for the lien plus about $50,000 in rehab, so roughly $76,000 into a property she puts at $75,000 to $80,000 in value, sitting behind a $400,000 senior claim. There is no equity to recover. There is no refinance. There is no exit sale. The only reason the position functions at all is that the senior lender has chosen not to act, and that choice is not hers to control.

Elapsed time tells you nothing about a mortgage balance. It tells you how long the meter has been running.

This deed is the lowest level deed. Taxes are above it, mortgages are above it. I knew there was a mortgage — it started off around $200,000, so I assumed by this point it was mostly paid off. Was I wrong. It was a $400,000 mortgage.

— Zhanna Kelley, CPA and New Jersey real estate investor

Why the Senior Balance Was Bigger, Not Smaller

The borrower history Kelley reconstructed after the fact explains the whole number. Around 2000, the owner took a USDA rural development loan — a zero-down government program for low-income buyers in rural areas, structurally similar to a VA loan in that the borrower has no cash in the deal.

From there:

• A fire damaged the house, and the insurance carrier funded a complete remodel. The owner got a rebuilt property without spending her own money.
• She lived in it, then rented it out and collected income for roughly six or seven years.
• She never paid a dollar toward the mortgage. Not one payment in over two decades.
• She never paid the HOA. She never paid property taxes — the lender advanced them to the township.
• Eventually she moved to Florida and abandoned the property, which then fell into disrepair.

Every one of those years added to the senior balance. Accrued interest, late fees, default penalties, and the property taxes the lender kept paying on the borrower’s behalf all fold into the payoff. A servicer protecting its collateral advances taxes and insurance and adds them to what it is owed.

The practical lesson for a junior bidder: a non-performing senior loan is a growing liability, not a shrinking one. The longer it has been in default — which is exactly the condition that produced the HOA delinquency you are bidding on — the further above original principal the payoff sits. The same distress signal that creates the opportunity is the signal that the senior debt has been compounding the entire time.

Ghost Mortgages: When the Senior Lender Simply Never Forecloses

The reason Kelley still owns and rents that house is that the USDA has never foreclosed. She went looking for an explanation and found the pattern is not rare.

The USDA publishes a foreclosure listing. When she checked it, there were roughly 10 foreclosures listed for the entire country — a number she found impossible to reconcile with the volume of defaulted rural loans out there. Her read is that reported foreclosure counts make the program look bad, so the loans sit. The agency can still pursue the borrower by other means, including collecting against Social Security, but the property itself never goes to sale. She calls these ghost mortgages.

It is not only a government problem. On another association foreclosure at the country club community where she serves on the board, the acquired property carried a Deutsche Bank mortgage. The borrower had not paid in five or six years. No foreclosure. As Kelley puts it, she does not understand what they are waiting for or why it stays on the balance sheet.

Treat this correctly: a dormant senior lender is an unresolved cloud, not a windfall. Nothing in either case prevents the servicer from filing next month — a portfolio sale, a change in loss-mitigation policy, or a new asset manager reviewing old files is all it takes. You can observe that lenders sometimes sit for years. You cannot underwrite to it, because you have no contractual right to their inaction and no notice of when it ends.

The Accidental Cash Flow — and Why It Isn’t a Strategy

The monthly numbers on Kelley’s property look excellent, and that is exactly what makes the case instructive.

• Acquisition: about $26,000 for the HOA lien
• Rehab: about $50,000
• Rent: about $2,200 per month
• Insurance: about $80 per month
• HOA dues: about $122 per month
• Debt service: none — the mortgage is not hers
• Property tax: none — the USDA still sends payments to the township every month

Roughly $2,000 a month in net cash flow on a $76,000 basis, with the federal government covering the tax bill. Her own summary: “I guess I’ll just own it forever.”

Now the exposure. The $400,000 lien is still recorded and still senior. The lender can foreclose at any time and she loses the property and the basis with it. There is no clean sale and no conventional refinance while that lien sits on title. Clearing it means litigation — she raises the possibility of hiring an attorney to argue that too much time has passed since the 2000 origination and the lien should be removed.

That argument got harder, not easier. Kelley notes New Jersey’s foreclosure statute of limitations used to be six years; the state extended it to 20 because six was considered too short. A loan that would once have been time-barred well before now may still be actionable.

Good cash flow produced by someone else’s inaction is not a repeatable model. It is a position she is stuck holding.

A Pre-Bid Diligence Sequence for Association and Tax Liens

Here is the order Kelley works now, built from what the $26,000 deed taught her. Run it before the sale, not after.

1. Pull block and lot from the township list and map each one to a street address. The published list gives you parcel identifiers, not properties.
2. Identify the owner of record, including the entity. LLCs and out-of-state or foreign owners behave differently in default and redemption.
3. Pull every recorded lien against the parcel — and get the current payoff, not the original amount. This is the step that cost her $76,000. Origination figures tell you nothing about what is owed today.
4. Determine which lien holds priority. A property can carry a mortgage plus multiple other lien types, and your bid only makes sense once you know where you land in the order and what survives your sale.
5. Inspect the survivors in person. Kelley still drives every property that clears the screen.

The screening itself is where she has compressed the most time. When her township released its tax lien list, instead of manually looking up block, lot, address and mortgages one by one, she uploaded the list to ChatGPT, told it which search sites to use, and had it build a spreadsheet with owner, address and recorded mortgage data. That eliminated about 95% of the list immediately. She then works through the survivors with it — this one has a mortgage, this one has a different lien type, which is the priority lien — to think through each scenario before committing to a bid.

She also has it monitor the sheriff sale site, which posts every two weeks, and report what is coming up and what sold.

Screening is the automated part. Verifying payoff amounts and walking the property are not.

Frequently asked questions

Does winning an HOA lien foreclosure wipe out the mortgage on the property?

No. An association lien is junior to recorded mortgages and property taxes, so foreclosing it and taking the sheriff sale deed leaves the senior debt in place. You own the property subject to that mortgage, and the senior lender keeps its right to foreclose and take it from you.

Priority rules vary by state and some jurisdictions give associations a limited super-priority for a portion of unpaid dues. Have a local attorney confirm where an association lien sits in your specific state before you bid.

How do I find the current payoff balance on a senior mortgage before I bid?

Start with the recorded documents — the mortgage, any modifications, assignments, and the lender’s own foreclosure filings if one exists, since a filed complaint usually states the amount claimed. Recorded origination amounts tell you only what was borrowed, not what is owed. A title search or an attorney’s opinion is the practical route to something you can underwrite.

Where you cannot verify the payoff, assume the worst case rather than the convenient one. A loan that has been in default long enough to produce an HOA delinquency has likely accrued interest, penalties and lender-advanced taxes well above original principal.

Why do some USDA and bank mortgages go years without being foreclosed?

Kelley’s read on the USDA side is that reported foreclosure volume reflects badly on the program, so defaulted loans sit rather than getting filed — the agency’s public foreclosure listing showed only about 10 properties nationally when she checked. The agency can still pursue the borrower directly, including collections against Social Security, without ever taking the house.

Private lenders do it too. She acquired another association foreclosure carrying a Deutsche Bank mortgage where the borrower had not paid in five or six years with no foreclosure filed. Whatever the internal reason, the loan remains enforceable, and inaction is not a release.

If the senior lender is paying the property taxes, who is actually at risk?

You are. The lender advances taxes to protect its collateral and adds those advances to the payoff, so every payment it makes grows the claim ahead of you. On Kelley’s property the USDA sends money to the township monthly, which is why she has no tax outlay — and why the balance kept climbing.

Meanwhile you carry the rehab cost, the insurance, the association dues and the operating risk, and you can be foreclosed out with no equity recovery. Paid taxes look like a benefit on the monthly statement and function as an increasing liability on title.

Can AI research replace title work when screening a county lien list?

For screening, it is genuinely effective. Kelley uploads the township’s released lien list, specifies the search sites, and gets back a spreadsheet with addresses, ownership and recorded mortgages that eliminates roughly 95% of candidates before she drives anywhere. That is triage work on public data, and it used to consume days.

It does not replace verified payoff figures, a title search, or a physical inspection. She still walks every property that survives the screen. Use it to decide what deserves real diligence, not as the diligence itself.

The bottom line

Before your next association or tax lien bid, do one thing: write down the verified current payoff on every lien senior to your position, and refuse to bid on any parcel where that figure is a guess. Kelley’s property cash flows well and she may still lose it, because the number she assumed and the number recorded ahead of her were $200,000 apart.