(BREAKING NEWS – OP-ED) — The author of this post includes the relative case opinion for your educational enjoyment. One does not have to be an attorney to read a court opinion and derive the same conclusions I did, even though they’re not legal advice.
A lot of you have moved into areas that contain homeowners associations (hereinafter “HOAs”). After living in one once, I’m no longer a big fan of them. This is largely due in part to the following rationale:
- There’s usually an area resident living near you that drives by your home every day and takes notes of “alleged violations” on your property (e.g., grass not mowed to that person’s specified desire; extra vehicle parked on the street; vehicle with signage on it visibly parked in the driveway; mailbox flag painted green when the specifications call for flags to be painted red; 5-gallon bucket of water (with water in it) sitting noticeably within eyeshot, which could draw mosquitoes; dead grass which should be replaced with decent sod (in their opinion); tree branches hanging too low over sidewalk; roof shingle torn away; clump of weeds growing visibly near the entrance to your driveway … and the list goes on and on of all the nitpicking that these “Gladys Kravitz’s” do on a regular basis);
- Making modifications to your home without contacting the HOA’s Architectural Control Committee FIRST and getting prior approval (or not) before doing the modifications; and the most notorious …
- Failing to timely pay HOA dues and assessments.
I hate it when people tell me I “can’t” do something to a property I’m responsible for occupying and maintaining, don’t you?
While the foregoing examples can be particularly annoying, the argument for having an HOA is that having community-based oversight protects property values in the neighborhood … except when the HOA decides to file liens against you and subsequently foreclose on the property in a manner that “shocks the conscience”.
Such was the case in South Carolina, where (in this case), the Hales, who had been faithfully paying on their existing mortgage regularly, inadvertently forgot to pay their $250 HOA dues and were foreclosed on by their HOA (Winrose).
Investors particularly like this kind of scenario because they can buy properties through HOA sales cheap. The problem with all of this is that (if you were paying attention beforehand) the Hales had a mortgage and were current on it.
What part of reading the Covenants, Conditions & Restrictions (hereinafter “CC&Rs”) and By-Laws of the HOA do you not get?
Here’s a thought: Before moving into an area, do the following:
- Identify immediately upon inquiry whether the property is part of an HOA, COA (Condominium Owners Association) or POA (Property Owners Association) … or any kind of Planned Unit Development (PUD) BEFORE even deciding whether or not you want to live there;
- Identify what utility districts supply the property with water, sewer, electric, etc. (yes … these little buggers can posit real headaches for you as well); and
- Demand a copy of the CC&Rs (some of these can be quite lengthy … yes, you need to get them) and the HOA/COA/POA/PUD By-Laws … and read them from cover to cover. You’ll notice one particular thing about these entities: they don’t have to notice lien holders, only property owners!
The disagreement came from the Chief Justice of the South Carolina Supreme Court, who appears to have sided similarly with recent Nevada and U.S. 9th Circuit opinions that HOAs may possess a super priority lien in certain cases; however, when it comes to fighting a homeowners’ claim that you unjustly enriched yourself (as an investor buying their property at an HOA foreclosure sale) for a pittance while they were stuck with the mortgage … well … that’s where the rubber meets the road (as it were) as you’ll see when you read this opinion:
I found this 11-page opinion interesting because of its apparent equitable conflicts. The case was reversed and remanded back to the appellate court because the Hales demonstrated that the buyer of their HOA lien (Regime) bought 38 other properties at HOA foreclosure sales and not once bothered to pay off the senior liens, which then turned around and foreclosed on the properties Regime bought for failure to pay the mortgages. In other instances, Regime bought at least 15 properties where it quitclaimed back to the owners for a profit between $2,911 and $13,984 per property … WOW! What a game of things, eh? This is one way to make money as an investor, especially when the homeowners are actually paying on their mortgages. The 38 properties were probably rented out, if Regime actually evicted the homeowners in favor of renters and Regime could have likely pocketed the earnings prior to foreclosure (if there was equity in the properties, could that not be construed as criminal equity skimming?); however those side mentions were not actually contained in the opinion.
Shitty investor behavior? Perhaps.
If you read Part II of this opinion (starting at Page 5), you’ll see why judges have “equity hats”. While many investors think of these as “Ass Hats” because in the minds of the investor, a sale is a sale is a sale is a sale. However, the CC&Rs and the By-Laws clearly state (in nearly all instances I’ve seen) that the HOA is NOT required to notice the lien holder of a pending foreclosure sale! Even though the mortgage (deed of trust) does state that the lender MAY, in an effort to protect its lien interest in a property, mostly contained in the mortgage’s Paragraph 9), pay the HOA dues to protect its lien interest, most don’t. This is what has created the super priority liens cases in Nevada … and now apparently, due to inequitable concerns, in South Carolina.
The “Equity Hat” comes in (in this case) where the winning bid “shocks the conscience”. It’s one thing if the investor were to do a chain of title assessment (COTA) on the property and discover bogus assignments for which it could later “knock out” the existing lender in lieu of paying the mortgage loan off.
However, that is NOT how this plays out.
The inequities in this instance went against the HOA and Regime:
- The Hales were minimally in arrears on their HOA dues, yet the HOA foreclosed on a $128,000 home in its eagerness to collect the outstanding $250! The greedy bastards! Welcome to the world of homeowners associations! The majority of them behave just like this! Many at least give the homeowners notice (along with plenty of time) to make up the delinquency in order to avoid foreclosure.
- Regime, because it attempted to extort the astronomical sum of $35,000 from the Hales on a $3,000 bid it paid at the HOA foreclosure sale! The greedy bastards! Welcome to the world of extortion by investor. This is not unusual; however, since I’m an investor, I tend to look at things a bit more objectively.
Black letter law is what it is. Investors aren’t responsible for paying the senior lien if they acquire property at an HOA foreclosure sale. Homeowners are responsible (according to their mortgage loan terms and conditions) for paying dues and assessments to prevent the lien holder from losing their first position claim to the property. In this case, lesson learned. The Supreme Court vacated the HOA sale and remanded the case back to the Special Master for further proceedings. Equity is Equity folks. What shocks my conscience even more is the absence of thought when it comes to buying property in an HOA, giving a third party control over how you live and charging you a fee to do it … and when you don’t pay the fee, they steal your property for a paltry sum just to make a point that they’re in control of your life!
Be that as it may … especially as we’re in the “holiday season” … the outcomes (the just desserts) are based on your honest objectives in investing in anything, whether it’s buying a property (in an HOA or not) or investing in others’ misfortunes. What goes around comes around.
Be that as it may … a homeowner living in an HOA has to be on the lookout for “shitty behavior” on the part of the HOA (including checking the legal description and comparing it to what’s really recorded in the land records … you might be surprised to find the HOA doesn’t have a claim of lien on you at all because the legal description was improper!) … and by not stepping into this trap in the first place by buying elsewhere, where HOA’s don’t rule your life.
I know … some people like having an axe held over their heads all the time to keep them in line. They think they’re good citizens by living in an HOA community. Many of these HOAs have golf courses and other super amenities that cater to the current affluence out there … but … as the saying goes: Ah, the times … they are a-changing! These HOAs may find the younger mindsets of the millennials and their successors want nothing to do with them.
This is why I teach chain of title assessment classes … BTW … there’s one coming up soon … CLICK HERE for more info! Caveat Emptor!
In my next post … I’m going to break loose into the politico of the discord that has infiltrated America … which goes to show that you can’t drain the swamp without something stinking! Many of you are “preparing for uncertain times” … and rightly so … you should be!