Foreclosure

Losing your home in a foreclosure because you missed a $250 HOA payment – can that actually happen? Is it even legal?

Yes and yes. This exact situation happened to Tina and Devery Hale. Our past two blogs went into detail on their case, Winrose Homeowners’ Association v Hale (read the opinion here), which went before the South Carolina Supreme Court in 2019. Those blogs are linked here and here.

But we’re not done yet because there’s even more to it. This case exposes bad parties acting in bad faith that every homeowner should be aware of.

Can Your HOA Take Your Home for Non-Payment of Dues?

Did you know that it’s not only the bank that has the power to foreclose on your home? It may seem absurd that your HOA can foreclose on your home because you missed paying your assessment, but it is legal in South Carolina and it does happen.

In the Winrose case, the Hales agreed to the following covenants and restrictions when they bought their house:

“If the [HOA dues] assessment is not paid within thirty (30) days after the delinquency date, the assessment shall bear interest from the date of delinquency at the rate of eight percent per annum, and the [HOA] may bring legal action against the owner personally obligated to pay the same or may enforce or foreclose the lien against the lot or lots […]”

The HOA was within their legal rights to do what they did. However, that doesn’t mean the SC Supreme Court was happy about it.

HOAs Making a Buck Off Unsuspecting Homeowners

Typically, once the court has stated its decision, that’s the end of the opinion. But not here. Writing the opinion for Winrose v Hale, Justice Kittredge had more to say. “We note our concern about this foreclosure proceeding,” he begins.

Recognizing the right of the HOA to pursue a lien and a foreclosure on the Hales’ house, the court characterizes this as a tactic to “capitalize on a small debt.” Though the amount past due was small, the HOA’s attorney went straight to the strongest measures possible as a next step – placing a lien and foreclosing on a house valued at $128,000 for a past due amount of $250.

Why? “The true nature of this foreclosure action is illustrated by the service and filing fees (which are more than double the amount of the principal due) and attorney’s fees (which were eight times the amount of the principal due),” writes the court (emphasis original). “A foreclosure proceeding is a last resort, not a business model to be swiftly invoked for the purpose of exploiting property owners.”

The Hales’ HOA was willing to let them lose their home and their equity in it in order to make some money in fees. Luckily for The Hales, they got their house back in the end, but that’s not always how this scenario plays out. Many people have lost their homes to HOA foreclosures.

Buyers Extorting Homeowners

The HOA was not the only bad actor here; the court was also “especially troubled” by the actions of the party that bought the Hales’ home, Regime Solutions, LLC.

In the majority of judicial sales, like the kind that was used to sell the Hales’ home, the purchaser of the foreclosed home takes on the property’s mortgage and other debts. This is necessary because the house is only free and clear once the associated debts are settled.

But Regime never took on the Hales’ mortgage. Not only that, but their business model appears to be based on not assuming the mortgage of the properties it purchases. After buying a foreclosure at a very low price, Regime either lets the bank foreclose on the property or it negotiates with the homeowners to let them have their house back for a large fee.

Between 2013-2016, Regime bought 38 properties that were later foreclosed on by the bank and 15 properties that it gave back to the original owners through a quitclaim deed for a profit of between $2,911-$13,984 per property. In the present case, the Hales offered to pay Regime $9,000 to settle the matter, but Regime asked for $35,000. The Hales didn’t pay it.

Summing up this section, the court states, “We do not countenance the improper use of foreclosure proceedings by the HOA, its attorney, or Regime” (emphasis original).

Could This Happen to You?

Yes, possibly. Depending on what covenants and restrictions you agreed to with your own HOA or regime, you could potentially find yourself in a similar situation as the Hales.

What can you do to avoid it?

First, make good decisions. Towards the end of its opinion, the court states “Our decision today should not be read as a shift toward providing relief to homeowners despite their own poor choices, in particular here, falling behind on a minimal amount of HOA dues and subsequently failing to respond to the summons and complaint.”

So take action on any and all legal matters that come your way. Fulfill your legal obligations as you promised to do in a timely manner by paying your mortgage and dues on time every month. Don’t assume that there could be no legal ramifications to paying late just because it’s a relatively small amount of money. This thinking can get you in trouble.

Next, review the paperwork you signed with your HOA or regime. It’s common for buyers to skim over these documents during a long real estate closing and therefore have no idea what it is they’re actually agreeing to. But you can take the time now to look at your covenants so you’re aware of the powers your HOA or regime has to charge you interest, place a lien on your property, pursue a foreclosure, and so on.

Finally, contact an attorney if you have any questions, especially if you’ve been served with papers.

Smart Legal Advice

If you need help with estate planning, business documents, commercial real estate, or strategic advice in a legal matter, contact Gem and his associates at the Gem McDowell Law Group in Mt. Pleasant, SC. Gem is a problem solver with over 35 years of experience helping families and business owners alike protect their interests and make smart decisions for peace of mind. Schedule a free consultation by calling 843-284-1021 today.

In South Carolina, a judicial sale of a property can be set aside if the sales price is “inadequate.” Either the sales price must be “inadequate” and also involve fraud, or the price must be “so grossly inadequate so as to shock the conscience of the court.”

What makes a sales price “grossly inadequate”? Just how low does it have to be? In South Carolina, there is no set amount or percentage that a court must apply to make that determination. However, looking back at past cases in the state, courts have consistently determined that sales prices of 10% or less of the property’s value are “grossly inadequate.”

Based on this, the 10% threshold was used as a benchmark in Winrose Homeowners’ Association v Hale (read the opinion here) which went before the South Carolina Supreme Court in 2019, and which we discussed in a previous blog.

How to Calculate the Sales Price: Debt Method vs Equity Method

In Winrose, Tina and Devery Hale’s home was sold in a judicial sale after they missed an HOA payment of $250 and their HOA foreclosed. Regime Solutions, LLC, bought it with a high bid of $3,036. The fair market value of the house was $128,000, with an unpaid mortgage balance of $66,004.

Since fraud was not an issue in this case, the question for the court to decide was whether the sales price of the house in question was “so grossly inadequate” that the sale could be set aside. If so, the foreclosure could be vacated and the home returned to the Hales. If not, the judicial sale would stand and Regime would retain the house.

With the 10% benchmark in place, the court needed to determine what the sales price was. There are two methods for determining whether a bid price is so grossly inadequate as to shock the conscience:

1. The Debt Method. This assumes that the party that purchases the foreclosed property will become responsible for the mortgage and other associated debts. This method focuses on how much the foreclosure purchaser must pay before having a free-and-clear title to the property, so the value of the outstanding mortgage is added to the bid price.

In this case, Regime would have paid ($3,036 bid) + ($66,004 mortgage balance) = $69,040. This is 53.9% of the Property’s fair market value of $128,000.

2. The Equity Method. This method focuses not on the debt the foreclosure purchaser is taking on, but the equity they would gain through the transaction. Instead of adding the outstanding mortgage balance to the bid, the balance is subtracted from the fair market value and compared to the bid.

In this case, Regime would stand to gain ($128,000 fair market value) – ($66,004 mortgage balance) = $61,996. The amount Regime paid, $3,036, is 4.9% of the equity it would stand to gain.

The majority of the time, the party that purchases the foreclosure does take on the obligations of the mortgage, because associated debts needs to be settled in order to have a free-and-clear title. For these situations, the Debt Method is appropriate.

But in the present case, Regime never took on the Hales’ mortgage and never took any positive steps to do so. As Justice Lockemy pointed out in his dissenting opinion in the Court of Appeals decision, it didn’t make sense to credit Regime with having taken on the mortgage. Furthermore, the Hales continued to pay their mortgage, substantially reducing the outstanding debt on the house over time. Therefore, using the Equity Method in this case is, in the words of the SC Supreme Court decision, “the only logical option.”

Since 4.9% is clearly below the 10% threshold, the court concluded that the bid was, indeed, “so grossly inadequate as to shock the conscience of the court.” The court set aside the foreclosure sale.

Get Strategic Legal Advice

For guidance and legal help on business matters, estate planning, and commercial real estate in South Carolina, call Gem of the Gem McDowell Law Group in Mount Pleasant, SC. Gem and his associates are experienced problem solvers who are here to help you and your family. Call 843-284-1021 today to schedule a free consultation at the Mount Pleasant office.

Imagine this situation:

You miss an HOA payment. Then you receive some legal documents in the mail, put them in a drawer, and forget about them. When the HOA sends a bill for the outstanding amount, you pay it and later receive confirmation that the situation is resolved.

The next thing you know, you discover that your house has been foreclosed on, someone bought it at auction, and now they are trying to evict you.

Though this may sound crazy, this is exactly what happened to Tina Hale and her husband Devery Hale. Their case, Winrose Homeowners’ Association v Hale (read it here), went all the way to the Supreme Court of South Carolina. It’s a good cautionary tale about what can happen when you ignore legal proceedings and an eye-opening look at the way some parties try to take advantage of unsuspecting homeowners.

The Hales Miss an HOA Payment

Tina and Devery Hale bought their home (the Property) in 1998 for $104,250. In addition to paying their mortgage regularly, they were also obligated to pay a monthly assessment of $250 to their HOA, Winrose Homeowners’ Association, Inc.

In January 2011, the Hales fell behind in HOA dues. In response, the HOA first filed a lien against the Property and then pursued a foreclosure, seeking $556.41, which was the amount of the late dues plus accrued interest. The right of the HOA to charge interest on late payments, put a lien on the lot, and pursue foreclosure was part of the covenants and restrictions that the Hales agreed to when they bought their house.

The Hales didn’t respond to the complaint (in an affidavit, Tina Hale said that she simply put it in a drawer and forgot about it), so the HOA submitted an affidavit of default. From then on, the Hales didn’t receive any further notices of what was going on with respect to the foreclosure and sale.

It was here that the HOA sent the Hales a bill for the outstanding $250, which they paid. The HOA’s law firm then sent the Hales a letter saying that the lien had been satisfied, and the Hales thought that was the end of it. But the HOA didn’t withdraw their suit.

Foreclosure and Sale

The matter first went to a master-in-equity (Master), who entered a default judgment of foreclosure and sale against the Hales. He calculated an amount due of $2,898.67, comprised of $250 in principal, $80.87 in interest, and $2,025 in attorney’s fees. The Master noted that the sale of the property would be subject to the existing mortgage.

The Property sold at public auction two weeks later to Regime Solutions, LLC (Regime) with the high bid of $3,063. At that time, the fair market value of the Property was approximately $128,000, with an outstanding mortgage balance of approximately $66,000.

The Hales remained unaware of all of this. It wasn’t until Regime tried to evict them from their house – which they continued to make mortgage payments on – that they discovered what was happening.

The Hales Fight Back

Upon discovering what was going on, the Hales filed a motion to vacate the foreclosure sale on the basis of the sale price being “so grossly inadequate as to shock the conscience of the court.” Vacating the sale would give the Hales back ownership of their house.

The Master denied the motion to vacate. Though the amount of $3,063 is low, when taking into account the outstanding mortgage amount of $66,004, he calculated an effective sales price of $69,0404. At a little over half the fair market value of $128,000, this is a great deal for the buyer but is not low enough to shock the conscience of the court.

The matter next went to the South Carolina Court of Appeals, where a majority of the panel affirmed the Master’s decision. Notably, Chief Justice Lockemy dissented, saying it didn’t make sense to consider the outstanding mortgage amount in the effective sales price, since Regime had not, in fact, assumed the Hales’ mortgage and never took any steps to do so.

The South Carolina Supreme Court’s Decision

The matter then went to the South Carolina Supreme Court, where it was heard in September, 2019. The issues at hand were whether the judicial sale of the Property should be set aside due to an inadequate sales price and how to calculate that price.

Ultimately, the SC Supreme Court agreed with Chief Justice Lockemy’s take that it wasn’t right to credit Regime with having taken on the debt of the mortgage. Using the Debt Method, the court determined that the sales price of $3,036 on a house with a fair market value of $128,000 was, indeed, so grossly inadequate so as to shock the conscience of the court. The court set aside the foreclosure sale and remanded the case back to the Master.

(Read more on how the court determined the sales price and what exactly constitutes a “grossly inadequate” price in this follow-up blog.)

Take Care of Legal Matters Promptly

Though the Hales ultimately won, it took over eight years to get a verdict in their favor and surely caused a lot of stress and expense in the meantime. While they weren’t in control of the actions of their HOA or Regime, there are a couple lessons to be learned here.

First, do not ignore a summons, lawsuit, or any other legal document, and don’t put it in a drawer and forget about it; speak to an attorney right away about it. Second, understand the contracts you’re involving yourself in. Most people would probably find it inconceivable that their HOA would foreclose on their house for a simple missed payment of $250. But that’s exactly what happened here, and it was because of the terms in the contract both parties agreed to. It’s important to understand what you’re agreeing to anytime you sign a contract.

For help or advice on contracts, or for issues of business law or estate planning, contact Gem McDowell. Gem and his associates at the Gem McDowell Law Group can give you the strategic advice you need to make smart, informed decisions. Call 843-284-1021 today to schedule a free consultation or to book an appointment at the Mount Pleasant office.