There are many misconceptions about an HOA foreclosure that people believe to this day. But, it is imperative to separate fact from fiction to keep your association safe, legal-wise.
HOA Foreclosure in North Carolina: Can All HOAs Foreclose?
One thing that most HOA and condo boards ask about foreclosure is, “Do we have that ability?” And the answer, as of now, is it depends.
Recently, the North Carolina Court of Appeals made a decision, Foreclosure of a Lien by Executive Office Park of Durham Association v. Rock, that condominiums that were formed prior to October 1, 1986, under the North Carolina Unit Ownership Act (Chapter 47A) do not have the right of foreclosure under a power of sale.
But, condominiums formed under the North Carolina Condominium Act (Chapter 47C) and associations formed under the North Carolina Planned Community Act (Chapter 47F) do possess the right of foreclosure under a power of sale. This covers most of the condo and homeowners associations in North Carolina.
Currently, there are attempts to have the Court of Appeals decision overturned. There are also efforts to seek legislation that specifically grants Chapter 47A condominiums the right of foreclosure under a power of sale. But, as of writing, no such changes have been made. As such, this means condominiums under Chapter 47A only have a judicial foreclosure as their option. This option, though, is known to be more expensive and complex.
For the purposes of this article, we will only be covering an HOA foreclosure as it applies to Chapter 47C condominiums and Chapter 47F planned communities.
What Is an HOA Foreclosure?
Many homeowners are only familiar with foreclosures as they relate to their mortgages. When a homeowner buys a property, they typically must borrow money from a mortgage lender such as a bank. But, when they fail to pay for their mortgage, the bank can foreclose the deed of trust to cover the homeowner’s debt.
In short, a foreclosure is an act of assuming possession of someone’s property on the courthouse steps to settle a debt. For HOAs, this debt is the Claim of Lien for Assessments. Homeowners who are part of an HOA must pay regular dues and assessments to the association. When they fail to make these payments, the HOA can file a claim of lien.
Homeowners association foreclosures consist of some similar qualities as bank foreclosures, with a few notable differences. Knowing what steps are involved in HOA foreclosures is paramount for HOA managers and boards alike. While you can seek assistance from an attorney, not all attorneys have a clear understanding of what goes into HOA foreclosures. Thus, it is best to seek counsel from an attorney who practices in this area of the law.
What Is an HOA Lien?
The most common reason why an HOA might foreclose on a property is because of unpaid dues or assessments. The HOA will need to file a Claim of Lien for Assessments against the property in question.
This HOA lien impedes an owner’s ability to sell or refinance the property without satisfying the debt first. If the owner does not sell or refinance, though, the lien simply remains on the public record.
Liens stay attached to a property for three (3) years. After that, they expire. The HOA can then file another lien against the property. Alternatively, the HOA can foreclose the lien to force the owner into paying their debt to the association.
Understanding the HOA Foreclosure Process
What does the HOA foreclosure process entail? Find out below.
Phase One: Notices, Voting, and Hearing
Once an HOA board decides to foreclose, it must satisfy some statutory requirements, such as:
- Confirm that the homeowner is indeed behind on their dues or assessments by at least 90 days;
- Vote to specifically act on the lien and initiate foreclosure proceedings;
- Provide the owner prior written notice, allowing them the opportunity to settle their debt in full or offer a payment plan; and,
- Appoint the HOA attorney as the trustee to administer the foreclosure.
After meeting these requirements, the HOA should then file a Notice of Foreclosure Hearing with the Clerk of Court in the county where the property is located. The HOA should serve this notice to the owner via Certified Mail, Federal Express, and/or by the Sheriff. If you are unable to locate the owner even after due diligence, the Sheriff may “post” the property.
The notice lets the owner know that they must attend a hearing before the Clerk of Court, a process known as non-judicial foreclosure. In this type of foreclosure, the HOA does not take on a high burden of proof. What does the HOA need to prove?
- The owner is 90 days past due on their dues or assessments
- The board vote to foreclose the lien
- The owner received proper pre-foreclosure notices
- The HOA has the authority to foreclose
Keep in mind, though, that the law grants the owner at least one postponement of up to 60 days to attempt to pay the debt, provided the property is the owner’s principal residence. The HOA should accept payment arrangements, so long as they are reasonable. It can then postpone the foreclosure action or dismiss it completely with the agreement that the HOA will re-file the lien if the owner fails to follow the payment plan.
Phase Two: Notice of Sale and Bidding
If the two parties fail to agree on a payment arrangement and the HOA meets the statutory requirements, the Clerk will then enter an order to permit the foreclosure to continue. This triggers the second phase of the foreclosure process.
Phase Two starts with the HOA filing, posting, and publishing a Notice of Sale. The sale date is typically set 25 to 30 days after this notice is filed and takes place on the courthouse steps. The attorney-trustee will read the Notice of Sale and open for bidding. An HOA will usually bid the amount of the debt, plus any fees incurred during the process. If there are no other bidders, the HOA is deemed the highest bidder and the sale ends.
Although the HOA puts in a bid, it never actually pays any cash. Instead, the bid assumes the form of a “credit bid,” which is bidding what it is owed. After winning the bid, it is then necessary to file a report of the sale with the Clerk. This then triggers an “upset bid” period, which takes place over 10 days. Anyone can file an upset bid, but it must be at least five percent (5%) higher than the last bid.
Once the 10 days are up, the HOA will then file a final account with the Clerk. The trustee must also record a deed in the Register of Deeds to the high bidder (typically the HOA).
It is important to note that the HOA does not actually receive payment for what it is owed if it is the highest bidder. Instead, it assumes possession of the property in lieu of the debt amount.
Frequently Asked Questions About the HOA Foreclosure Process
Can other people bid on the HOA foreclosure sale?
Yes, third parties can place bids at the foreclosure sale. If there are third-party bidders, they must place a higher bid than the HOA to win. Even a single dollar higher is accepted. The bidder must then pay $750 or five percent (5%) of the bid to the trustee at that time, whichever is greater. The same process follows, with a report of the sale filed with the Clerk, triggering the upset bid period.
If the third-party bidder wins the sale, the HOA will receive the amount it is owed and any surplus goes to the Clerk. This ends the HOA’s involvement, with the new owner now bearing the responsibility of evicting the previous owner. The new owner must also pay HOA dues since they are now part of the association.
What is the success rate for HOAs?
Non-judicial foreclosures generally tend to favor HOAs. This is because owners cannot use disputes — such as whether the HOA fulfilled its duty to maintain the common areas and about the amount owed — as defenses. If your attorney does their job well, you should have a high success rate.
Most of the time, though, the process will halt before Phase Two begins. A majority of homeowners would rather pay the amount owed in full or agree to a payment plan than risk losing their home over unpaid dues.
What happens when a foreclosure is contested?
For contested foreclosures, the HOA’s attorney can no longer act as its attorney and trustee at the same time. This will require the HOA to appoint another independent party as the trustee.
Most of the time, the newly-appointed person is also a lawyer. A contested foreclosure can be more costly. Everything else about the foreclosure process, though, remains the same.
Winning the Bid: What Happens After an HOA Foreclosure?
If a third party wins the bid at the sale, then the HOA will receive payment for the debt and welcome a new resident to the community. As far as the HOA is concerned, the issue is over. But, what if the HOA wins the bid and assumes ownership of the property?
Evictions and Renting
If the HOA becomes the new owner of the property, it can have the Sheriff evict the previous owner/s. If the property is occupied by a tenant, it can evict the tenant as well. But, considering tenants bring in revenue, the better option is to retain the tenant and have them pay rent to the HOA instead.
When evicting the owner, the HOA must provide them with a 10-day notice prior to the eviction. Many owners will negotiate with the HOA and pay their debt in full out of fear of losing their homes.
Mortgages and Sale
If the HOA remains the owner of the property, that does not mean it has to continue paying the previous owner’s mortgage. This will usually force the bank to foreclose, which can take months — even years. During this period, the HOA can rent out the property and earn extra revenue.
It is also a common misconception that the mortgage company will pay off the HOA once it becomes the new property owner. Since the mortgage is superior to the HOA lien, the lender usually does not care. The mortgage company also does not owe the HOA dues or assessments, as per North Carolina law. Additionally, the mortgage company is not liable for any previous unpaid dues even if it forecloses.
Once the HOA becomes the new owner, though, it can now sell the property or list it for sale with a real estate broker. It is a good idea for the HOA to sell the property as soon as possible. The sale price can vary, but the HOA normally does not need much to settle the debt it is owed. Keep in mind that the HOA’s function is to maintain the property, not to sell real estate.
Property Taxes and Insurance
Most of the time, the HOA is not liable for property taxes once it becomes the new property owner. But, in some counties, such as Brunswick and Onslow, the trustee can only record a deed after any back taxes are settled. Plus, because the property won’t remain under the HOA’s ownership for long before it decides to sell or the first mortgagee forecloses, the HOA rarely needs to pay property taxes.
As for insurance, the HOA will generally need to purchase hazard insurance if there is equity in the property. Otherwise, it is not necessary. In all cases, though, the HOA should include the property under its liability policy (if not already included) so that the association is covered if someone is injured on the property.
Attorney’s Fees and Court Costs
The court will order the homeowner to pay the court costs and attorney’s fees related to the foreclosure. But, collecting these will come as a challenge for the HOA.
By law, the attorney’s or trustee’s fees for uncontested foreclosures have a limit of $1,200 plus court costs. This covers the services through the sale of the property. For tenant negotiations, bidder defaults, evictions, and post-sale bankruptcies, those are extra. Expect court costs to range from $400 to $500 for Phase One and another $800 to $1,000 for Phase Two.
Can the HOA File a Lawsuit Against the Owner?
Aside from filing a claim of lien and foreclosure, HOAs also have the option of obtaining a judgment against the delinquent homeowner. This requires the filing of a lawsuit in either:
- Small Claims Court. The HOA must file the lawsuit in Small Claims Court if the amount owed is less than $10,000 and the owner resides in the county where the property is situated.
- District or Superior Court. The HOA must file the lawsuit in District or Superior Court if the amount owed is more than $10,000 or the owner resides in another county.
Although the HOA technically can file a lawsuit against the owner, it is not always the best course of action.
The Pros and Cons of Filing a Lawsuit
What are the advantages of filing a lawsuit and obtaining a judgment against the owner instead of filing a lien and foreclosing?
- Liens and foreclosures require the help of a lawyer, whereas a suit filed in Small Claims Court does not.
- Judgments last for 10 years, while liens only last for three (3) years.
- Liens only apply to a single piece of property, but judgments apply to all real property. Judgments are best if the owner has no equity in the property but has equity in other properties (particularly in other counties).
On the other hand, there are also drawbacks to filing a lawsuit, such as:
1. Counterclaims
Unlike foreclosure actions, lawsuits allow owners to file a counterclaim against the association for failing to maintain the common areas and generally not performing its function. As previously explained, in non-judicial foreclosures, owners don’t have that opportunity. They can’t even file a counterclaim as a response to a Claim of Lien for Assessments.
2. Two Appeals
Compared to foreclosures, which only allow for one appeal, lawsuits filed in Small Claims Court allow for two appeals at the local level. If the HOA wins in Small Claims Court, the owner can put in an appeal and go through arbitration. If the HOA wins that as well, the owner can appeal again and go through a hearing before a District Court judge.
Such a process is less favorable to HOAs since it will require more time and effort, not to mention funds to hire a lawyer. Even in foreclosures that only have room for one hearing, it occurs very rarely.
3. Statutory Exemptions
Certain statutory exemptions apply to owners when it comes to enforcing a judgment. If a judgment is granted against a married couple for $8,000, for instance, the HOA can only collect the money if the owners have enough equity in the property. On the other hand, liens don’t have such statutory exemptions. This means that the HOA can foreclose the lien even if the owner has no equity in the property.
4. Bankruptcy
Another area where liens are superior to judgments is when it comes to bankruptcy. If an owner files for bankruptcy, there are more statutory exemptions that can apply. For judgments, the owner would need to have more than enough equity in the property for the HOA to receive payment during the bankruptcy process.
But, if an owner files for bankruptcy when there is already an existing HOA lien attached to the property, the HOA remains a “secured” creditor as long as the owners have enough equity in the property.
5. Limited Effectivity
Judgments have limited effectivity because they only secure the amount owed at the time they are entered. That means the HOA is not secured any additional amounts owed beyond that judgment. If the owner continues to miss payments, the HOA would need to file more lawsuits.
In comparison, when the HOA files a lien, it will continue to remain in effect and secure amounts owed beyond the date filed. Liens last for up to three (3) years.
6. No Right to Evict
Lastly, judgments don’t give the HOA the right to evict the owner or tenant. The HOA also can’t seize part of a tenant’s rent to settle the debt. A Sheriff can possibly foreclose and sell the property to fulfill the judgment, but this can only occur if the owners have more than enough equity in the property.
HOA Foreclosures Work
An HOA foreclosure may seem like a long and arduous process, which is why it can turn many boards and managers off. But, for occupied properties, it is the best course of action an HOA can take to settle an owner’s unpaid dues. Even if the foreclosure action itself does not satisfy the debt, it helps fast-track the bank foreclosure process that would welcome a new paying owner into the community.
Foreclosures can be a confusing topic for self-managed boards. An HOA management company like Cedar Management Group, though, can help make the process go smoother. Call us today at (877) 252-3327 or contact us online for a free proposal.
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- Homeowners Rights Against HOA: Avoiding Conflict In The Community
- Should Your HOA Hire A Separate HOA Collection Agency?
- Your Guide To North Carolina HOA Laws
