Monday, Nov. 23, 2009

Unpaid dues drive homeowner association foreclosures

Grand Strand homeowners groups crack down on delinquent residents

John Fritzsch knew he was behind on his payments to his homeowners association, but he was still floored when he learned those late payments had led the association to foreclose on his condominium in Myrtle Beach.

"It wasn't something that I expected," he said, adding that he didn't know the association had the power to foreclose on him.

Fritzsch, of Brick, N.J., was diagnosed with multiple sclerosis after buying the condo in 2005, a setback that forced him to stop working and that brought mounds of medical bills - which made him fall behind on his HOA payments.

The number of foreclosures by homeowners associations has jumped in the past few years - another byproduct of the recession. Some of those who have been foreclosed on say they had no idea a HOA had that kind of power, while HOA representatives say the foreclosures are a last resort that must be taken to be fair to the community, especially the property owners who pay their dues.

Last year, there were 461 foreclosures filed by homeowners or property owners associations along the Grand Strand, more than double the 181 in 2007, according to SiteTech Systems, a local company that tracks the real estate market. From January to September, there were 260 foreclosures by HOAs, according to the company.

Pat O'Dea, an attorney with McCutchen, Mumford, Vaught, O'Dea and Geddie who handles many foreclosures for homeowners associations, said that under the horizontal property act that governs condos in the state, associations can put liens on a property or foreclose if someone has not paid their dues.

"It's a very effective tool for an association to obtain its delinquent assessments," he said.

In most cases, the mortgage lender is also filing foreclosure, and the HOA will only get paid if there is money left after the lender and the taxes are paid, he said.

Although there are some similarities, each association sets its own procedures for late payments - some give homeowners more time to work things out than others, and some may start removing services, such as cable TV or pool privileges, paid for by the dues.

"The bottom line is that's the last course of action we want to take against any homeowner," said Chris Beseler, the secretary of the homeowners association at Waterway Village, a 279-unit condominium development. "It's a very difficult decision to make those kinds of moves on an owner that is facing a hard time financially."

Beseler said the association has had to foreclose on some owners, especially in situations when that person doesn't communicate with them.

"Any money that is not paid in is money other owners are going to have to pick up," he said, adding that any collection action taken, such as a lien placed on a property, is done to protect the other owners. "Everyone understands we are going to aggressively pursue them for their dues for the good of the whole community."

While most property owners understand that the dues have to be paid, some, like Fritzsch, are surprised at the association's ability to foreclose.

Fritzsch said he got several letters informing him that his dues were late and tried to work out a payment plan, but it didn't work, and the association put a lien on the condo.

He said part of the problem was that in addition to the association fees, there were several special assessments, to replace siding on the building, replace air conditioning and repair the roof.

But, he said, the board votes for them even in this tough economy. He said he budgeted for the $264-a-month regular fees but couldn't afford the extra $2,000 to $4,000 in special assessments.

The legislature may consider a bill in the upcoming session that would try to address how associations settle disputes with homeowners and determine what the state should do to regulate them.

In some situations, such as with rising insurance costs, a HOA may have no choice but to require a special assessment, said Jennifer Harmon, the vice president of operations of The Noble Co. of South Carolina.

If a HOA had perfect planning, it should have saved enough money in the reserves to cover the costs of some repairs, such as fixing a roof, and be able to avoid a special assessment, Harmon said. But that isn't always possible, she said.

In the past year, the HOAs that she manages have tried to keep budgets constant and avoid special assessments because of the economy, Harmon said.

"It's not the year to take any increases that you could reasonably do without," she said.

Second-home owners and investors represent most of the owners that HOAs have foreclosed on, according to O'Dea and several people who manage HOAs.

Jackie Wright, the owner of Wright Management, said that she is seeing investors walking away from properties they can no longer afford, which is forcing the associations to file a lien or start foreclosure proceedings.

"It's been very widespread," she said. "Everybody is struggling in all directions."

She said the associations are trying to work with borrowers, but that hasn't always been possible.

A number of the communities where she manages the associations have cut back on some things, such as certain landscaping projects, to reduce costs, she said.

While management companies know that the master deeds of the properties give HOAs the power to foreclose, some are surprised at how frequently it is happening.

"It's just mystifying in some ways," Harmon said. "Unfortunately it's becoming common, and it is happening with people you never would have thought would have an issue."

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