Unconscionable HOA foreclosure sales: preying on homeowners

                          A recent Arizona appeals case relating to insurance policy enforcement reveals great news for homeowners facing HOA foreclosures.  The courts have and will set aside homeownee association foreclosures: “foreclosure sale may be set aside if price ‘is so gross as to be proof of fraud or shock the conscience of the court’”.   But, the homeowner must file a motion to set aside!!!                        

 “Purchasers may enjoy a windfall if, as in the usual case, the sale is not challenged.”  

This case also revealed the predatory practices of real estate speculators who seek and bid on HOA foreclosures to obtain windfall profits, with apparent cooperation from mortgage companies. The speculators involved in this instance are Arizona LLCs, Action Acquisitions, LLC and Free for Now, LLC.   

The brief history: Homeowners lost their home worth anywhere from $300,000 to $400,000 for a trivial $3,500 debt to HOA in 2005. The Purchasers, the 2 speculator firms, purchased the home subject to the $162,000 mortgage.  In other words, the mortgage wasn’t paid off and remains an obligation of the “real” homebuyers, the persons who will be buying the home from these speculators at a windfall price, assuming the house sells as fair market value.  And that is the objective of the predatory speculators. 

The homeowners filed a motion to set aside, and the trial court agreed that the price shocked “the conscience of the court”.  There went the windfall profits and the predators filed for insurance reimbursement under their policies.  The appeal concerned the right of the insurance companies to deny compensation, which they did and the court agreed.

  For our HOA purposes here, the appellate record reveals how these speculators operate [recall that CAI opposed bills to require a fair market sale in HOA foreclosures]: 

[Note 2]. The court explained, “When Defendants bid $3,500 for the purchase of the subject property, which they concede had a fair market value of between $300,000 to $400,000[,] they knowingly incurred the risk that the sale could be set aside as being commercially unreasonable. While they may not have anticipated that the homeowner would take action to set aside their acquisition of the subject property, they knew that their bid was woefully inadequate.”

                         [Author’s comment: This seems to require the cooperation of the mortgage company, or the silent acquisition of the mortgage company, to not offer a creditor bid to protect its loan, and an agreement to accept the purchase as “subject to”.  The mortgage company obviously agreed that the foreclosure purchase was a “steal”, and that there was no risk to them relating it its outstanding debt. I think this analysis needs to be substantiated by an attorney.] 

[The record continues]. Purchasers argue they are in the business of bidding at sheriff’s sales on homes that are foreclosed upon by homeowners’ associations due to unpaid assessments. Usually (and in this case), Purchasers bid on homes without seeing them and without knowing of any liens that might encumber the properties. They asserted on summary judgment that in the three-month period surrounding the transaction at issue, they made 17 such purchases. P. 13. 

[note 8]. Purchasers offered evidence of some of their successful bids; they acquired most of the homes for bids of only $3,000 to $6,200.  

Indeed, Purchasers’ counterclaim sought $400,000 in damages, which they contended was the value of the home they lost. Under their view, without having to bother with improving the home, finding a buyer or negotiating a full-value sale, Purchasers would receive insurance proceeds equal to the full cash value of a home they had purchased for only a small fraction of that amount.  

[note 9]. Purchasers’ damage demand apparently did not take into account the $162,000 encumbrance on the home.

In our case, the home was worth between $300,000 and $400,000 and was encumbered by a $162,000 deed of trust. Purchasers paid only $3,500 for between $138,000 and $238,000 of equity; their successful bid was between 1.5 percent and 2.5 percent of the equity they acquired.

 

First Amer. Title Ins. v. Action Acquisitions, 1 CA-CV 06-0782, 10-30-07

Case Authority citations

Mason v. Wilson, 568 P.2d 1153 (Ariz. App 1977).

Krohn v. Sweetheart Props., 52 P. 3d 774 (Ariz. App Div. 1 2002).

Homecraft Corp. v. Fimbres, 580 P. 2d 760, Ariz. App. 1978).

Restatement Third, Property (Servitudes) § 8.3, cmt b.

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Published in: on November 21, 2007 at 2:02 pm  Leave a Comment  

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