Rising Foreclosures Endanger Condo Associations
Q: Our condominium is in trouble. Many of our owners obtained those "favorable" interest-only loans a couple of years ago, and now that their monthly payments have increased, their units are being foreclosed upon. This is putting a burden on the rest of us because those owners are no longer paying their condominium fees. We are a small association with a tight budget. The developer left us with very little reserves, and now we are struggling to keep alive financially. What should we do?
A: You have raised a serious question. There has been a lot of press about the increasing foreclosure rate and how that affects homeowners. What you are feeling, though, is the ripple effect that foreclosures have on the rest of the community.
Let's go back a few years. The real estate market was hot. Condominium developers were selling units faster than they could build them. Lenders were making what everyone saw as very favorable loans -- 100 percent financing with interest-only payments.
Many developers lowballed the proposed budgets for their condominium associations, thus keeping the fees low. Many also did not pay any money into a reserve for the units that were unsold.
Things have changed. Condo prices have stalled or fallen, especially where developers reduced prices. Some of those owners who are now faced with higher mortgage payments are being forced into foreclosure. They're not paying either their mortgage or their condo fees.
Every year, the board of directors of a community association prepares a budget for the next fiscal year. The board estimates the expenses the association will have, including insurance, utility bills, management and legal fees, and ordinary repairs. The directors also obtain a reserve analysis of future costs to repair or replace such major common elements as elevators, roofs and walkways.
Usually the only source of income to pay these costs is the owners themselves. Board members are elected and, like other elected officials, often are reluctant to raise fees. So most association budgets are quite tight; they're based on the hope that all the association owners will promptly and regularly pay up.
So if several owners suddenly stop paying, the association usually faces a shortfall. That means that its bills will be deferred or not paid.
What options does an association have?
First, the association can enact a special assessment, forcing all owners to pay more, either monthly or as a one-time payment. Obviously this money will come only from those who are not facing foreclosure -- but, again, the ripple effect may cause even more owners to become delinquent if they cannot afford those added fees.
Ultimately, the association might have to file for bankruptcy protection. I have been reading that more associations are, in fact, contemplating such a drastic measure.
Next, the association can adopt -- and enforce -- a zero-tolerance rule. If a unit owner is delinquent for more than a month, begin legal action against him. Don't let the unpaid fees get so high that there is no way the owner can ever repay.