Foreclosures Pick Pockets of Homeowners Associations

By Elizabeth Razzi
Sunday, November 9, 2008

If you live in a neighborhood that has a homeowners association, brace yourself. Neighbors losing their homes to foreclosure and short sales not only are dragging down your property values but also are setting you up for higher fees. There's even a threat that your entire neighborhood could grow shabby over time, if cash runs short for upkeep.

Associations often lose six months of dues, sometimes more, from each homeowner who slides into foreclosure or short sale. Budget trouble can hit any community where homes are being lost, whether they're neighborhoods of detached houses or townhouses, or condominium apartment buildings.

When some people don't pay, of course, the remaining neighbors must spend more to keep things running. Trash still needs to be hauled; insurance bills need to be paid; grass needs to be mowed. Soon, snow will need to be cleared.

For the time being, associations can try to trim expenses. Maybe only one snow plow will tackle your neighborhood instead of the two trucks you've had before. Your board may look for cheaper insurance policies or management companies.

But it's almost irresistible for board members to cover some of today's budget shortfall by postponing expensive repairs and maintenance. They're also more likely to starve the reserve account that all associations are supposed to maintain to cover inevitable, big-ticket repairs.

New-home developers, who keep control of the homeowners association until the project is almost completely built out, are notorious for under-funding reserves, even in good times. It's easier to attract new buyers when the association fees are low, and builders will be gone before those big-ticket repairs have to be made.

But construction is on hold in many of these new developments, foreclosures are causing dues to go unpaid, and builders are strapped. They're still in charge of these associations, and that doesn't bode well for amassing reserves. Eventually, when this foreclosure mess is over, and homeowners are fully in control of these associations, they're going to face big deferred maintenance bills with few reserves to handle them.

Pia Trigiani, a community association lawyer who heads Virginia's new Common Interest Community Board, said associations normally allocate about 4 percent of their budget for unpaid dues. Now, she said, they're wise to set aside 8 to 10 percent of their budget, especially in new communities where the builder hasn't finished the development.

Ron Pereira, general manager of a 7,700-unit homeowners association in Lake Ridge, in foreclosure-plagued Prince William County, said the association has created new fees and increased some existing fees to try to make up for budget shortfalls. For example, an owner who is 30 days late will now run up $50 in late fees, compared with $20 previously. And the association has started charging a $500 "reserve contribution" to anyone who buys in the neighborhood, including banks that foreclose.

Pereira said current residents haven't protested the reserve contribution because they don't have to pay it; buyers do. But that's another $500 that buyers won't pay the seller in this overstocked housing market.

At the same time association finances are growing more precarious, some buyers are not getting the financial disclosures required by law in time for them to be useful.

Virginia law requires sellers or their real estate agents to get a presale financial disclosure packet from the association and give it to buyers. Buyers have three days to review the financial disclosures and rules governing life in the association and can back out of the deal if they don't like what they see. In Maryland, buyers have seven days in which to review the documents and cancel the purchase. In the District, buyers are allowed three business days.

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