MORTGAGE EXPERT, DETROIT, BIRMINGHAM, BLOOMFIELD, ROCHESTER, ROYAL OAK, TROY, MICHIGAN
When I wrote an earlier post telling condo buyers to be cautious before buying, I should have also considered advice for those who are already condo owners.
Many condo owners are watching the value of their homes drop dramatically, leaving them severly upside down.
Especially hard hit are condo owners who bought into new developments that are still unfinished or converted apartment buildings where many units sit unsold. In both these cases, the developer has usually dropped the sale prices of the unsold units in an attempt to get out of the project before their bank forecloses on the project. Many condo owners have to drive by for sale signs every day advertising these unsold units for less than they paid, often for less than they owe on their units.
There are even a number of condo developments around the country where the developer's bank has foreclosed on the project leaving those who purchased units already in limbo as to maintenance and completion of unfinished common areas.
A more common challenge facing condo owners is financially strapped Home Owner Associations (HOA).
Condo owners facing economic hardship often stop making their monthly HOA dues payments even before they stop making their mortgage payments. The banks sitting on foreclosed units, whether listed for sale or not, typically aren't making the required HOA payments.
These nonpayers cause all kinds of challenges for the HOA in charge of maintaining the complex and paying the corresponding bills. The HOA has a budget based on the expected monthly dues. While they usually plan for a small percentage of nonpayments, many are seeing their best laid plans blown apart by the unexpected number of owners not paying their monthly dues.
With less revenue than expected coming in, the first thing the HOA managers usually do is cut back on regular maintenance expenses and delay large capital projects (like replacing leaking roofs). If the revenues continue to drop they have only two choices: raise monthly dues on those owners still paying or request a special assessment. Either option places addition financial burdens on the remaining owners.
All of this also pushes values down even further. Higher HOA dues are a turn-off to potential buyers. So are unkept common areas or pools with no money to open or repair.
Another hidden problem is that most HOA board members have little, if any, financial backgrounds. Many are just nice people that volunteered for an unpaid position because they care and have the free time. Compliments to them as it's often a thankless job. Their lack of financial experience isn't a problem when things are humming along with only an occassional minor bump here and there. It can be disasterous though, if they fail to take appropriate and prompt action during these times. It used to be the rare exception that a HOA would declare bankruptcy. It's not so rare these days.
Traditionally, HOA handle nonpayment of dues in three stages:
- First sending out warning letters
- If still no payment, put a lien on the unit
- Final action would be to foreclose on the owner for nonpayment
Warning letters mean nothing to owners without jobs or the banks holding foreclosed units.
Liens don't offer the protection many think they do. If the HOA puts a lien on a unit that eventually goes to foreclosure, that lien is usually wiped out if the mortgage balance was higher than the sales price. The HOA needs to start the process all over against the bank that now owns the unit. It does nothing to recoup the amounts wiped out in the foreclosure, but the bank has to pay any subsequent lien added during their ownership when they eventually sell the unit. Too often, inexperienced HOA boards don't restart this lien process against the banks owning units.
The last option, that of the HOA foreclosingon a unit, is not an option for any unit where the mortgage balance(s) exceed the value of the unit. To foreclose an HOA would have to buy out the mortgage holders. Pretty much a useless option these days.
So what can be done to avoid these issues?
My advice for condo owners is to get more involved with your HOA and ask a lot more questions. It's so much easier to ignore the potential problem and just keep making your payments, letting someone else handle it - until you get a notice that hits you in the wallet.
Most HOA have regular meetings, start going to them and ask questions. Ask to see the financials and the plan to address any shortfalls.
If your reading this and you're a HOA board member, know that there are legal & financial experts that can be brought in to give your HOA board advice on what to do. If you're a condo owner, make sure your board knows they have these options.
You are now adequately warned. If you chose not to get involved and you're surprised when your HOA raises dues, hits you with a special assessment or goes bankrupt, we can all say, "we told you so".