Condo and Homeowner Associations Struggling to Meet Budgets
Foreclosures and owners who aren’t paying their fees put condo and homeowner associations in a financial bind.
Palm Coast, Florida – February 24, 2009 – Condo and homeowner associations have obligations. Their responsibilities include common area maintenance, security, insurance, reserve requirements, enforcement of deed restrictions (CC&Rs) etc. Statutes give them the power to assess fees to cover their expenses and reserve requirements, but when owners don’t pay, or properties go into foreclosure, the revenue stream slows down. Meanwhile, the responsibilities continue and real estate values can suffer.
In a recent survey conducted by law firm Becker & Poliakoff for their Community Association Leadership Lobby (CALL) reveals that 2/3 of respondents are suffering from burdensome revenue shortfalls, caused by non-payment of association fees plus increased collection costs and legal fees.
Banks can keep properties in foreclosure for years. As an example, of the 337 lots in the Conservatory, a Ginn Development community in Palm Coast, Florida, 96 have experienced a foreclosure filing. One quarter were filed in 2007, but only 18 have gone through a foreclosure sale. When banks take possession, they must pay up to 6 month’s of unpaid association fees or 1% of the mortgage amount, whichever is smaller as well as any fees going forward. So by putting off a foreclosure sale, they save money. Another reason for delaying action is that taking the property back increases the banks reserve requirement.
Lenders are not the only culprits. Property owners themselves often stop paying fees, leaving others to make up the difference and causing a reduction in services. At one point last fall, 200 lot owners in the Conservatory were not paying their POA fees.
Collection costs and legal fees add an additional burden on the associations’ budgets. Associations can force a lender’s hand by forcing a foreclosure sale for unpaid fees, but this costs an estimated $500.
Associations not suing to enforce liens
And some associations may find they may be better off by NOT filing a suit to enforce their liens for unpaid assessments. Instead they sue to collect the debt and for court costs and fees, get a judgment, and then hope to be able to collect the personal judgment from the owner. If the Association foreclosed their lien, and got title to the property in the judicial sale, it would then own property with no dues coming in, and be saddled with taxes and prior mortgage liens.
Reply to Phil
The party that initiates a foreclosure is not necessarily the party who ends up owning the property. In this case, the association would initiate the foreclosure sale, which is really an auction, open to the public. The association would enter the auction with a credit equal to their default judgment, probably less than $10 to $15 thousand dollars – much less than the value of the property. If there are no other bidders, they own the property for a song, and could resell it. More likely, the lender (bank) would be bidding to protect their interest in the property. The loan balance is likely several times as large as the past due fees. Or a private party could bid. So either the bank or another party ends up making the winning bid. In either case, the new owner would begin paying fees.