When too many condominium owners lose their units to foreclosure, condo associations feel the financial pain. That’s bad news for homeowners and real estate investors who depend on these associations to take care of building maintenance, property insurance, utilities, landscaping and other amenities that are shared in common.
While most owners pay their association dues as they are obligated to do, a rising number have fallen behind for various reasons. The problem isn’t insignificant: Approximately 24 million housing units are governed by some 300,800 homeowner associations in the United States, according to the Community Associations Institute, or CAI, a nonprofit organization of homeowner association managers in Alexandria, Va.
“If you’ve been foreclosed on and you have a lien against your home or (if you’re in financial trouble due to) general economic conditions and you aren’t able to pay your assessments, that creates some major problems for the association,” says CAI spokesman Frank Rathbun.
Shortfalls may be more common among newer associations that haven’t had much time to build up reserves and may be more exposed to owners who have burdensome mortgages. But older associations aren’t immune, especially if they haven’t set aside reserves, budgeted for bad debts or kept up with common-area maintenance, according to David Swedelson, a partner at Swedelson & Gottlieb, a law firm that represents community associations in Southern California.
“Some associations are assessing $10,000, $20,000 or $30,000 per unit. (The buildings) are 30 or 40 years old and they need renovations. Some owners are defaulting, and then that’s another $10,000, $20,000 or $30,000 that the rest of the homeowners need to make up,” he says.
What condo owners can do
Owners should “get involved and participate in the process,” Rathbun says. “Awareness is always better than uncertainty. Don’t just stand on the sidelines and condemn and criticize.”
Owners can attend association meetings, ask questions, educate themselves about the options, and ensure that the association, as personified by the board, takes decisive action to remedy financial problems.
Associations do have options, though none of them may be all that palatable to the owners, Rathbun adds. Depending on the severity of the problem, size of the association, and bounds of state laws and regulations, an association may be able to consider several options.
Associations can’t abandon their obligations just because the funds aren’t adequate. Rather, they have a responsibility, as determined by state law and the association’s governing documents, to maintain common areas and provide promised services and amenities to the owners.
“The best option is to be as frugal as possible, and if there is still a shortfall, (they should) do the one thing that associations can do, which is to assess the owners as necessary,” says David G. Muller, an attorney at Becker & Poliakoff, a Sarasota, Fla.-based law firm that represents community associations.
If the situation becomes dire, the association needs to make major changes in the way it operates.
