WHAT HAPPENS IF THE CONDO ASSOCIATION GOES UNDER?

By
Real Estate Agent with Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate 303829;0225082372

"WHAT HAPPENS IF THE CONDO ASSOCIATION GOES UNDER?"

That was a question from a home buyer yesterday.  This is a cash buyer in the market for a condo in Prince William County to use as rental property for a few years and then live in when he sells his present home. 

THE QUESTIONS WERE PROMPTED BY THE LISTING REPORT.  There are three properties offered for sale in that community, two short sales and one regular home owner sale.  One of the short sale listings wants "Cash Only, too many distressed sales for financing.  Condo assn. in trouble" 

HOW CAN THE CONDO ASSN. PAY THEIR BILLS?  The buyer's question is well founded since, under normal circumstances, when there is a high percentage of delinquent owners, the condo fee will be raised for remaining owners to cover condo expenses.  Maintenance of condo buildings, trash removal, grounds maintenance, snow removal, insurance, etc. are critical to protect the value of the property. 

WHAT DOES "Condo assn. in trouble" mean?  Condo associations are required by law to maintain certain condo"reserves" to protect the owners under special circumstances or a dramatic increase in expenses OR a high degree of delinquencies.  As delinquencies increase, the remaining owners will have to pay higher fees or assessments to cover necessary expenses.  If there are insufficient funds to operate, condo associations may not be able to make payments for contracted services and loans.  Condo owners who refuse to approve increased fees to compensate for delinquencies are merely putting the entire community at risk if the condo association is forced into bankruptcy or receivership. 

IT GETS WORSE.  As delinquencies increase, the condominium project may also lose FHA and VA financing approval.  In all but super luxury projects, that's usually deadly for property values and purchase financing. 

OWNERS STOP PAYING FEES.  This is a trend in many condo and HOA associations.  Sadly, it simply makes matters worse, puts the home owners' credit at risk and further limits the ability of the condo associations to perform critical maintenance.

WE DON'T GIVE LEGAL ADVICE.  Since the buyer's question involved a legal matter, my suggestion to my broker partner was to speak with a real estate attorney with whom we do settlements,   This questions is clearly "above our pay grade".  That said, I suggested that they search a bit farther for a condo to buy in a building that is not "at risk". 

CAN YOU GET A "PEEK" AT THE DOCS?  I also suggested that the listing agent or owner may already have a copy of the condo docs and would permit a "peek" prior to writing an offer.  The association docs must disclose the financial condition, any liens against, etc. the association.  It's worth a phone call. 

Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988.

Map Woodbridge

Homefinders.com offers home buyers help throughout Prince William County in:

  • Bristow * Dumfries * Gainesville * Manassas * Triangle * Woodbridge * Haymarket

Woodbridge Homes and real estate.Lenn

HOMES FOR SALE IN PRINCE WILLIAM COUNTY.
MORE ABOUT PRINCE WILLIAM COUNTY REAL ESTATE
ABOUT DALE CITY REAL ESTATE

SEARCH Homes for sale in Prince William County in Catharpin, Dumfries, Haymarket, Gainesville, Manassas, Manassas Park, Bristow, Nokesville, Dale City, Woodbridge, Quantico, Triangle.  If you have questions about real estate in Prince William County, just call Lenn at 800-711-7988.  Ask about our Home Buyers REBATE.

Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988.

 

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Re-Blogged 14 times:

Re-Blogged By Re-Blogged At
  1. Wallace S. Gibson, CPM 01/26/2011 08:07 AM
  2. Bill Burchard 01/26/2011 11:10 AM
  3. Virginia Gardner 01/26/2011 01:14 PM
  4. Jim McCormack 01/27/2011 10:22 AM
  5. Ruthmarie Hicks 01/27/2011 12:37 PM
  6. Gloria Ledesma 01/27/2011 01:26 PM
  7. Jim Lee 01/27/2011 05:06 PM
  8. Celeste "SALLY" Cheeseman 01/27/2011 06:03 PM
  9. Dagny Eason 01/27/2011 08:54 PM
  10. Missy Caulk 01/27/2011 09:47 PM
  11. Peter Michelbach 01/29/2011 09:30 AM
  12. Ginny Gorman 01/30/2011 06:53 AM
  13. Cindy Jones 01/30/2011 08:25 AM
  14. Marcie Sandalow 01/31/2011 02:23 PM
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Rainer
39,809
Liz Murray
Renaissance Home Staging & Redesign - Chandler, AZ

Lenn, I'm living the dream, --- or should I say nightmare.  I have lived in an HOA townhome for the last 10 years I bought  new.  It was the second phase of a property that had been abandoned, after the original builder went under during the S & L debacle!  Remember that one??

The HOA sued the second builder for defects, and then the board only repaired a few items,..including repairs for the first phase.  The board decided to take a portion of the settlement and put it in reserves "to keep the dues down".  I screamed about having a reserve study done,..which the board refused to do, stating that they didn't want to raise the dues in order to have one done.  (Does this tell how stupid the board is?) 

Well they finally had a study done this year, and we are $350,000 short of what we need, and we will need to put in $150,000 per year in order to just keep pace with the maintenance plan for the future. Our HOA is responsible for the common area, and exteriors of the homes.  That means we must maintain, roadways, sidewalks, exterior painting, roofing, 2 pools and 2 jacuzzi spas, a basketball court, as well as 20 acres of landscaping, which includes around 400 trees, and over 1200 shrubs that should be trimmed annually!

There are 212 units, and about $320,000 a year in assessments is collected . About 2/3 of the property is new, but 1/3 of the property is from the first phase.  About 1/3 of the units are in arrears.  About half are now rentals. Many of us who bought new  did not sell and get out in time.  2/3s of the board is now  comprised of members from the first phase.  You should see what the second phase now looks like because of that composition.

So lesson learned. Realtors when an HOA gives you their "reserves", make sure they are NOT UNDERFUNDED!  This is what I refer to as the HOA ARM,.. the Adustable Rate Monster", or the special assessment you did not plan on.  This is a "don't tell, don't ask" ploy that many inept HOA boards are hiding behind.   If they do not have a reserve study... run for the HILLS!  The last thing you want is a homeowner living in place that was on the brink of disaster, and forces the homeowners to default on their mortgages because they can't pay the HOA Special Assessments. 

And in Arizona, an HOA can put a lien on your home, and foreclose on your home (you lose ALL the equity) if you do not pay the assessments.  And they can do that if the amount is $1200 or 12 months, which ever comes further.  That's right.  Even if you refuse to pay them $50, they can take your home away from you,here in Arizona!! 

 

 

 

Jan 28, 2011 11:08 AM #86
Rainmaker
814,461
Lyn Sims
RE/MAX Suburban - Schaumburg IL Real Estate - Northwest Suburbs of Chicago - Schaumburg, IL
Schaumburg Homes

It's a good topic to bring up which reminds me I have to call today to see how one assn is doing in my area. Don't want to buy into problems.

Jan 28, 2011 02:18 PM #87
Ambassador
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Liz.  Those board members who wouldn't visit the researves violated their fiduciary.  I believe they should be sued individually.  Of course, I'm not a lawyer, but it makes sense to me.

Lyn.  It pays if we sell these things to know what's going on.

Jan 28, 2011 02:26 PM #88
Rainer
39,809
Liz Murray
Renaissance Home Staging & Redesign - Chandler, AZ

Lenn, oh would we love to sue those board members, but there isn't enough money to do it.  And if we recall them, it is probably too little, too late. 

I exposed ALOT of things they have done over the years.  They hired unlicensed contractors to do repairs on the common areas, and told everyone it was okay, because the repairs were under $1000,..the problem was the total repairs amounted to almost $20,000 in 1 year for routine light repairs.  The contractor/handyman??  The tenant of the President of our HOA.  

Then the board allowed the handyman to solicit business in the HOA, and every piece of literature did not disclose he was unlicensed.  Becaue he worked for the HOA, members in the community assumed that he was licensed.  It's illegal for him to do that in Arizona, and most states.

Then that same President left the HOA, and decided the HOA needed a "website to archive our documents", and the board contracted with him for the website,..which we now pay around $3000 a year for his services!

And I talked with a realtor about a month ago who claimed she talked to our board, and they said the BOD had $500,000 in the reserve fund, and they didn't have any plans at the moment to increase dues??? So what does that mean??  The property is over 20 years old in some cases.  What is happening now ,with all of the developers that went bankrupt, they are released from their obligations to fund reserves.  Just like the HOA I'm in now. The Realtors need to probe further.  $500,000 is nothing when there wasn't any money  put into reserves for the last 20 years!  Only  lawsuit funds, that should have been used to repair defects.

I realize they violated their fiduciary duties, but it would be great to sue each one of them personally for their negligence.

Jan 28, 2011 02:43 PM #90
Rainer
56,607
Dennis & Terri Neal
RE/MAX, Big Bear - Big Bear Lake, CA

You can't sell because lenders won't lend once the condo association is in trouble.

Jan 28, 2011 03:13 PM #91
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Liz.  That sounds like a corrupt board.  Find an attorney that will take it on a contingency or report them to the state entity that regulates Condos. 

Cennis & Terry.  Sadly, there are more of them than folks realize.

 

Jan 29, 2011 05:29 AM #92
Rainer
5,975
Peter Michelbach
David Grace R/E - International, INT

Lenn --

you brought up very important parameters, especially for those new in the industry. It is local and global advise! Even in 'down under' Thank you for that!!

As many colleaugues already suggested, a thorough research incl minutes, by laws, and especially in W.Australia it is called Strata Company in groups over 3, endeavour to get all details, even if there's a fee involved.

It can get dramatic, when the condo is sold by one agency, yet property management is done by a 2nd party, and the strata management is controlled by a 3rd party! So keep closed ranks, and as you so clearly advised Lenn, have a good settlement agent and or seek legal advise! Thank you for sharing -  Brilliant Post -- Suggesting

Jan 29, 2011 09:24 AM #93
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Thanks Peter.  With so many first time home buyers in the market for the first time, this is an important subject.

Jan 29, 2011 02:10 PM #94
Rainer
16,855
Craig Hatcher
Georgia Residential Realty, LLC - Smyrna, GA

I totally agree with your suggestion of having them seek legal advice. I can't believe an agent would put that on a listing.

Jan 30, 2011 11:25 AM #96
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Craig.  I can't either.

Jan 30, 2011 03:28 PM #97
Rainmaker
173,321
Betsy Schuman Dodek
Washington Fine Properties - Washington DC Area Real Estate - Potomac, MD
SearchPotomacHomes.com

Lenn,

 

This is very timely and it's critical for condo buyers to understand their prospective condo association. Knowing the condition of the association from the start and how the budget works is important!

Too often my clients don't want to even read the docs...but I highly suggest they do!

Betsy

 

Jan 31, 2011 07:35 AM #98
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Betsy.  I've known many who didn't want to read the docs.  I always read them before giving them to the buyers and if I see any "red flage", make them read it.

Jan 31, 2011 08:03 AM #99
Rainmaker
189,522
Marcie Sandalow
Marcie Sandalow Evers & Company Real Estate 301.758.4894 - Bethesda, MD
Bethesda Chevy Chase DC real estate

Excellent, excellent post.  Thanks for the opportunity to re-blog.  I've always cautioned my clients to read and re-read the docs.  And like Betsy above, I'm sure not all of them do.  I also try to sniff out the red flags, and by doing so have interrupted a few sales.  Next!

Jan 31, 2011 02:30 PM #100
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Marcie.  Good for you.  I would never leave the review of condo or HOA docs to buyers.  It's Greek to them and I know it.  They may not admit it but that's the way it is.

Jan 31, 2011 03:15 PM #101
Rainmaker
696,056
Lanre Folayan
Keller Williams Capital Properties-Buy a home in Washington DC. Sell a home in Washington DC - Washington, DC
How much is my Petworth DC House Worth?

Lenn I have a condo buyer that I am working with righrt now so this blog came in right on time. Thanks for sharing this great blog Lenn. Great post.

Feb 08, 2011 12:27 AM #102
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Lanre.  Thanks.  The condo market is a real challenge today. 

Feb 08, 2011 05:52 AM #103
Rainmaker
261,530
Wayne B. Pruner
Oregon First - Tigard, OR
Tigard Oregon Homes for Sale, Realtor, GRI

Many condo associations are in trouble or almost there. Buyer beware. You may also have to actually participate in the association to keep it viable.

Feb 24, 2011 09:55 PM #105
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Tigard.  Buyer beware indeed.  Owners may have to actually "chip in" to save the association.  More defaults by owners simply shift the collective costs to the remaining owners until the balance is tripped and the entire thing goes under.

Not a pretty picture when the fact that financing is difficult if not impossible. 

Feb 25, 2011 06:23 AM #106
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Lenn Harley

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