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Financial crisis hits condo associations
As more homeowners fall behind on dues, those who are able to pay suffer
By Amy Hoak, MarketWatch
CHICAGO (MarketWatch) -- People often buy a condo unit partly because they don't need to worry about cutting the lawn or fixing the roof -- their condo association takes care of maintenance and repairs for them, with those services paid through homeowner assessments each month. At least, that's the way it's supposed to work.
Now the economic downturn is hitting Americans hard -- and, in turn, putting stress on their condo associations. When homeowners lose their jobs and can't pay dues, or investors decide to walk away from their rentals, condo associations suffer.
That, in turn, affects everyone in the development, not just homeowners in financial straits.
"When someone doesn't pay assessments of the community, they're picking the pockets of every one of their neighbors," said Andrew Fortin, vice president of government and public affairs for the Community Associations Institute.
The current problems only exacerbate what's been an issue for years, some say. Many condo associations aren't prepared for major maintenance jobs due to ill-funded reserves and insufficient planning, said Evan McKenzie, a political science professor at the University of Illinois at Chicago, who has written about homeowner associations.
"This is a very troubled housing sector right now," he said.
To compensate for lost income, some associations are hiking assessments on all residents, said Frank Rathbun, vice president of communications and marketing for the CAI. Many are also cutting back on spending, which could mean anything from deferring capital improvements to skimping on landscaping projects.
Some are employing tougher tactics to collect dues from homeowners who are behind on payments, more frequently slapping liens on properties and in some cases foreclosing on those who are delinquent. Fortin said that usually the threat of a lien is enough to get most people to make an effort to become current on their dues.
But getting tough about collections is easier for professionally managed associations. Many smaller buildings are managed by a board comprised solely of residents, and that can get awkward because they have to enforce rules on neighbors who might be dealing, say, with a job loss, said Richard L. Thompson, president of Regenesis, a homeowner association management consulting company.
Meanwhile, windows and roofs may need to be replaced or streets repaved. If there's no money, the projects won't get done.
Lenders shun some buildings
It's also getting tougher for associations to get a loan for the extra funds they need, when drawing extra money from members isn't enough, McKenzie said.
And there's another consequence of dues-dodging neighbors: Lenders are less likely to approve a refinance loan for anyone in the building, or a purchase loan for prospective buyers, if a significant number of owners are past due on their assessments.
If dues are 30 or more days delinquent for more than 15% of the units in a condo building, the entire building earns a "non-warrantable designation," and borrowers are unable to obtain a typical mortgage loan, said Dan Green, a loan officer with Waterstone Mortgage, in Cincinnati.
"The guideline applies to all government-backed loans -- from FHA, Fannie or Freddie -- and it applies to every condo in every market," Green said in an email.
For a condo unit owner, that means your neighbors' negligence in paying their dues could put the kibosh on you refinancing your home loan at a good rate. Or, it could kill a home sale for a buyer who needs a conforming mortgage to close.
No choice but to pay
Even more frustrating, a homeowner in an association doesn't have much choice but to pay the dues -- even if they're unhappy with the management.
"When you buy into common-interest housing, you have to pay the assessments, you are bound to pay the assessments. And if you don't, they will put a lien on your property," McKenzie said. "Once you're in, there's very little you can do."
That's why it's important for people to be diligent before buying a condo unit, looking into the financials of the governing group before closing on a deal.
Before buying, find out if special assessments are anticipated, get a statement of the reserves and find out how they compare to the most recent reserve study, McKenzie said.
A reserve study will analyze the financial state of the association's reserves and anticipate expenditures that will be needed down the line. If a study hasn't been done, step back and think about what you're getting into -- an association that may not be adequately prepared for future expenses, he said. Many experts also recommend finding out how many units are being rented in the building.
"You have to protect yourself before you buy. You can't buy a cheap condo at bargain basement rates and think you got a steal," McKenzie said. If it comes in an under-funded building, it could end up being a headache -- potentially a pricey one -- in the future.
After you move in, participate in meetings and pay attention to the financials, he said. Your home's value depends on it.
Homeowner associations are designed to be "hands on," Thompson said.
That means while you might not be shoveling your own snow or cutting your own grass, you should be spending some of that extra time attending meetings and staying aware of the association's finances.