Falling Dominoes: More Condo Owners Threatened by Neighbors’ Defaults

June 1 – Conducting your due diligence before you bought into a development used to be a lot simpler. Not that it was always easy, but at least the basics were fairly straightforward:
– Research the reputation and track record of the developer
– Check to see if reserve (sinking) funds are adequate
– Examine Home Owners (Community) Association rules and finances to see if you can live with them
– Check out the neighborhood and find out what might be developed nearby

These days, however, there are even more things to worry about. Two of the biggest concerns involve foreclosures and defaults in your new community. The St. Petersburg (FL) Times just ran a story, “Rampant Foreclosures Leave Condo Owners Stuck with Fees“, about the nightmare that is happening in Brittany’s Place in Largo, a 96 unit condominium complex. Like much of Florida, the real estate boom that ended in 2006 left thousands of homeowners stuck with mortgages that exceed the value of their underlying properties. Many have chosen to walk away from their negative equity, while others are being foreclosed upon because they lost their jobs or financial base.

In Brittany’s Place, thanks to foreclosures and other troubles, and because many vacant condos were controlled by the new owners of the community, only 12 of the 96 units are paying association dues. The 12 units are being asked to pay special assessments to cover the community’s operating expenses and basic maintenance. With only 12 units trying to support a 96 unit community, the assessments are so high that the remaining owners will most likely be driven into default and foreclosures themselves. Another issue highlighted in the article is what happens if the developers of a community default. In that case the ownership of the property could go into a long limbo as the banks and other lenders sort out what happens.

Comments made by readers of the St. Petersburg Times articles were mostly very angry. Readers took turns blaming former and current U.S. Presidents, banks, developers, and the people who bought into the community. But all agreed the situation is a big, and all too common, mess.

Foreclosures are always bad for an active adult community because they ruin the new and the resale markets in that community. Another way they hurt communities is because the banks who control the mortgages don’t have to pay Home Owners Association (HOA) fees until they actually own the units. So as the problem gets worse and worse, fewer and fewer owners are available to cover the community’s common expenses. The problem spirals more when other owners who haven’t yet become foreclosed upon see what is happening and they stop paying their HOA fees. The problem can be particularly bad in small condo projects where even a small number of non-payers can drive the building into severe financial trouble.

Other Issues
Unfortunately, foreclosures and defaults are not the only problems to be wary of. Chinese dry wall and mold are two other serious issues. Builders who saved money on Chinese dry wall now have angry homeowners who experience lingering and strong odors in the walls. To remedy the situation drastic and expensive repairs are usually necessary. Another problem, particularly in the southern U.S., is mold. Units where there have been plumbing leaks or the air conditioning was off for a long time will usually experience mold growths. Mold remediation is an expensive problem you don’t want to discover after you purchase.

Add These to Your Due Diligence Checklist
The foreclosure and default crisis means that you need to add more items to your due diligence checklist, before you buy:
– Demand to know the number of units that are behind in their HOA dues
– Find out how many units are in foreclosure or default
– Inquire about previous or impending special assessments
– Find out how many vacant units there are and who owns them
– Hire a building inspector to check out your new property, especially looking for mold and chinese dry wall.

Bottom Line
Run, don’t walk, away if a sizable percentage (10%?) of units are in default, foreclosure, or not paying their dues.
No matter how attractive the price, you cannot afford to be in a community where a dwindling number of units has to pay the expenses of an entire community. If you are in a community that is experiencing this issue, you need to work together to try to correct the situation.

For further reference
Home Owners Associations Struggle with Delinquencies

What do you think? Please add your thoughts in the Comments section below