Buyer beware of underfunded HOA

Home Sale Hindsight

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Sep. 2, 2010

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Home Sale Hindsight

Tara-Nicholle Nelson
Inman News

Q: If I purchase a condo with a 97 percent occupancy in its complex with a monthly maintenance fee per owner of $500 per month, and three years later, due to the economy, the occupancy rate drops to 70 percent, do the remaining owners absorb the maintenance fees that are not being paid by the missing occupants? --Ken, California

A: Probably the single most underreported effect of the foreclosure crisis is the tailspin into which it has sent many homeowners associations (HOAs) across the country. When HOA members stop paying their dues or, worse, stop paying their mortgages and lose their homes to foreclosure, it has an immediate and intensely negative trickle-down effect on their fellow HOA members.

Most condo owners stop paying their HOA dues long before they stop paying their mortgage. So, by the time condos go into foreclosure, they are often many months or even years delinquent on their dues.

While this seems like it's just the prudent thing to do from the homeowners' perspective -- not throw good HOA dues money after bad on a home that you know will not be yours much longer -- it can actually be devastating to the HOA's financials and those of the other HOA members.

First off, to your question, it is the case that when an HOA is seriously underfunded because people are not paying their dues, the HOA will generally continue to collect funds from those owners who are not paying (in the case of foreclosed homes, the bank) while being forced to increase dues or even impose assessments on all the other owners to make up for the lost income.

While many condo owners and buyers see HOA dues as just another bill, the fact is that the vast majority of the funds paid in as HOA dues go to cover actual expenses incurred for the maintenance of the property, such as landscaping, roof and boiler repairs and long-term upgrades; paying for the buildings' hazard insurance policy; and paying for shared utilities, like gas, water and garbage.

When people stop paying dues, those expenses don't necessarily go away.

However, I think you might be getting two issues confused. The occupancy rate is not a dues issue; even vacant (unoccupied) units are still owned by someone. The owner is legally obligated to pay HOA dues, whether or not he/she occupies the property.

Even vacant foreclosures are owned by the bank, which means the bank is on the hook for the dues incurred by the unit during the time the bank owns the property -- do note, however, that even banks have a habit of falling delinquent on HOA dues on foreclosed units, waiting to pay the arrearage when they resell the home.

Of course, as we just discussed, the fact that people are legally obligated to pay dues doesn't mean they do. And, as you suspect, the shortfalls created by delinquent dues are often passed onto the rest of the HOA's members.

And, as an aside, complexes with greater than a 15 percent dues delinquency rate are very difficult to resell, as most mortgage lenders refuse to lend money on complexes with delinquent dues above that level. Condos that cannot be sold except to cash buyers drop in value very quickly and, often, very significantly.

Lenders know that delinquent dues tend to snowball into full-blown HOA financial crises. The on-time-paying owners get frustrated and stop paying when they see their neighbors stop paying -- or they simply can't afford the rapidly escalating dues and assessments that result from the other owners' delinquencies, and stop paying for that reason.

As such, you're right to be concerned if your HOA has a number of units for which dues are not being paid. Technically speaking, though, I think you might be confusing the issue of dues delinquencies with the issue of owner-occupancy.

Every condo subdivision has an owner-occupancy rate, which the HOA tracks very closely, primarily because it also dramatically impacts the ability of units to be bought and sold and, as a result, their value.

Most mortgage lenders have a guideline of lending only on condo units with 25 percent or less non-owner-occupied (i.e., rental) units. I think this might be what you're thinking of, as 90 percent is a very attractive owner-occupancy rate, while 70 percent is much less so.

Owner-occupancy rates in many complexes have dropped due to foreclosures and delinquent dues rendering the homes able to be purchased only in cash, which makes them primarily attractive to investors who immediately rent the homes out after they buy them.

However, in and of itself, a reduced owner-occupancy rate does not impact dues payment or cause any increase in fees allocated to the remaining owners.

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