May 16, 2008

Buying a Condo: Don’ts and Dues

At the very bottom of the mountain of loan docs, deeds, contracts, disclosures and other paperwork that you initial and sign but try not to read when purchasing a condominium, there’s what you might consider the least of these:  the bylaws of the condo homeowners association.  I don’t have any hard facts here, but I’d have to guess not too many owners read them very carefully, and fewer still attend the association meetings - I know I didn’t.

But they should.  Because the bylaws spell out what the association’s responsibilities are in return for the hundreds of dollars a month in dues that you have committed to paying for maintenance, repairs and upkeep.

In normal times, condo owners have the luxury of paying little attention to any of this, and things generally get taken care of anyway.  But in times like these when some condo buildings and complexes are riddled with multiple foreclosures, it’s critical to stay alert and try to learn what you’re getting into before it’s too late.

Earlier this week The Wall Street Journal looked into the impact of the housing crash on homeowners associations, and the properties and owners they serve.  It’s a serious wake-up call that anyone considering buying a condo should heed.  The Journal says that many of the 300,000 neighborhood associations across the country are struggling with dwindling budgets, and that one estimate figures five per cent of owners are now delinquent on dues - up from a baseline of two per cent in better times.

But those are averages; some associations suffer far higher delinquency rates.   At one development in Stockton some 25% of the owners are behind in paying their dues.  That leaves the rest of the owners holding the bag to pay for roof, siding and roadway repairs, painting and other routine maintenance.  In some cases essential services such as common area electric lights and trash pickup have been interrupted. 

It’s no surprise that owners who can’t make their mortgage payments are also delinquent on HOA dues.  But here’s a shocker:  many banks which have foreclosed on units and are expected to assume payment of homeowner fees have been deadbeats, and refused to pay.   One Florida association has filed half a dozen lawsuits against the banks, but so far has recovered no fees.  So the costs that responsible individual owners are forced to bear mount higher and higher, in the form of dues increases and special assessments.

At the extreme the situation can result in a complete breakdown, and is disastrous for the remaining owners.  This listing for a REO condo in Panorama City, reduced to the asking price of $95,000 for obvious reasons, highlights the danger in its MLS description, which is hysterical veering on comical:

… HOA has essentially stopped operating. Building needs new roof.  There is no money and no reserves. Utilities and insurance are being shut off.  Cash offers only.  Amazing value!

Let the buyer beware.