Falling Dominoes: More Condo Owners Threatened by Neighbors’ Defaults

Category: Active adult communities

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

Posted by John Brady on June 1st, 2010

6 Comments »

  1. 🙄 Your article on “Falling Dominoes” raises even more concerns than I previously had as to making such an investment . As middle class retirees with limited funds, we cannot risk losing what little we have on a poor investment.
    Thank you for the education and the knowledge that there are people such as you that are out there watching out for us.
    Thanks again, Cros’ 🙂

    by M.Cros — June 1, 2010

  2. Not surprised this is happening. My own condo association in Michigan is experiencing a near 20% default on HOA dues. Lenders are hesitating to lend money when this percentage of late or non payers occurs. Sign of the times in real estate. May continue until 2017. According my own research. Better to rent if you can until things improve. Could see another 30-40% drop in prices in the markets that gained the most from 2000-2006.

    by Ed — June 2, 2010

  3. Three words: rent, rent, rent.
    For at least a year.
    Often, rent will be lower than owner pays in HOA fees, taxes, maintenance, and utilities.
    Do not make an initial payment (usually: security + two months’ rent) more than you can get in your car and drive away from
    Read the agreement carefully. Write in large letters that you are responsible for only the stated monthly rent and have all present initial it.
    If you cannot complete any of the above, if the owner or leaser objects, drive away.
    If in Florida, or the Gulf of Mexico coast, and you intend to reside year-round, be sure to spend the hurricane season (aka “Summer”) in residence to acquaint yourself to/with 90+ humidity and temperature.
    You are in the driver’s seat. Drive.

    by oldnassau — June 3, 2010

  4. Thank you for so much advice on renting. I am stuck here in CA with an upside down house and mentally retired 2 years ago! I keep feeling this tug to buy but info like this helps me keep things in perspective. I appreciate it.

    by hudde240 — June 13, 2010

  5. […] further Research Bad Things at Good Communities Falling Dominoes: More HOA’s Threatened by Non-Payment of Dues HOA Collection Strategies Posted by John Brady on July 12th, 2010 Entries (RSS) and Comments […]

    by HOA’s Play Hardball to Cope with Growing Delinquencies | Topretirements — July 12, 2010

  6. […] further reference: Falling Dominoes Endangers More Home Owners Associations Home Owners Associations Struggle with Delingquencies Seven Steps to Follow for Finding the Best […]

    by » Before You Buy a Home for Retirement: 10 Things for Your Financial Due Diligence List Topretirements — April 3, 2012

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