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Foreclosures Forcing Homeowners' Associations Into Financial Trouble

By Eric Kodner

Real Estate Broker/Owner with Wayzata Lakes Realty: Eric Kodner Sells Twin Cities Homes

October 11, 2007 03:42 PM

Our local ABC Television affiliate in Minneapolis-Saint Paul just aired a news spot about a homeowners' association which is teetering on the brink of insolvency.

The news story referenced a 24-unit townhome development in the metro area with eleven foreclosure properties in the development. The association is currently losing over two thousand dollars a month in association fees that cannot be recovered, at least for now. In order to stay afloat, those residents who are not in foreclosure are picking up the slack.

The president of the homeonwers' association commented that the association is unable to keep up with repair or maintenance costs and may have no choice but to default on insurance premiums for common areas. Apparently there were not sufficient reserves in the association account to cushion the impact of this shortfall.

Buyers who are going to be dealing with a property owners' association should take some steps to protect themselves. Owners and prospective buyers should:

Treat a property owners' association account as if it was your own.
Ask for a copy of the association financial statement before you purchase.
Get involved in association governance. If your association doesn't have a reserve account, establish one.

What are you telling your townhome/condo buyers about the risk of homeowners' association default? Are you encountering this situation in your own market?

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Eric Kodner

Wayzata Lakes Realty: Eric Kodner Sells Twin Cities Homes - Minnetonka, MN

Wayzata Lakes Realty: Twin Cities, Madeline Island

Joe, the situation I learned about on the local news station was one of the worst I've heard about. Nearly fifty percent of the units are in foreclosure! No wonder the association is going under.

Oct 11, 2007 04:18 PM

Eric Kodner

Wayzata Lakes Realty: Eric Kodner Sells Twin Cities Homes - Minnetonka, MN

Wayzata Lakes Realty: Twin Cities, Madeline Island

Keisha, I think it's just something that gets past buyers, even agents. Most of my townhome buyers don't take a close enough look at association financial statements. I'm sure going to make certain in the future that they do! This issue presents huge liability issues for agents.

Oct 11, 2007 04:20 PM

Dwight Wolfe

Emerald Coast Realty, Inc. - Panama City Beach, FL

This is a situation that I definitely think will be growing. I wish I could say that was not the case. I have not seen anythiing on it in Florida yet, but how far away can it be. I fear that many of the condos sold and built late in the boom will succumb to this situation. Overall, not more bad news for real estate, TERRIBLE news for real estate. Does anyone know if the HOAs have any seniority to collect past dues if the units are sold at auction etc.?

Oct 11, 2007 04:36 PM

Eric Kodner

Wayzata Lakes Realty: Eric Kodner Sells Twin Cities Homes - Minnetonka, MN

Wayzata Lakes Realty: Twin Cities, Madeline Island

Dwight, it's scary news, isn't it? About the only way the HOA can collect is to exercise their lien rights (if any) and hope there's enough cash left at closing to step in and get something back.

Last year, I witnessed a HOA that was unable to collect a former owner's unpaid association fees. They didn't file a lien and the property was foreclosed upon. The HOA then tried to go after the next owner, who had purchased it from the bank. Both the new owner and the bank refused to pay and the HOA wound up eating a year's unpaid dues.

Oct 11, 2007 04:48 PM

Jolynne Photography, Creative Wedding Photography, Family Portraits, Bar Mitzvahs

Jolynne Photography - Hemet, CA

Bat Mitzvahs, Senior Pictures, Event Photography

WHOA...that is something I didn't see coming. So off my radar.

Fascinating post Eric..and another reason to disclose, disclose, disclose.

Oct 11, 2007 05:05 PM

Eric Kodner

Wayzata Lakes Realty: Eric Kodner Sells Twin Cities Homes - Minnetonka, MN

Wayzata Lakes Realty: Twin Cities, Madeline Island

Joey, this news story took me by surprise too. It's tough enough to actually get buyers to readthe association documents, let alone getting them to take a good hard look at the financials!

Oct 11, 2007 05:10 PM

Dwight Wolfe

Emerald Coast Realty, Inc. - Panama City Beach, FL

Is there a RE lawyer in the house? I do know that HOAs in Florida can use foreclosure law to go after delinquent HOA Dues. I think anyone with a monetary claim can file to foreclose on you. Of course contractors usually use a lien because it is a simplified procedure. I suppose that if the HOA files for foreclosure before the bank, they may have priority. Does anyone have an answer to this? I do know that here in Florida, that the HOA will file against the offending HOA member innediately. There is no grace period!

Oct 11, 2007 05:23 PM

Eric Kodner

Wayzata Lakes Realty: Eric Kodner Sells Twin Cities Homes - Minnetonka, MN

Wayzata Lakes Realty: Twin Cities, Madeline Island

Dwight, good question! I've seen some association documents that did not contain a clause that gives the association lien rights. If those rights are statutory, that language probably wouldn't be necessary. But someone from the association has to make an effort to enforce the lien. The foreclosing lender probably isn't going to go out of their way to help an association.

Oct 11, 2007 05:29 PM

Charlottesville Solutions

Charlottesville Solutions - Charlottesville, VA

Eric, we are not but I can see this happening. There are some far reaching problems to still be worked out!

Oct 11, 2007 11:57 PM

Aziz Abdur-Raoof

RE/MAX Rewards - Columbia, MD

Howard Co. Real Estate Scoop

Eric -- good posts very informative. I served on an HOA board years ago and you're right you have to watch your investment beyond just your home

Oct 12, 2007 12:04 AM

Eric Kodner

Wayzata Lakes Realty: Eric Kodner Sells Twin Cities Homes - Minnetonka, MN

Wayzata Lakes Realty: Twin Cities, Madeline Island

Charles, it took me by surprise. The worst problems are going to be where there's a high foreclosure rate, but this should serve as a heads-up for anyone who owns property in an association.

Oct 12, 2007 04:37 AM

Eric Kodner

Wayzata Lakes Realty: Eric Kodner Sells Twin Cities Homes - Minnetonka, MN

Wayzata Lakes Realty: Twin Cities, Madeline Island

Aziz, I think most homeowners in an association simply don't pay close enough attention to the state of the association's financial health. In this tight economy, associations need to take some "cost control" measures to keep expenses to a minimum. And I'm a firm believer in reserve accounts.

Some states mandate that "common interest communities" of a certain size maintain cash reserves in order to deal with a cash crunch.

Oct 12, 2007 04:43 AM

Cynthia Tilghman, Realtor® Onslow County NC Home Specialist

Kingsbridge Realty, Inc - Hubert, NC

Hi Eric,
Bad situation and I really feel for the homeowners. If I were associated with HMA, I would do some investigating very soon.

Oct 13, 2007 08:38 AM

Eric Kodner

Wayzata Lakes Realty: Eric Kodner Sells Twin Cities Homes - Minnetonka, MN

Wayzata Lakes Realty: Twin Cities, Madeline Island

Cynthia, it's very worrisome in many ways. Not only do homeowners have to be concerned about their own debts, but they also need to watch "who's minding the store" when it comes to association governance issues.

I know a lot of people who refuse to serve on HOAs because they feel it takes too much time, etc. The flip side is, if you take your hands off the wheel, it's hard to complain when things get out of control.

Oct 14, 2007 12:19 AM

Armando Rodriguez

QUEST REALTY SERVICES - Orlando, FL

Orlando Homes 4 Sale, Real Estate Broker-GRI

Very true...it's happening everywhere

Good info!

Take care & good luck to you!

Oct 14, 2007 04:17 AM

Eric Kodner

Wayzata Lakes Realty: Eric Kodner Sells Twin Cities Homes - Minnetonka, MN

Wayzata Lakes Realty: Twin Cities, Madeline Island

Armando, thanks for commenting. How is this situation being dealt with in your market?

Oct 14, 2007 07:41 AM

Judy Greenberg

Compass - Long Grove, IL

Compass- Long Grove -Buffalo Grove

I never thought of this. One of my clients is thinking of buying a condo where the developer is having a hard time selling the units. This is something for her to consider before purchasing.

Oct 22, 2007 12:22 AM

Eric Kodner

Wayzata Lakes Realty: Eric Kodner Sells Twin Cities Homes - Minnetonka, MN

Wayzata Lakes Realty: Twin Cities, Madeline Island

Judy, I've started to ask more questions on behalf of my clients when they look at property that's in an Association. I think it's something we need to pay more attention to. Thanks for commenting!

Oct 22, 2007 03:32 AM

Marlene Bridges

Village Real Estate Services, Inc. - Laguna Hills, CA

Laguna Homes|Laguna Condos|Laguna Real Estate

Eric - Very interesting. Yet another new wrinkle to the great lending debacle.

Nov 02, 2007 04:09 PM

Eric Kodner

Wayzata Lakes Realty: Eric Kodner Sells Twin Cities Homes - Minnetonka, MN

Wayzata Lakes Realty: Twin Cities, Madeline Island

Marlene, learning about the problems faced by homeowners' associations in the current real estate climate has really opened my eyes to being more careful when I represent buyers searching for property governed by an association.

Nov 02, 2007 04:31 PM