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Homeowners Association under siege by foreclosures
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About one in six Americans currently live in a community run by a condo or homeowners association. With the recent increase in foreclosures, some homeowners associations are running out of cash. HOA’s are like miniature governments that depend on revenue to finance upkeep of common areas, community pools, tennis courts and private roads.
Before a property goes into foreclosure, many owners stop paying their monthly HOA dues. In fact, HOA fees are generally among the first bills struggling homeowners quit paying. If they can’t afford their mortgage, then they aren’t going to pay their HOA fees. Adding to the problem, some banks aren’t paying HOA fees on properties they have foreclosed on and now own. As a result, association fees rise and the property may be less desirable to buyers.
There is a very informative article in the May 13th, 2008, Wall Street Journal that summarizes some of the problems to home owners and potential buyers.
In the current climate of foreclosures, it’s even more important for potential buyers to read the bylaws; as the bylaws will explain what services are provided and if there is a cap on the annual fees. Some of the bylaws even include information on how they’ll handle foreclosures and payments of fees. It’s also important to know how the board is managed. Boards are typically managed two different ways; by the homeowners themselves, or by an outside company that has been hired by the homeowners association. In the uncharted waters of foreclosures, a professional management company may be the best bet for a home owners and potential buyers.
When looking at the balance sheet of a homeowners association, a buyer should look at their reserves. Buyers want to make sure there is enough cash on hand to take care of maintenance and other services. If there is no reserve fund, the association may have to impose special assessments when major projects become necessary. If HOA’s don’t have reserves, they may be forced to close community amenities like parks, pools and community centers, because they can no longer afford to build and maintain them.
It’s also important for buyers to remember that Associations aren’t corporations. They operate year to year. They collect in dues what they believe they need to pay for amenities and services that residents expect. Even though many homeowner associations have the power to foreclosure if dues are in arrears, few have the money or means to do it.
There is a very informative publication by the Community Association Institute that outlines some of the questions a potential buyer should ask when buying into a community that has an HOA:
What procedures are in place to collect delinquent assessments?
How often can dues increase and by how much?
What is the annual budget and how does it compare to similar communities?
Does the community have a viable reserve to fund major, long-term maintenance and repairs?
What do the dues cover? They typically cover expenses for items such as maintenance of common areas, trash collection, snow removal, private streets, recreational facilities and other amenities. In some communities, assessments cover exterior maintenance to units.
Realtors can help
Buyers need to do their due diligence; as it will help them avoid surprises after they move in. Realtors who specialize in being a Buyer’s agent or who have the Accredited Buyers Representative designation can help guide a buyer to get the documentation they need; as well as they can find out how many foreclosures are in the area.
If you enjoyed reading this article, why not Kathy (719-287-1049) KTorline@msn.com
