Here’s the problem. It’s true millions of American homeowners are failing to make mortgage payments, skipping payments, defaulting on their home loans and getting foreclosed on. The magnitude of the problem is definitely an issue for communities with many such properties, but generally speaking a foreclosure in a fairly stable neighborhood mainly impacts the unfortunate homeowner and the lucky new owner.
Not so with condos…Condos are usually the first to lose value in a market downturn. Our current downturn has had a magnified effect on condo owners who have seen huge drops in home values almost across the board. Of course, condo owners in trouble often stop paying not only the mortgage payment but also the homeowner association [HOA] fees. Condo associations use the fees to pay for property insurance, gardening, pool maintenance, trash removal, exterior water and lights, security guards as well as exterior maintenance of the development’s buildings, including roofs, painting, balconies, garage doors, walks and a myriad of other tasks.
When many distressed condo owners stop paying HOA fees, the consequent effects occur in a rapid cascade. Of course, without the fees or enough fees, the association will not able to fulfill its obligations and so must begin to cut corners. Perhaps scheduled exterior painting is put off for a year or pool maintenance is bumped up to once a month instead of once a week. Maybe the security guard is let go. Possibly the association will incur late fees as it misses the deadline for insurance payments.
Eventually, the complex will show the effects of continued deferred maintenance, making it difficult for any homeowner to sell individual units. Some fees absolutely have to be paid, of course. A leaking or collapsed roof cannot be allowed to stay; a huge hole in the asphalt roadway must be repaired; a rotting balcony is a liability. When the HOA does not have enough funds to pay for emergency repairs, then it must require special assessments of every homeowner with the burden falling mainly on those who are continuing to pay.In order for any homeowner to sell, the special assessment must be disclosed to a potential buyer and paid before the sale is completed.
To make matters worse, if the number of delinquent homeowners reaches 15% of the total, new buyers will not be able to get any kind of financing, so current owners will have a very difficult time to sell their units. Financing choices will be cash from the buyer or seller financing. Additionally, FHA will pull its approval for the complex, and no one will be able to get an FHA-backed loan. FHA loans currently account for almost 50% of all home purchase loans.
In the ultimate event, the development does not have enough solvent homeowners to pay ongoing costs like water or insurance or to pay special assessments or to make emergency repairs. At this point, the entire complex defaults. When the whole development goes into foreclosure, everybody loses, the remaining condo owners, the surrounding community and its city which loses a large chunk of property taxes. This ultimate disaster has not happened frequently to my knowledge in Southern California, but is a common occurrence in Florida and perhaps in Las Vegas.
Because of these cascading consequences, I always ask my distressed condo owners to continue making the HOA payments during the short sale process if they are at all able.