Get an Insurance Quote Now!

Minimize Your Community Association Risk Against Current Housing Trends

stephen polinsky on Jan 30, 2009 9:16:00 AM


When the housing market encounters a downward trend, and most recently accelerated by the rapid decline of the mortgage industry, cash-strapped homeowners must balance whom to pay, whom not to pay, and what to pay for. Sadly, many have decided to relinquish the maintenance on their homes.

In some cases, owners are abandoning their home, awaiting foreclosure. An abandoned home can directly impact the condo association and its members. Owners with no means of financial support are not able or willing to spend money on what they consider low priority - maintenance on their homes, which they do no expect to own much longer. Homes with pools are left without regular services, resulting in major health issues. Unkept lawns can result in brown grass, overgrown shrubbery, and trees untrimmed for many months. At times newspapers and junk mail accumulate on the property. A home in foreclosure can mean an empty house, which can then be a target for vandals. Owners, hoping to keep their property, may consider renters, who may not not have the same sense of ownership and pride in the community. Some renters can make it harder to enforce the rules and comply with community standards. Not only are maintenance problems an issue, but association dues may drop low on the priority ladder, maybe even being totally ignored.

Onsite owners are affected, too. Neighbors may continue to pay their association dues, but feel frustrated that nothing can be done thei neighbors' delinquency and the low rate of maintenance. To them, a foreclosed home is still private property owned by someone, and problems at that property should be addressed by the association. At times, these owners may take upon themselves the task of completing maintenance at neighboring property, just to protect their own property value. Or these owners stop paying their dues in retaliation of what the association is not doing to protect the community.

And what happens if an association and its management firm attempts to maintain the property? Can they run into legal trouble if they turn on water or mow the lawn? Are they expending association funds that may never be recovered from the delinquent owner? Add to the problem the fact that the association may not have enough funds to maintain its own assets, much less maintain an owner's property. Should the association hire a maintenance service to handle extreme cases of health risk or potential extreme hazards, such as patrols to fend off vandals?

As the housing crisis deepens, so can association problems. Hurt by the slump in housing sales, builders are opting not to pay their association dues. Pursuing and collecting on those dues erodes an association's resources Collection of monthly dues is critical for maintaining common areas and solidifying long-term reserves. Association dues keep the pool clean, buildings painted, and landscaping maintained. Associations are considering shutting down clubhouses or decreasing the frequency of necessary services such as trash removal, pool maintenance and grounds upkeep. Gated developments usually have an even higher monthly or annual fee ecause of the additional common elements that must be maintained Trying to collect an owner's delinquency through a lawsuit costs the association money that the association may never recover. So, the delinquency can be less than a collection lawyer's retainer fee. Officially recording a lien on a property may also cost more than the delinquent amount. It can be a struggle for the association to deal with these delinquencies that turn into foreclosures.

What happens in a foreclosure? The foreclosure process for residential mortgage loans is a lengthy ordeal in which the secured creditor (lender) sells or repossesses a parcel of real property after the owner has failed to comply with the mortgage agreement which is secured by a lien on the property. When the foreclosure lawsuit process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that "the lender has foreclosed its lien". The association has the same enforcement tool: the lien. An indebted homeowner who wants to sell or refinance his or her property would also need to satisfy the association's lien. But a lender foreclosure eliminates an association's lien, meaning the association can no longer foreclose and a lawsuit against the owner personally is often the only way for an association to possibly collect back payments. If an association begins the foreclosure process before the lender does, the association has a better chance of persuading the owner to pay delinquent maintenance fees before losing his or her home.

Many associations have already suffered through many of these financial situations. What steps can your association take to strengthen its financial position and minimize its risk?

  • Review your collection policy - tighten up the association's procedures. Are the collection notices being sent out in a timely manner and delinquencies referred to the attorney promptly? Research your governing documents and state law to verify that the all possible collection activities are taking place.

  • Evaluate the reserves - Review the status of your association's reserve accounts. Are they adequately funded to make it through a downturn in the economy? Make sure that if you are considering "borrowing" from the reserves as a means to offset a decrease in assessment revenue, that your reserves will remain well funded.

  • Look at the association's service contracts - perhaps there are discretionary services that can be temporary eliminated that will not cause long-term damage to the association's assets.

  • Cost saving ideas - eliminating necessary services obviously does not support the mission of the association to preserve and protect property values. However, you may need to implement some short-term fixes to ensure the sustainability of the association.

  • Making the most of your money - are your association funds getting the best yield while still complying with investment requirements detailed in the governing documents and state statutes?

  • Raising assessments - while this option will not be appealing to the owners, it might be required. The Board should consider all available options, and remember that they have a fiduciary duty to the association, and raising assessments may be the only remedy to offset increased costs and/or declining collections.

Being ready and prepared to make it through these financial times will greatly improve

Source: Association Times


Leave a comment

Get an Insurance Quote to insure your HOA or Condo Association property.  We can also provide comprehensive coverage including D&O board member protection.

Fill out the short form:

  • Get a call from our insurance group
  • Receive quotes from the biggest carriers
  • Free service - no obligation on your behalf

Information needed for a competitive quote from our insurance carriers:

  • Declaration Pages from your Current Insurance Policy
  • Copy of Association Bylaws
  • Annual Gross Income of Association
  • Age of Property
  • Approximate Property Square Footage
  • Information regarding recent Property System Replacements or Upgrades including Roof, Heating & Air, Electrical, Windows, etc...

Contact us at 

Recent Posts