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HOA Loans Can Offset Unit Foreclosures

stephen polinsky on Feb 2, 2009 7:25:00 PM

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HOA loans can help offset lost income by potential foreclosures on units owned by condo association members.  An HOA loan can hold over a condo association until the condo unit is resold and condo fees start getting paid again to the condo association.  Also, condo associations should look into debt purchasing options.

Dues stop when owners lose home

owners lose their units to foreclosure, condo associations feel the financial pain. That's bad news for homeowners and real estate investors who depend on these associations to take care of building maintenance, property insurance, utilities, landscaping and other shared amenities.

While most owners pay their association dues as they are obligated to do, a rising number have fallen behind for various reasons. The problem isn't insignificant: Approximately 24 million housing units are governed by some 300,800 homeowner associations in the United States, according to the Community Associations Institute, a nonprofit organization of homeowner-association managers in Alexandria, Va.

Shortfalls may be more common among newer associations that haven't had much time to build up reserves and may be more exposed to owners who have burdensome mortgages. But older associations aren't immune, especially if they haven't set aside reserves, budgeted for bad debts or kept up with common-area maintenance, said David Swedelson, a partner at Swedelson & Gottlieb, a law firm that represents community associations in Southern California.

Associations do have options, though none of them may be all that palatable to the owners, CAI spokesman Frank Rathbun says. Depending on the severity of the problem, size of the association and bounds of state laws and regulations, an association may be able to consider several options, including: borrow money from a bank; borrow money from the association's reserves; reduce contributions to reserves; cut back on amenities; reassess costs; renegotiate service contracts; delay capital expenditures; increase monthly assessments; and levy special assessments.

Associations can't abandon their obligations just because the funds aren't adequate. Rather, they have a responsibility, as determined by state law and the association's governing documents, to maintain common areas and provide promised services and amenities to the owners.

Nor can associations ignore their obligation to try to collect delinquent dues and assessments. Some associations are "a little bit lax in their assessment collection," Swedelson said. If that's the case, owners again should take an active interest. Contact the board, ask for information about the collections process and press for prompt action.

One common misconception is that an association owns an individual unit free and clear after a foreclosure. That's not the case. In fact, the association takes title to the property subject to the first mortgage, said David Muller, an attorney at Becker & Poliakoff, a Sarasota, Fla.-based law firm that represents community associations.

Associations may be reluctant to foreclose on a unit that's worth less than the owner's mortgage, but a foreclosure may be a necessary step toward resolution of the problem, Muller said. Once the association forecloses, the owner typically will stop paying the mortgage and the lender may be willing to accept a deed to the property from the association in lieu of a bank foreclosure.

People who buy a property at a foreclosure sale or auction should be aware that in some states they can be held responsible for the prior owner's unpaid assessments, which could amount to many months' or even years' worth of accumulated dues, interest and penalties.

In any case, buyers should ask the seller about the association's financial condition, including any special assessments in the previous calendar year; pending assessments that will be due in the next 60 days to 90 days; homeowner delinquency rates; and pending foreclosures against current owners.

Learn why HOA Loans and Condo Association Loans are great alternatives to using condo reserves or assessments.

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