While we’ve been more concerned with the impact of foreclosures on neighborhood comps, the New York Times explores the impact on the HOA, building maintenance, and owners in a few of the more troubled markets. From our plugged-in tipster:
[A]lthough it may be obvious to others, it came as a rude reminder to me how dependent condo owners are on others they share a building with. Might be worth a discussion…given how many new condo buildings are going up in San Francisco…
And from the Times (and perhaps a bit “closer to home”):
Those who fear a downturn remember that Manhattan co-op prices suffered so much during the housing downturn of 1989 to 1993 that buildings had a hard time luring buyers. This financial instability hurt New Yorkers at all economic levels. Some recall neighbors handing over their Fifth Avenue apartments for $1 because they could not afford the maintenance fees.
∙ Collateral Foreclosure Damage for Condo Owners [New York Times]
This should have implications for Infinity and ORH. Infinity has been sitting at 80% for quite some time now and people are moving in. What happens to HOA if they sit on the market for a long time and/or existing units have trouble paying HOA. can’t be good for condos.
— cooper, the builder is generally required to pay the HOA dues on the unsold units.
yeah i am sure they plan for that for a few months –but what happens if they have a lot of unsold units after a year or more. if the builder doesnt have the cash then what.
No worries about that at Infinity. Tishman has very deep pockets. In any case, I think what people worry about is the individual investor/flippers who end up not paying, particularly if they go through foreclosure. That could easily be a concern at any of the new projects. Although in the short term I think it will be more an issue in small condo/tic projects that sold over the past year or so. Because if even one unit stops paying, it immediately affects the other owners.
can there be some stipulation that if you don’t pay, the HOA can take over your unit, sell it, and collect the owed money?
For Florida condos, it’s a double whammy:
1 – there is a huge inventory of renovated and new development
2 – Even if you want to buy one, the HOA fees could be going through the roof.
We’re partly holding the bag for the reckless flippers whatever the outcome. And the bag will be heavier if the dems get their way with a bailout.
cumudgeon said “No worries about that at Infinity. Tishman has very deep pockets. In any case, I think what people worry about is the individual investor/flippers who end up not paying, particularly if they go through foreclosure. That could easily be a concern at any of the new projects. Although in the short term I think it will be more an issue in small condo/tic projects that sold over the past year or so. Because if even one unit stops paying, it immediately affects the other owners.”
why would they? at some point its not their problem. And it wasnt that long ago that we thought Countrywide had “deep pockets”.
“can there be some stipulation that if you don’t pay, the HOA can take over your unit, sell it, and collect the owed money?”
When I was looking to buy a townhome in another state, all of properties I looked at w/ HOA’s had that as part of the contract, including the one I bought. If I recall correctly, the clause was that after 3 missed HOA payments the association could foreclose and seize the property.
If you don’t pay HOA fees, the HOA can place a Lien on your property. If you sell your property, you will have to pay off the Lien, so either way, you must pay HOA fees. I’m assuming the same is the case for developer owned or unsold units.
Cooper, Tishman owns any unsold units. Until they sell them, they need to pay the HOA.
I watched “Curse of the Lottery”.
one of the lottery winners had his home foreclosed because he didn’t pay his HOA dues.
it was a multimillion $$ home that ended up being sold for a fraction of what it was worth
not sure if that’s typical or not…
not if they run out of money they don’t. my point, don’t assume everything is going to be taken care of by Tishman. if I were buying there I’d look to see how much they had set aside. could be a separate company with a separate balance sheet for the project. and yeah its a lien on the property when its sold but if it doesnt sell before the HOA runs out of money to operate the building before they sell the buolding that’s big problem.
HOAs can lien and actually foreclose on properties for non-payment of HOA fees. Then they can sell the unit. Think about that one.
It is important that HOAs be vigilant and if they see a problem with an owner not paying fees, to lien the property quickly to maintain priority foreclosure rights.
http://www.davis-stirling.com/ds/pages/bankruptcy.htm
….or this could happen… http://video.aol.com/video-detail/condo-crisis/1627997970?icid=acvsv1
But seriously, this will not be a problem for any of the San Francisco highrises. It’s a huge problem in the small complexes down in Socal for example. One complex had 15 units, 5 in foreclosure and two more on the way. The other owners get hit with huge assesments, and for some, this can be enough to put them on the road to foreclosure. Additionally, the REO’s or any of the units in these complexes are difficult to sell because no lenders will do new loans when a complex has 20% or more in default, unless a buyer has a large downpayment, usually >25%.
For investors, these represent some of the best deals, because without normal financing alternatives, prices are even lower than comparable REO’s in healthy complexes.
If a property is foreclosed, what are the chances of the HOA to get back unpaid fees?
I mean, if a foreclosed owner had a 100% financing and the property is under the water and the place is auctioned, the first mortgage will be paid first, right? And then whatever is left (if any) will go to the other lien holders in a specific order. Where do the HOA stand?
the hoa will always get its money- eventually. The owner must pay, so when ownership reverts to the lender then the lender must pay. If a buyer purchases the unit with the lien on it, then the buyer must pay all of the back dues. One way or another, the association will eventually get its money.
The problem becomes that a lot of units are not paying in and it takes a year or two to collect the dues then the other units must make up the difference.
not if they run out of money they don’t. my point, don’t assume everything is going to be taken care of by Tishman. if I were buying there I’d look to see how much they had set aside. could be a separate company with a separate balance sheet for the project. and yeah its a lien on the property when its sold but if it doesnt sell before the HOA runs out of money to operate the building before they sell the buolding that’s big problem.
That’s a lot of what ifs. First of all, developers create 10 year LLCs on these buildings to insulate themselves from lawsuits regarding construction, etc. That’s very common. 2nd, Tishman owns the units until sold, so they’ll have to cover the HOAs. If they go bankrupt (unlikely, but who knows), SOMEONE is going take over the units, they they have to pay. I just don’t see a scenario where you’d have a bunch of units that no-one couldn’t sell at any price. I’m sure that might be a problem somewhere, but not at the Infinity or ORH.
it’s just one “if”. If they run out of money. We just lost the entire mortgage company. It could happen.
At this point, anything is possible. and never say never. if I bought there (and im interestedin tower 2 at infinity), I’ll do the diligence to make sure I understand exactly what happens if a lot of units go unsold.
i don’t think builders/developers will pay hoa on unsold units forever. even if they don’t completely run out of money.
and i think before this is over we could see a new construction (even new highrises) builder or two going under. in fact that may be partially how the market corrects. current developer cannot sell at these prices, declares bankruptcy, new investor picks it up for much less and can offer units that much cheaper.
maybe this is less likely in sf…maybe not. i don’t see a tall building as being that much different than a new development sfh neighborhood. did anyone ever imagine levitt and sons going under?
A subdivider must pay hoa dues on all unsold units forever. It’s the law. Otherwise, they will lose the units, the association will collect its’ dues, and the subdivider will get what’s left. Or a lender will foreclose and either pay the dues or build the dues into the sale. There is no option for a developer not to pay hoa dues. If they run out of money they lose the property just like the rest of us.
My understanding is that getting banks to pay can be difficult because they intend to sell the property as soon as possible. Banks will try to have back dues paid separately by the new buyer or have the money transferred to the hoa at the closing.
The bank takes the property and can do whatever it wants with it, without any regard for the HOA, because the HOA lien is behind the Bank’s lien. The theoretical rule is that the bank does not have to pay off the HOA.
BUT the next mortgage company will not lend on it until all of the liens are released. So the bank doesn’t have to pay the HOA, until it sells it, at which point, it has no real choice.
So in effect, the HOA, who has the right to slap the liens on the property under the terms of the deed will always get paid.
The issue is that the HOA can take years to get repaid from the time the homeowner stops paying until the property is actually foreclosed and sold off.
@Ozzie “It’s a huge problem in the small complexes down in Socal for example. One complex had 15 units, 5 in foreclosure and two more on the way. The other owners get hit with huge assesments, and for some, this can be enough to put them on the road to foreclosure.”
I think that is really the nub of this issue. When we talk about an HOA it sounds like some well-heeled governing body which takes care of all problems, whereas it is often just a collection of owners who are brought together by a formal agreement when each buys his or her own place. Some are incredibly naive and run by the seat of the pants. Putting a lien on a property is all very well but it takes time to do that (following all legal procedures) and in the meantime the other owners have to pick up the fees and the share of any other assessments that are coming down the pike. It is this snowball effect that is the most worrisome.
@ Tipster (and others)
In a previous lifetime, I managed HOAs in Colorado during the mid- to late-1980s. The oilpatch economy was in the tank and many of these units were sold with even sketchier financing than we’ve seen lately. HOAs found themselves with numerous homeowners who were in over their heads. Other “homeowners” were outright scammers who never paid their mortgage or their maintenance fees while collecting the rent.
As others have pointed out, the HOA has a lien that is junior to all existing bank liens. If the HOA chose to foreclose, they would take title subject to the existing liens. For that reason, the HOA rarely did that.
If the lender forecloses, then all subordinate liens are *expunged* and the HOA gets hosed. That happened a lot in Colorado during the ’80s and a lot of the HOAs had a tough time.
The HOA can also obtain a personal judgement…we were successful in collecting on very few of these.
I’m not sure if foreclosure law works the same in California.
hoa assessments (monthly dues are actually an annual assessment paid monthly) automatically act as a lien on a condo in california. When an owner falls 90 days behind, an association can record a notice of delinquent assessment and the clock starts ticking to non-judicial foreclosure. Association dues are never expunged in California. If the bank takes the condo for the value of the loan at auction the bank then owns the unit and owes the dues.
I am on a board that just went through this with a delinquent owner who owned multiple units. Ultimately, the owner paid over 40% more than the back dues when late fees and collection costs were taken into account. It took 6 months after the 90 day delinquency period (total of 9 months) to get the money and would have taken another 3-4 months if foreclosure had been necessary.
You can only foreclose on someone who owes at least $1800 or is a year late on a payment.
anono, Tipster and all, thanks for all this info.
I expected HOAs to go into the secondary liens, but it is good to know they are never expunged. Were I buying a foreclosed condo, I’d have to add the overdue HOAs into the overall cost. With the high price of RE in NoCal, these overdue fees cannot be more than a low digit percent of the buying price, but it still has an impact.
HOA fees in California generally have priority over trust deeds, same with melo roos taxes. Thus I do not see how this is a real problem here.
Off topic, but of interest to SFers:
(out of the WSJ)
Fannie Mae will announce today that it is scrapping it’s “declining market” policy that requires higher down payments in declining markets.
perhaps this will allow people to borrow more again.
HOA secondary lien status is not as much of an issue now that lending standards are higher. Sure, we could see a 20% fall, but at least there are not going to be many/any 0% down units. I can’t speak for One Rincon, but I am aware of Tishman’s activity at Infinity and can say that they are still pouring discretionary money into the building to not just complete it, but to make what was complete even better. They have purchased and then repurchased furniture because they did not like the first, they are redoing the lighting in the gym because they did not like the result, and they are redoing the ceiling. This is Tishmans “big” condo project and they are not walking away from it.
I live in a Pacific Heights building where there are owners who have not paid their HOA dues for months and months. The building has been in desperate need of repair/updating for years and yet the board allows this to go on and on and on. Why? Because it costs money to go after these slackers. Money the HOA doesn’t have because homeowners don’t pay their dues. When money gets tight and homeowners are choosing between paying their mortgage or their HOA dues, the mortgage will always win out especially in a building where the board lacks the ability to do anything due to lack of funds.
Suzi, many companies will handle all aspects of hoa dues collections with little or no upfront cost. You could kindly refer your board to Attorney Lien Services (you can google it). They are in SoCal but the company is run by an attorney and they handle every stage of collection including foreclosure and collect their fees from the owner so it costs the association nothing. There are local companies as well for smaller amounts or problems that also charge nothing upfront and hoa collect 100% of what is owed or the owners lose the unit. The board can be conflicted here because the association has an absolute right to its dues but individual members could be harmed by the lower property values that result from forced sales to collect the dues. In my experience however, the owners come up with the money when forced to.
Generally an HOA has a blanket lien on all of it’s member units stating that the unit owner must follow the CC&R’s of the HOA. However in order to re-coop unpaid HOA fees, the HOA must file a specific lien on the property, which will then be junior to all of the other liens in front of it. Many times the Board of Directors will not file the specific lien as they do not want to hurt their friends in the building.
M.R.
^^ that’s why hoa’s should just adopt a blanket policy of handing the matter over to an attorney specializing in hoa collections on day 91 of the delinquency. Owners will know well ahead of time what lies ahead and can work out their options. It’s amazing how fast people come up with their dues when they find out they are going to pay a bunch of fees and possibly lose their home over $2000.
Also, an hoa’s blanket lien comes from state law. While technically that lien may be “junior” to the bank, once the bank owns the property the bank owes the dues. The whole process just takes a lot of time, which is why it’s best to start on day 91- by which time the owners have already had tons of notice.
There is quite a bit of misinformation in this thread. Past due HOA dues do not pass to the lender when they foreclose on a property. The bank is reponsible for the HOA fees incurred AFTER they take over the property. HOA dues, including special assessments, do not pass to the new owner (including senior lien holders and lenders) according to CA law. If a lien has been filed by the HOA (it’s always junior) and the lender forecloses, the only way the HOA gets paid is if there is sufficient equity after the sale to satisfy all of the senior lien holders. It is also important to note that a lender normally only bids to the amount they are owed at the foreclosure sale. Anyone who bids higher will have to pay off the lender anyway. If you have an instance where the HOA did get paid, with little or no equity, it was usually the result of the bank attempting to clear title the quick and expeditious way by just paying off the HOA even though they were under no legal obilgation to do so. If a lender is trying to sell a property for $500k it is easier to simply payoff the $4,000 in delinquent dues rather than go through the legal system to get the lien dismissed. Once special assessments in the $20k to $50k range come into play the bank may not be so generous.
I really would not worry about Tishman running out of money. The depth of their construction portfolio is astounding and the breadth of Tishman-Speyer’s holdings is truly astounding. Don’t worry about Tishman running out of money because if it comes to that we are going to be in worse shape than the great depression (which Tishman weathered well).