HOA delinquencies have caused many associations to under-fund their reserves. Are assessments coming to make up for the losses? What other choice does an HOA have?
Irvine Home Address … 14941 GREENBRAE St Irvine, CA 92604
Resale Home Price …… $659,900
The road is long
With many a winding turn
That leads us to who knows where
Who knows where
But I'm strong
Strong enough to carry him
He ain't heavy, he's my brother
So on we go
His welfare is of my concern
No burden is he to bear
We'll get there
Hollies — He Ain't Heavy, He's My Brother
Are you ready to carry your neighbor.
Some time ago, I wrote about the problems California HOAs are having with delinquent properties the banks do not foreclose on.
The amend-extend-pretend policies of lenders is fraught with unintended consequences. The obvious costs to lenders is lost revenue from squatters who get to stay in their homes without making any payments, but lenders are not the only parties involved who aren't getting paid.
Local taxing authorities and Home Owners Associations (HOAs) also are not being paid. The taxes will get paid eventually because property tax obligations survive the foreclosure. Whatever bills the old owners left behind are the responsibility of the new owner. Bills due to HOAs are only paid after mortgage holders are paid in full. Since most delinquent homeowners are underwater, there is no equity left over to pay the HOA bills, and any delinquent amounts are not paid by the new owner. The costs of extinguished HOA dues are passed on to existing homeowners who are still paying their bills.
Home owners associations have only one recourse to compel an owner to pay their dues: foreclosure. In a normal real estate market — one where home owners have equity — the threat of foreclosure is an effective threat; however, when owners do not have equity and they are not paying their mortgage, HOAs have no leverage. HOAs are generally unwilling to foreclose because their ownership position after the foreclosure is subordinate to the surviving mortgages — an HOA foreclosure does not wipe out the superior liens. In other words, HOAs can take possession of an underwater property — which provides them no benefit — and in the process wipe out any claims to back HOA dues. Taking ownership of a property they cannot sell to a dues-paying owner does not help them.
Shared homeownership could mean paying your neighbors' bills
People in condo, co-op and town house communities may have to pick up the slack for missed dues when other owners walk away from their homes or lose them to foreclosure.
By Kathy M. Kristof — November 7, 2010
For those who have a lot of cash or can get credit, this could be an ideal time to buy a house — the foreclosure crisis has pushed prices down and interest rates are way low.
But beware if you are looking to buy a condominium, co-op, town house or other property that's part of a homeownership group. Another side effect of the foreclosure crisis is that you could end up responsible for some of your neighbors' bills.
That's because people in shared ownership communities chip in to pay the cost of maintaining the buildings and amenities such as swimming pools. Also, the funds, usually paid in monthly installments, are often used to pay for landscaping, as well as to insure the structures.
But when individual owners in a group walk away from their homes or lose them to foreclosures, the bills end up getting split by the remaining homeowners.
Sometimes those costs don't get passed on immediately. Instead associations have been known to let bills pile up, creating potentially devastating surprises for owners.
Can you imagine how bad the assessments are going to be in the North Korea towers? The dues there are $998 per month, and probably less than a third of the "owners" are paying them. Assessments of tens of thousands of dollars are inevitable.
"There's really a crisis within a crisis in the shared ownership community," said Gary Poliakoff, coauthor of "New Neighborhoods: The Consumer's Guide to Condominium, Co-op and HOA Living."
The Community Assns. Institute trade group recently reported that more than half of the nation's 310,000 community associations are struggling with "serious" or "severe" financial woes.
Some 59% of association managers reported that more than 3% of homes in their community groups were vacant, the study said, because the owners either had walked away from their mortgages or were unable to rent the homes. Some 65% of associations reported that more than 5% of their homeowners were delinquent on their monthly assessments.
"When some owners, including banks that have foreclosed on homes and now own them, don't pay their share, other homeowners often must make up the difference through higher regular assessments or special assessments," said Thomas M. Skiba, chief executive of the trade group.
If an association determines that it needs to levy a special assessment on homeowners, there's no legal limit on how high that assessment can be. Unlike rent, homeowner dues aren't subject to price controls.
And homeowners can't just decide not to pay. Associations can get legal judgments to allow them to take a portion of homeowners' wages or put liens on their properties.
"You are an owner, not a tenant," Poliakoff said. "You are responsible for paying a share of the expenses, no matter how high they might be."
To help avoid problems, check out the association thoroughly before you buy.
- Dig deep into financial records. Normally you are given a disclosure that reveals the level of dues. But you need more, Poliakoff said. You should get the association's financial statement and find out what expenses the complex is paying, and what percentage of its overall obligations is handled by the dues.
Associations should have a balanced budget that covers both current and anticipated costs, he explained. But an increasing number of associations are either dipping into reserves or putting off prudent saving for anticipated big expenses, such as roof repair, because of the financial crisis.
The Community Assns. Institute survey, for example, said 38% of associations have delayed capital improvement projects, 31% are contributing less to reserves, 23% have borrowed from reserves and 6% have borrowed from banks and other lenders. Any of these factors can be a warning flag of trouble ahead.
- Make sure the association has adequate insurance coverage. Owners normally insure their possessions and the interior of their units, but associations generally hold the policy on structures.
One complex recently burned down and the owners found out too late that the association had cut costs by letting the fire insurance policy lapse, Poliakoff said.
- Check into an association's reserves. Some states require that the associations maintain reserves for any expense that's likely to exceed threshold amounts, such as $10,000. In those states the association must have a reserve study showing what the anticipated costs are, when they're expected to be needed and how much money is set aside to handle them.
If the roof would cost $50,000 to repair and needs fixing each 10 years, for example, you'd expect that nearly half of that anticipated cost would be saved by year five. Even if a reserve study is not legally required, your association should have one.
- Look over the grounds. Some 35% of associations have reduced landscaping services and 12% are asking homeowners to do some work themselves, the Community Assns. Institute study said. If the grounds are not well-maintained, the value of a home is likely to diminish over time.
All good advice.
It's different in Nevada
One of the first things I learned when I started analyzing properties in Nevada is that their HOA liens suvive a foreclosure. Unlike California where this debt is wiped out and the debt is spread to all the owners, in Nevada, HOA liens survive, and like back taxes, they must be paid by the new owner of the property. Being familiar with the HOA problems brewing in Calfornia, I think the Nevada law is a good one.
However, Nevada does create its own problems. There is currently no limit on the collection fees the attorneys for Nevada HOAs can charge. I saw a recent property with a $380 outstanding HOA bill. After all the collection fees were added up, the final bill was over $3,800. That is highway robbery.
The good news is that HOAs in Nevada are solvent and well funded. The bad news is that attorneys are using extortion tactics to make a fortune off collecting for HOAs. In the end, this hurts the banks because they must lower their expectations at public auction because buyers there know they must reserve enough to pay off the HOAs. The more money that goes to paying off the HOAs, the less money is left to recover on the loan.
Ms. Imploding Ponzi 
Women were big participants in the housing bubble. Mary Tyler Moore would be proud of the independence demonstrated by the various spendthrifts during the bubble. Of course, swapping dependence upon men for dependence upon lenders isn't real liberation, it's merely becoming a slave to a different master. I wonder how many Ms. Ponzis are seeking out men to bail them out?
- The previous owner paid $293,000 on 4/29/1999. She used a $263,700 first mortgage and a $29,300 down payment.
- On 3/22/2001 she refinanced with a $300,700 first mortgage.
- On 11/14/2002 she obtained a $86,800 HELOC. That taste of kool aid sent her shoppping.
- On 7/2/2004 she enlarged her HELOC to $186,800. What do you think she spent that $100,000 on?
- On 3/16/2005 she obtained a $475,000 Option ARM with a 1% teaser rate and got a $77,000 HELOC.
- On 7/31/2006 she refinanced with a $650,000 first mortgage.
- On 8/30/2006 she obtained a stand-alone second for $125,000.
- On 1/11/2007 she got a third mortgage for $65,000.
- Total property debt was $840,000.
-
Total mortgage equity withdrawal was $576,300. That's a lot of trips to Nordstroms.
- She quit paying in mid 2007, and she was foreclosed on in March of 2008.
Foreclosure Record
Recording Date: 03/07/2008
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 12/05/2007
Document Type: Notice of Default
Juggling with knives
The bank foreclosed and wiped out the second and third mortgages. They paid $675,750. The resold the property to the current sellers on 9/10/2008 for $610,000. Apparently the current owners — cash buyers from out of state — are worried about the strength of the market and have decided to sell.
It looks like the current owners improved in the property. Do you think they will get out without losing any money?
Irvine Home Address … 14941 GREENBRAE St Irvine, CA 92604 
Resale Home Price … $659,900
Home Purchase Price … $610,000
Home Purchase Date …. 9/10/2008
Net Gain (Loss) ………. $10,306
Percent Change ………. 1.7%
Annual Appreciation … 3.5%
Cost of Ownership
————————————————-
$659,900 ………. Asking Price
$131,980 ………. 20% Down Conventional
4.38% …………… Mortgage Interest Rate
$527,920 ………. 30-Year Mortgage
$127,160 ………. Income Requirement
$2,637 ………. Monthly Mortgage Payment
$572 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$110 ………. Homeowners Insurance
$50 ………. Homeowners Association Fees
============================================ .jpg)
$3,369 ………. Monthly Cash Outlays
-$437 ………. Tax Savings (% of Interest and Property Tax)
-$710 ………. Equity Hidden in Payment
$211 ………. Lost Income to Down Payment (net of taxes)
$82 ………. Maintenance and Replacement Reserves
============================================
$2,515 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,599 ………. Furnishing and Move In @1%
$6,599 ………. Closing Costs @1%
$5,279 ………… Interest Points @1% of Loan
$131,980 ………. Down Payment
============================================
$150,457 ………. Total Cash Costs
$38,500 ………… Emergency Cash Reserves
============================================
$188,957 ………. Total Savings Needed
Property Details for 14941 GREENBRAE St Irvine, CA 92604
——————————————————————————
Beds: 4
Baths: 2 full 1 part baths
Home size: 2,300 sq ft
($287 / sq ft)
Lot Size: 5,289 sq ft
Year Built: 1974
Days on Market: 16
Listing Updated: 40481
MLS Number: S637295
Property Type: Single Family, Residential
Community: Orangetree
Tract: Othr
——————————————————————————
Great Cul-de-sac inside tract location. Remodeled Kitchen with added Eating area. Upgrades in Kitchen include Granite Counters, upgraded cabinets, stainless steel appliances, wood flooring, Plantation Shutters and French Windows. Inside laundry area. Spacious Master bedroom with Balcony. Fireplace in Spacious Living room that has vaulted ceilings. Great Home!
I’m flabbergasted, IR. Day after day you provide us with staggering examples of HELOC-abusing idiocy and thievery in our very own Irvine. Is there no limit to the stupidity?
I think the word “stupidity” isn’t exactly correct. The word I would use would be “greed”. As for the question if there is a limit on greed, the answer would be no.
I think this HOA/condo-dues problem has already hit Florida. You can get 1000 sqft condos in good school districts for < $30k. At that price, your PITI cost is maybe $200/mo, but your fees can be up to $250-300/mo (or more, one I checked was $286). And that's just what they'll tell you. The story of unpaid fire insurance has to somewhat resonate with FL. Imagine if there's no hurricane insurance, and there's a year like 2005 where there were at least 4 big storms that went through FL. Some of the units in FL appear to me to be rental-to-condo conversions, which I would think the best course is for someone to buy all the units and convert them back to rentals. This is also probably a reason why the GSE's have requirements about % of a condo building owned by one person, or sold to paying residents. If you get tacked with a massive assessment, how much extra will you have to keep up with the GSE's mortgage payment?
We are starting to see them hit condos in Orange County too. There are numerous complexes that will soon only be able to sell to all cash buyers because they are not financeable. IR and I spoke about this over 18 months ago; it’s only a matter of time. Many of these have already corrected as a result, however, still remain risky because it’s nearly impossible to tell if the correction is enough.
However, for some reason politicians are still proud of their policies that only plan for one step ahead and often make the problem worse. They need to start speaking with people that are in the trenches. I spoke to a guy yesterday that told me about some new Fannie and Freddie pilot programs that will make current bad policy sound genius. IR should be meeting with the source soon, hope he can bring them to light.
I think this HOA/condo-dues problem has already hit Florida. You can get 1000 sqft condos in good school districts for < $30k. At that price, your PITI cost is maybe $200/mo, but your fees can be up to $250-300/mo (or more, one I checked was $286). And that's just what they'll tell you. The story of unpaid fire insurance has to somewhat resonate with FL. Imagine if there's no hurricane insurance, and there's a year like 2005 where there were at least 4 big storms that went through FL. Some of the units in FL appear to me to be rental-to-condo conversions, which I would think the best course is for someone to buy all the units and convert them back to rentals. This is also probably a reason why the GSE's have requirements about % of a condo building owned by one person, or sold to paying residents. If you get tacked with a massive assessment, how much extra will you have to keep up with the GSE's mortgage payment?
The kitchen eating area addition has resulted in a very odd patched-in floor, complete with transition strip effectively visually cutting the island in two. There appears to be a dishwasher to the right of the sink; what’s missing to the left of the sink?
“what’s missing to the left of the sink? ”
Thats your very own cubby hole! So now, you’ll have a place to put those pesky, rowdy children who misbehave, or have hyper ADD.
2nd dishwasher? Wine cooler? Probably trash compactor (for anyone who remembers those things).
Wine cooler seems the best guess. A trash compactor is narrower and that is definitely not a two dishwasher kitchen.
Seriously, who would patch a floor that way instead of removing planks and and fitting more in?
If they get the 659K price, they will likely break even after commisions/closing costs. If they put any significant money in for upgrades, it’s red ink time.
Two years later, there is something special about the Irvine market and other premium areas It’s time to try to understand the dynamics of high income earners and people with assets.
You can ignore it, but it won’t go away. Double digit pay increases are a nice thing.
What is the evidence that there has been a significant demographic income shift in the last few years in favor of these premium areas you speak of? Show us the numbers.
Not that it matters anyway. Clearly if demographics were the explanation, we’d have seen it show up in rents. Which we haven’t.
No one is ignoring the differential price stickiness. It’s just that some of us have explanations that make sense, and some of us have explanations that don’t.
Planet, keep dreaming that your average Irvine “premium area” homeowner gets double digit pay increases every year, especially in this economic climate. Most of these homeowners are upper middleclass and are very fearful of either losing their jobs or having their businesses go belly up. Don’t mistake some working stiff in Irvine with the Wall St. elite or the Silicon Valley wizkids…there’s a big difference!
Irvine *USED* to be filled with “middle class” people….about 20-30 years ago. While some of these have managed to survive and flourish in So Cal, most have cashed in and left. The new residents are primarily indeed DINKS, foreigners, and high income earners.
You have to be in order to afford the prices Irvine commands…..and it will get worse. If the new HOAG hospital that serves the upper elite class is any indication, there is no 4th floor in the hospital, thus indicating a HUGE influx of chinese who believe that the number 4 is bad luck.
There are so many foreigners, your local hospital doesn’t designate a Floor 4. Hellooooooo, anyone waking up out there?
Unlike many of you, I believe both PR and IR can be correct. Irvine will maintain it’s pricing standards through the Elite Class, and Las Vegas will turn into a money making market due to extremely low rents. This is the way the banksters want it…to further divide those whom have, and those whom have not.
A new America is upon us, and the fear factor still dictates people’s minds. Hell, you still find people that believe the wars in Iraq and Afghanistan are just and about freedom…LOL!!!
Hi all, I am a long time reader of this blog and I need some advice. My husband and I want to buy a home. Here are the specifics.
annual salary: 78k (stable job)
current rent: 1650.00 FV
family: 2 aduts 2 children
house price: 395k
city: West Garden Grove 92845
down payment: 80k
left in savings: 30k
401K: 32K
college funds: 7k 🙂
rental price in area: 2100-2500
commute time: 10 minutes
additonal debt: 0
What do you all think? Should we go for it or wait? I don’t work but plan on getting a job next year. I want to buy soon so we qualify for an MCC, that will be funded in January, which gives an additional tax credit of 15% on interest paid for the length of the loan. Schools on the west side are good and comparable to their current schools.
Hi Shannon— my email is Shevy@idealhomebrokers.com, if you want I can create an IHB report that will show you rental parity, the fundamental value, and will give you a clearer picture, please let me know and I will get the specific address if you have one and then we can meet and discuss the pros and cons for your specific situation.
I think you should go for it. Home ownership is great compared to renting. Also, think about the long term future. One day you could have no mortgage payment at all, I can tell you from experience its great. On the flip side I know people who still pay rent and they are older…than me, thats no fun. You plan on working forever?
Hi Shannon. Before you buy, please consider that maintenance costs about 1% of the purchase price annually. You also need to have at least 6 months’ worth of savings in case that stable job evaporates, or you’re unable to get a job that pays for itself. I’m concerned that you don’t have much saved up for retirement. If you use your savings for a downpayment you have absolutely no cushion.
Please wait – save up more money and eventually you’ll find a house that’s priced at 3 times your annual income, which is a sustainable debt level for most people.
Good luck!
Great points NorCal, when I first read it I thought it was IR.
Thanks for the great advice. We will still have 30k left in our savings after we use 80k for the down. I think we will start making low ball offers (370) on houses that have been on the market a long time and see who bites. I won’t fall in love with a house. To me I like the area and any house will do. This could give me a leg up emotionally when making offers. Since we are rentng I am not locked into a contingency. We are already pre-approved. My husbands work is very stable and going through an expansion. Also, i don’t work but will be looking next year. This should give us an opportunity to increase our savings. I’ll keep you updated.
IR,
I remember once that you did profiles on various neighborhoods of Irvine. How about doing a profile on various Irvine HOA? For example, you can inform your readers what to watch out for, what indicates proper reserve amounts, and what is considered serious HOA “gotchas.”
I wish I had more information on them, but the HOAs don’t make their reports publicly available.
How do you know the current owners made the improvements? Maybe Ms. Ponzi did.
I don’t care who made the improvements, I still would not offer then one nickel above what they paid for it. Screw them.
When an HOA forecloses on a delinquent property the proceeds from that sale are used to pay off the delinquent dues. So your “tens of thousands” of HOA dues are easily paid of with the sale of a single unit.
I don’t think it is that easy. At this point, as referenced in the blog, the HOA’s are at best 2nd, and generally 3rd in line so they get very little (or nothing if the loanowner is under water). An equity owner would have to be a complete idiot to get foreclosed on by his/her HOA before selling themselves. But….as we see here daily, no shortage of idiots.
“The proceeds of the sale”? The HOA is a JR. lien normally not even in 2nd position. When the 2nd forecloses, often over a year after the person stopped paying the HOA the lien is wiped off the property. If the property has equity, you are correct. However, a majority of these units that have back HOA’s have no equity, the first is underwater let alone the 2nd, possibly 3rd, and the HOA lien which is normally not even in 2nd position.
I have lived under two HOAs since 2007. In neither one am I aware of any back dues being recovered after foreclosure. Before the prices peaked, it did happen, but there were so few foreclosures during that time that those were simply people too stupid/lazy to sell after a job loss.
After the crash? Forget about it: the HOAs simply pray for new, dues-paying owners.
HydroCarbon- I believe that your experience is the most common. This is why many of the loan mod programs, the squatting, and the banks refusing too or claiming they are too busy to foreclose is unfairly hurting responsible homeowners in these associations.
The foreclosure process is in place for a reason to get those that don’t pay out and get paying people in. The moratoriums and mod programs serve to hurt the responsible and once again prove that our leaders are too near sighted to see more than one step ahead. Imagine if all of the owners in these condos understood that the politician that is promoting themselves as saviors that pushed for moratoriums or loan mods played a huge role in the additional $150 in HOA dues they are paying and $50,000 in lost value because as a result properties in their communities will now only sell to all cash investors?
What other choice does an HOA have?
I don’t know? Maybe cut spending like the rest of us. These HOA’s are like little governements who spend what they don’t have. Then they scream “raise dues” its not fare. I think these higher dues hurt homes values as well.
Most HOA officers are elected by owners, so you need to perform due diligence when you vote. Additionally, a lot of expenses are mandated by law. Until you’ve seen your associations reserve report you don’t really know how extravagant the HOA is being.
And it’s hard to say how exactly the HOA fees affect property values. High fees for a well-maintained place could well be better than low fees for a dump.
Does it affect the HOA’s lien status if the HOA has been diligent in suing the debtor for unpaid fees?
How does this Nevada law work on short sales?
By not wiping out HOAs and allowing add-on collection/legal fees… I think this makes it a barrier to buy distressed/foreclosed property in Nevada.
You just offer less at auction. If you think the place is worth 150K and it has a 5K claim on it, don’t offer any more than 145K. Shouldn’t matter if you are paying cash. The only ones it would affect are people trying to 100% finance who can’t scrounge up a few grand.
Yes, I simply lower my offers at the auction site because I know I will need to pay the fees later.
Why not go ahead and foreclose if you are the HOA? 1) you get rid of the person who isn’t paying HOA fees. 2) Bid on the property at auction since the likelihood of someone else bidding and taking the property subject to the mortgage is next to nothing, or cover your HOA delinquency if someone does purchase. 3) Lease the property out to a renter who can at least cover your HOA fees (below market rent baby!). 4) If the bank does foreclose, great, now they can resell it to someone who can afford the property and the HOA fee.
Sure, the renter under the above scenario runs the risk that a bank foreclosure will force them out of the home in a couple of months (with what is likely a nice cash for keys payment to the renter), but a below market rent (covering the HOA fees) might entice renters and maybe even start generating extra revenue for the HOA.
Unless the debt encumbrances and tax liens on the property are 15% less than the value, there is nothing for the HOA to go after.
The HOA is last in line at the lien trough. Since virtually all non-dues-paying debtors are underwater anyway, there is no reason for the HOA to bother.
I’m not saying there is anything to go after other than a way to legally evict the non-fee paying homeowner. Even if the HOA is 14th in line, why not foreclose on that interest and evict the homeowner? You will take the property subject to the senior liens, but if the bank isn’t interested in foreclosing, why not rent the property out in an attempt to recoup HOA fees that are otherwise down the drain?
Take the Korean Towers, for example. Evict a non-HOA paying owner and take the property subject to the senior lien holders. Rent the property out to someone for $1,000 a month (or, if you are ambitious, $1,500 a month). You cover your HOA fee that otherwise wouldn’t be paid. If the bank comes to actually foreclose (how many of these have gone to auction in the last 3 months?), the renter will still have time in the unit until the bank can secure an eviction. Does it suck that the renter can be ousted? Yes. Are there some renters that would make that trade for drastically reduced rent? I’m sure there is. Especially when they could probably just float from unit to unit in this building…
An interesting idea. Does the HOA have the standing to evict someone from a property to which the HOA does not hold the deed? My own HOA is a co-op, so there’s explicit group ownership of every unit, and the HOA does indeed have the power to evict. Perhaps that’s why we have few unpaid dues. But I don’t think North Korea Towers can evict someone who holds the note, or whose bank holds the note, until that bank decides to act.
Corner office, I think that this is a good and valid option and point. I recently read some court cases in Florida in which the banks were forced to pay HOA dues. I’m pretty sure that IR wrote about that in a post a few months back as well.
I know of a few instances in which investors have acquired the property through foreclosure by the HOA at and took possession and either leased it out or moved in. The deals like this that I have seen still had solid return for the person that acquired it this way because the banks are taking so long to foreclose.
I have also heard of people acquiring through HOA foreclosure subject to sr. liens and then moving in and not paying these knowing the banks will take months or years. I know of one in N. Tustin that the guy acquired the property through foreclosure when the HOA brought it to sale. He’s been living in a million dollar plus property for the cost of the back HOA dues when he acquired it and likely he’s keeping those current but nothing else because it’s in foreclosure. However, to delay the process he had it listed as a short sale. Likely he will live in the house for over a year for less than 1k/month.
“Now if one studies history one finds out that the Federal Reserve was formed to prevent speculative panics, to maintain the value of the dollar, to preserve the purchasing power of the consumer, and to responsibly manage the nations money supply. Has an organization ever strayed as far from accomplishing its goals as the Fed?”
Walter Zimmerman – Senior Analyst at United-ICAP
Dollar is strong and house prices/economy are bouncing back.. Mission accomplished FED.
Famous words: “Mission Accomplished”
I’ll see your “unintended consequences” and raise you “negative externalities”. That’s the true title of this debacle.