11/24/07: Keeping Your Condo Afloat

You are on the Board of Directors of your community association and are starting to see many units going into foreclosure. The financial statement that your property manager sends you on a monthly basis indicates a growing number of delinquencies.

Your association has many bills that have to be paid, such as management fee, water and electric bills, and legal fees. The landscape company is complaining that it has not been paid in over two months.

It will not be of consolation to you, but you are not alone. In recent weeks, I have received a number of letters from board members seeking guidance and asking what steps they can take to keep their association afloat.

One writer asks: if a homeowner goes into foreclosure, are we just out of the assessment money or does the lien we have placed on the house run with the land? The answer depends on the law in the state where you live. In some states, the association has to physically file a lien against the owner’s property. This is a formal document which is filed with the Recorder of Deeds in the jurisdiction where the property is located. Its purpose is to put the world on notice that the homeowner owes money to the association. In the District of Columbia, however, there is an automatic lien from the time the assessment comes due. While it is not necessary to actually record a lien against the property, I recommend that a lien be recorded. Not everyone knows the law in the District and recording will alert anyone searching title and considering taking action against the property.

In many states, if a mortgage (deed of trust) which is being foreclosed upon was recorded on land records before the association’s lien exists, the foreclosure will erase the lien. However, there is what is known as a “super-priority” lien in the District of Columbia for condominiums. If the lender’s mortgage was recorded after March 7, 1991, and if the owner being foreclosed upon was also delinquent on the association dues, the foreclosing lender is required to pay the condominium association up to six months of these delinquent assessments.

Some thirteen states have some form of priority status for associations; however, neither Maryland or Virginia have such laws on their books.

Another Board member asks if the new owner who buys at a foreclosure sale will be responsible for the existing lien? The answer is no. Other than the super-priority lien, the lien is lost. However, the new owner (or the bank if it takes back the property) remains responsible for all future assessments.

It should be noted that the delinquent owner still owes the money and can be sued. It is doubtful, however, that the owner has any money to pay any judgment that the association may get in court.

Thus, one immediate suggestion: do not let assessments get too large. I believe in “zero tolerance” when it comes to association assessments. If the owner is delinquent for even one month, depending on the procedures spelled out in the association’s legal documents, legal collection action should be instituted immediately.

Other board members have asked whether services which the association provides can be terminated against delinquent owners. The answer depends on state law as well as the association’s legal documents. For example, if the association is paying the heating bills, many states will not allow heat to be terminated during the winter season.

But other services – such as use of the swimming pool or the health club, can be stopped when an owner is not paying the association assessments. However, before the Board takes this step, it should advise the owner of the situation and invite him/her to attend a hearing before the board. The owner has the right to have an attorney present at this hearing, and should be provided an opportunity to explain why the services should not be terminated. Some state laws – such as in Virginia – specifically require such a board hearing. I recommend it as a matter of course for all community associations.

Another board member writes: “as a board, we have the power to do yard maintenance and trash removal” and the cost for these services “are included as part of our annual assessment… Can we eliminate these services and let the owners work with vendors on a direct billing basis?”

That’s an interesting suggestion, but I cannot recommend it. I have no problem with the board eliminating certain services, but to let individual owners do this on their own can lead to chaos. You don’t want a dozen or more trash trucks coming onto the property on a daily or even weekly basis. More significantly, we all know that not everyone will want – or can afford – to participate. As a result, there will be some lawns which become overgrown, and some properties will have trash piled outside for a long time. And in a high-rise condominium association, such a plan is completely unworkable.

But there is fat in every association budget. Examine your expenses carefully. I suspect that the board – working with your property manager – will be able to trim hundreds – if not thousands – of dollars from your overall budget.

For example:

• increase your insurance deductible. That should lower the annual premium charges. The downside of this, of course, is that you will have to pay more money each and every time you file an insurance claim.
• set up an association website. Official notices can be sent via email (or put on the web). You may have to amend your legal documents, since they may require that notices be sent by US mail. For those who do not have a computer, you can still send them the information through the mail, but for the majority who are computer-literate, this can save you handling and postage money.
• are there lawyers or accountants in your association? If so, they can assist with some of the legal and financial questions which periodically occur. It is important to have independent legal counsel and accountants working for the association, but using in-house professionals for limited advice may reduce your expenses.
• are you getting two or three bids for all work done by outsiders? Many times, property managers have ongoing relationships for specific service providers and feel comfortable working with them But any job – especially if the cost exceeds $5000 – should be sent out for bid.
• do you have a newsletter? Some associations derive income by allowing local commercial establishments to advertise in those publications. This could be a good source of revenue but the advertisements must be carefully examined by legal counsel on a case by case basis.
• do you charge for specific services which are not used by everyone., For example, why not impose a modest fee for guest parking or swimming pool passes? Some associations charge a yearly fee to use the health club or the tennis court.

All of these suggestions should be considered by Boards of Directors. The economy is weak, gas prices are up, and everyone is out to save some money. Why shouldn’t your association do the same?