As a by product of our economic and real estate troubles more and more associations
are experiencing money problems. The first payment that a homeowner will stop paying when they get in trouble are the
association dues. If at some point in time they stop paying their mortgage payment they have absolutely no incentive
to pay the association dues. What is even worse is that when the lender finally recovers the property through a foreclosure
they often do not pay the past or current association dues. This means that in the normal foreclosure situation the
association will not get paid until the foreclosure has been complate and the property has been sold to a new home owner.
This means that the assoication cannot count on recieving any money for at least 18 months.
With
the foreclosure rate at record highs and no end is sight, the danger for all associations is that so many association members
stop paying that they become non-functional. Once an Association becomes non-functional, the value of all of the properties
within the association plummet and basic issues like plowing, mowing and maintanence become hugh proplems. Not only
that but what lender will lend to a buyer of a property that is subject to a non-functioning association? What buyer
would want to buy such a property?
The following are five things a buyer should be concerned
about when buying a property subject to an assocition:
1. Are the monthly dues enough to pay for current
costs and future mainenance?
2. Does the association have cash reserves to protect the association from
non-payment of dues and unexpected costs?
3. How many properties subject to the association are in default on their monthly
dues?
4. Does one person/company own a number of properties in the association?
5. What
attempts are being made by the association to collect dues and assessments?
Monthly Dues
Quite often the buyer is looking for a property with a low monthly association
fee. While this is understandable, if the dues are so low that they do not provide the income to the association that
is necessary for the association to properly perform its duties, the low monthly payment is going to result in poor maintenance
or a large assessment down the road. Some associations have few costs and liabilities so the association fee does not
have to be very large. Other associations are responsible for plwing of roads and parking lots, mowing, and outside
mainentance such as siding, decks and roofs. When becoming a member of an association you are essentially buying into
joint venture with all of the other members and the associations finances should be carefully reviewed to make sure
that the association is adeguately funded.
Reserves
Some costs are constant others are not. While we don't know when a new roof will be needed or the siding needs
to be replaced we do know that it is ineveitable that these costs will be incurred at some point in time. If a cash
reserve is not created, the owners at the time the major expense becomes necessary will be stuck with the entire cost through
a large assessment. So if you buy into an assoication that has little or no reserves and a year later the roof needs
to be replaced you will be paying a full share of the cost of the roof replacement even though you only got the benefit of
the roof for one year. To avoid this situation, monthly fees should be high enough to build a reserve to pay for the
anticipated mainentance, including replacement of components over there expected life span.
Number of Members Currently in Defualt
The greater to number of members who are
not paying the monthly association fee, the greater the burden on the paying members. Unless the monthly fee is increased,
the money recieved will decline with each defualt and reserves will decline or services will be eliminated. In these
situations, when a buyer reviews the finances of the association they cannot simply take the monthly fee and mulitple it by
the number of members to determine if enough money is being genreated to properly fund the association but instead, must look
at the number of members who are paying to determine if enough money is being collected through the monthly association fee.
If barely enough is being collected to properly fund the association, the buyer must anticipate that the monthly fee
is going to rise or their is going to be a special assessment imposed to cover the gap.
It is also important to look at who the owner are who are members
of the association. If one person/company owns a number of properties the impact is greater upon the association if
that person/company runs into financial trouble and cannot pay the assessments. This generally occurs in two scenarios.
The first is the developer who still owns a great number of the properties in the association. If the developer
cannot sell those remaining properties or otherwise runs into financial problems and stops paying the monthly assessments,
the association may very well fail. The second scenario is where an investor bought a number of properties in the association.
Like the developer if the investor runs into economic difficulties and stops paying, the impact on the association can
be staggering. Unfortunately, it is simply a fact that developers, builders and investors are facing hugh economic troubles
that make it very likely that they may have to stop making the monthly assessement payments.
Collection Practices
Many associations have traditionally been slow to try to collect
past dues; however, in the present economy that can be a mistake. Every payment that is not collected affects the other
paying home owners. You don't want to join an association that is going to wait until there is not enough money to properly
function before they start collection actoins. Remember the basic functions of the association all have costs associated
with them: lawn maitenance, snow removal, management company, legal fees, insurance, etc.
Conclusion
The fact is buyers should always carefully look at the finances
and the running of an association before they buy or they may find that they have only bought themselves trouble. The
traditional review that focused on making sure the monthly assessment was as low as possible simply was and is short sighted.
If you want a properly functioning assoication, if you don't want to get hit with a huge assessment becuase the monthly
fees were kept low and no reserves were built up, you must make sure that the monthly fees are properly funding the association
and that they are sitting on a default timebomb that can destroy the associations ability to function and the value of your
property.
NOTICE
The
foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable
principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract are, or can be unique;
the unique facts and specific language of the contract may require a different legal analysis and may result in a different
outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent
in the field of practice relevant to your situation.
Copyright 2009 Nash
& Lodge, PLLP
