How to X-ray an HOA #5- Delinquency Rates, Foreclosures and Short Sales

Buyers should be wary of cash-strapped developers or bank-owned buildings.  Developers and banks tend to lowball the cost of major repairs or improvements.  These groups may also fail to aggressively market the building or fix construction defects. 

If the developer still controls the association, review the financial statements mentioned in Part 2 of this series.   Has the developer made the reserve fund deposits on time?  If instead, those payments have been deferred, try to verify the developer’s financial health and reputation.  

If it has not already been disclosed, buyers should ask for the HOA’s assessment delinquency rate and the current accounts receivable figure.  Fannie Mae, Freddie Mac and FHA now have strict guidelines on condo delinquency rates.  If more than 15% of the condos in a project are more than 30 days delinquent on HOA fees, then loan approvals will be scarce.  The few available mortgages might require a larger down payment or higher interest rate.  Note that this 15% rule does not apply to townhouses.

The tough economy has devastated many HOAs because delinquent owners have a strong ripple effect on the neighborhood.  When owners stop paying the HOA dues, that deficit must be covered by others.  When they stop paying the mortgage, their property is headed for a short sale or foreclosure. 

Industry experts estimate that only about 25% of short sale properties actually sell at that stage.  The rest end up as foreclosed parcels.   A high concentration of foreclosures depresses the market value of all homes in the immediate area.   And presumably, the owner who was foreclosed on stopped paying HOA dues long ago, putting a noticeable dent in the association’s funds.  

But once the foreclosure is done and the bank owns the unit, can the HOA recover the delinquent dues for that unit?  Maybe.  Banks may or may not be required to pay HOA dues on foreclosed units.  In Minnesota, the entity buying a foreclosed property generally needs to pay only the assessments that accrued during a specified six-month period.  And if the property undergoes a successful short sale, the association typically recoups none of the delinquent fees.  Why?  Because by definition, the short sale proceeds are insufficient to fully pay the first mortgage.  HOAs are subordinate lien-holders so they typically get nothing.

We are now more than half-way through the “How to X-ray an HOA” series so it’s time for brief refresher.  Go back to Part 1.  Re-swear your acknowledgement about how visiting this website does not create an attorney-client relationship, no matter what.  And this time, say it like you mean it.  

Then come back for Part 6 on lawsuits, judgments and insurance.

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