Unpaid maintenance fees. Twenty years or so, ago, I lived in New York City. I was considering buying a condo, learning about fees, when the stock market crashed. 1987. I won't forget it, or condos, because I wondered immediately what happens if my fees rise above my ability to pay because other condo members can't afford to pay theirs? Oh, I was told, that will never happen. Well, we never bought the Manhattan condo.Crazy me. Soon after Black Monday, stock markets bounced back, eventually into a bull run that propelled New York City real estate into the ether. The new high end norm in Manhattan, until recently, $3000 per square foot. And, by the way, the Citigroup stock I bought in 1987 is worth today about what I paid for it. (Please click, 'read more'.)
Those chickens have come home to roost. Big time. Here is the story from the Sunday edition of the Miami Herald certain to raise the hackles of condo developers: "Mediators foresee gloom, doom in condo industry". One of the more troubling statements in the interview with the Florida Condominium Ombudsman: "it is up to the government to try to help us." I don't understand this point: if you didn't understand the risk, you shouldn't have made the investment. Why should government try to help "us"?
Maybe I'm missing something: if government rewards busted private investments then whatever is paid to investors who failed should be tripled as a reward to ordinary citizens who didn't. Or quadrupled. But maybe I'm just being crazy, again.
Here's an excerpt:
A: I know of several condominiums that are on the brink of people just walking out. They can't afford to maintain their units anymore. Their slice of the pie has become so big that they can't afford it. They are just packing up and leaving their largest investment because it doesn't pay for them to stay. You are going to be hearing about this very soon. This is going to be a real problem.
Q: So unit owners who've been in their condos for many years, who have equity in their condos and even may have paid off their mortgages, are still having to move because they can't afford maintenance fees?
A: Yes, and some condos can't take in even enough money to pay their water bills. They're shutting off the water. They're shutting off the electricity. They can't come up with the money because there are so many delinquencies. The few who are left can't come up with enough money to pay all the bills for everybody. It's sad.
Q: How do these problems affect sales in the buildings? I've heard it described as a ``death spiral.''
A: Sales are very poor because people don't have the money to buy, No. 1. And, they don't want to take over places with debt problems. Sales are very bad. Everything is very bad. Let's face it.
Posted on Sun, Jan. 04, 2009
Mediators foresee gloom, doom in condo industry
BY MONICA HATCHER
Working for the state's Office of the Condominium Ombudsman is dirty, sometimes even ''disgusting,'' work, say Bill and Susan Raphan, who supervise the Fort Lauderdale satellite office. The tempers, the misunderstandings, the complaining -- the slapping, the threats and, at least once, the brandishing of a firearm.
''You would not believe some of the things we see,'' said Susan Raphan, who with her husband began working, first as volunteers, for the office soon after the Florida Legislature created it in 2004.
Despite the job's tribulations, the Raphans said they know that more than 1.5 million condo owners in Florida depend on them as a resource for understanding the rights and responsibilities that come with condo living. And they find satisfaction in helping people. Of the 16,000 phone calls the office got last year, Bill Raphan said roughly 90 percent were from Miami-Dade, Broward and Palm Beach counties and handled by Fort Lauderdale's staff of seven.
Their primary duties include acting as mediator between boards and angry owners, holding classes and seminars about condo law, and monitoring elections. But as the South Florida real estate market enters another year of soaring foreclosures and sinking home values, the Raphans expect a host of new problems they do not have the power to remedy -- condo associations entering bankruptcy, buildings closing and unit owners walking away from their long-held investments because they can't afford to carry the cost of empty units.
The reason: unpaid maintenance fees.
''It's a major problem,'' Bill Raphan said.
The Miami Herald sat down with Bill Raphan to discuss the issues facing condo dwellers.
Q: What are the biggest issues facing condo owners right now?
A: The condominium market, the problems in foreclosures, obviously, liens and delinquencies are a big problem right now. That's the biggest problem at this point, and it's up to the government to try to help us. There's not a lot our office can do. This is a national problem that is happening everywhere, but we have so many condominiums here. It's just more acute in this area.
Q: What kind of complaints have you been fielding?
A: People are complaining about foreclosures and their maintenance fees. I always explain it to them this way: Your condominium has to run like a business, and the business has to collect enough income to run the business, in this case, the association or the condominium itself. In order to maintain the property, you have to take in X amount of money. [The total amount needed] is like a big pie, and each person has a slice of that pie that they have to pay. So, for every person in your condo [who] is not paying, it means the slice of your pie gets bigger. In other words, if you're paying $100 a month and some people aren't paying, you might have to pay $110 or $120. You might have to pay $200, and there are places with 50 percent or more delinquencies. That means if you are paying $100 a month, you're going to pay $200 to keep that place going. People can't afford that nowadays. People are losing their jobs.
Q: What are condos doing to deal with the problem of budget shortages?
A: Some condominiums have actually eliminated their maintenance people, and they are cleaning up and doing things themselves. They've eliminated their landscapers and are cutting lawns. They've cut down as best they can on things they buy. The situation is very difficult. The people who are getting assessed that extra money are angry. They want something done, but there is not a lot that can be done.
Q: What about accusations that lenders are stalling foreclosures to avoid paying maintenance and association fees? Is there any truth to that
A: [Lenders] are not going to say they are stalling, but what condo owners are complaining about is a Florida statute that gives lenders a cap that says they don't have to pay more than six months of assessments or 1 percent of the value of the unit [before they foreclose on it. Then they must pay full association fees like other unit owners.] That's one of the things [Florida legislators] may be looking to change this year.
Q: Do you think there is a solution to getting lenders to pony up their share of maintenance fees?
A: It has to be legislative on any level, maybe even up to the federal government, who knows? It's a major thing. This is something that needs to be looked at on even a national level.
Q: What are the consequences of association-fee problems going unaddressed?
A: I know of several condominiums that are on the brink of people just walking out. They can't afford to maintain their units anymore. Their slice of the pie has become so big that they can't afford it. They are just packing up and leaving their largest investment because it doesn't pay for them to stay. You are going to be hearing about this very soon. This is going to be a real problem.
Q: So unit owners who've been in their condos for many years, who have equity in their condos and even may have paid off their mortgages, are still having to move because they can't afford maintenance fees?
A: Yes, and some condos can't take in even enough money to pay their water bills. They're shutting off the water. They're shutting off the electricity. They can't come up with the money because there are so many delinquencies. The few who are left can't come up with enough money to pay all the bills for everybody. It's sad.
Q: How do these problems affect sales in the buildings? I've heard it described as a ``death spiral.''
A: Sales are very poor because people don't have the money to buy, No. 1. And, they don't want to take over places with debt problems. Sales are very bad. Everything is very bad. Let's face it.
© 2009 Miami Herald Media Company. All Rights Reserved.
http://www.miamiherald.com
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10 comments:
What kind of society have we turned in to when "government" needs to interfere. There is risk/reward and buyer beware. I am in a situation where dues have gone through the roof, but at some point, the Association will get some funds back. It's not permanent. It will works itself out and Associations should really give back to dues paying owners, the extra funds they paid when the banks start paying them. It should not be a windfall for the Associations as the banks take over.
Also, FS 720 has been amended. The correction to one of the answers is a bank who forecloses on a unit and then aquires ownership is responsible for the lessor of 12 mths past due maintenance of 1% of the original mortgage amount. If you really look at that numbers, it's a bigger break for the bank (otherwise the legislation wouldn't have passed). I liked the 6 mths version better because if the fees were $400 per month x 6 mths, the assocation would be entitled to $2400. That's pretty basic. On that same unit, the key is "the lessor of". Let's say it's one of those purchases 80/20 and the first mortgage was only $200,000. The lendor would only have to pay $2000 to the Association.
#1: I would agree with you except that in some cases there simply aren't enough people paying to have the building cover its expenses. It would seem to me that the building should file for bankruptcy at that point.
Some of these buildings will have to be emptied out and either demolished or become rentals when someone picks them up.
It is an unfortunate side effect of a speculative frenzy. The real questions now are (1) how much of the damage can be or should be mitigated and (2) can we minimize the possibility of this happening again?
I would say for your Question 1 - it depends on each Association. Bankruptcy should be the last option, but I see your point where the deliquency's are so bad, bills cannot get paid. I would the ask, why can't the banks who recieved Gov't funding give those association a 6 mth to a 1 yr bridge loan while the mess settles. It would stabilize the buildings as the foreclosure process went through and allow affordable maintenance to the owners still left holding the bag.
In regard to Q 2 - This situation never had to happen and is not the norm for the Condo market. This Titanic started in 2004 and peaked out in 2006. I've never in over 20 yrs in the condo market seen so many unqualified buyers, so much novelty paper and the derivites, it was very predictable what was going to happend and am only surprised that lenders were surprised. This goes back to my risk/reward statement. The money train eventually stops. I think this will settle when the 5 yr ARMS come in to play this year and peak out in 2010 as one analyst has stated. The downside is unless you have a 750+ credit score and then some, lenders won't lend and that needs to be looked in to. I always liked the 20% down rule and when I saw these 80% 1st mortgage, 20% equity lines at closing, I cringed.
Well thank heavens GM has a plan that can save not only the American auto industry, but homeowners and retailers as well.
See the article entitled GM Announces Plan to Save Homeowners, Auto Industry and Retailers
If you want to see a really extreme example of condo investments gone bad, go to Thailand on the sea west of the border with Cambodia. The buildings built at the peak of the speculative investment in the mid/late 1990's are STILL vacant and crumbing, with about a 20% occupancy rate. A basic 3 floor 1500 sft structure can be rented for $30 a month, which is cheap even in Thailand.
Darn! You scooped me! I did a nearly identical post about this article!
http://www.miamicondoforum.com/?p=408
Check out the end of mine for some comic relief! Peace out.
What kind of society have we turned in to when "government" needs to interfere.
A civilized one?
Condominium Boards need to Foreclose on Condo Owners in default of Maintenance. Take out Loan Against Condo to PAY Maintenance!
Done. If Bank as First Lienholder Forecloses, send Bill to Bank. If Bank does not pay... sue in Small Claims Court!
Most people don't think of it this way, but buying a condo is buying a piece of a partnership, like an MD putting money into forming a group practice. Unlike most partnership agreements, however, condos very seldom have clearly spelled out arrangements for how to deal with pain when things go wrong. Even for existing condo developments in trouble, the condo owners can, if they wish, amend the terms, by mutual agreement and with court sanction, to keep people and banks from "freeriding". That seems to me preferable to bankruptcy, or lawsuits, or hoping for government help that won't arrive, or "jingle mail". For anyone buying a condo now, a key question to ask oneself is whether the terms of the purchase include a reasonable provision for how the pain will be handled if, say, a hurricane rips off the roof, or if vacancies rise beyond reasonable levels.
Another dirty little secret you wont be told when you buy a condo is that if more than about 16% of homeowners arent paying their fees even if someone closes on your condo the banks wont grant them a mortgage.
Once you hit this 16% threshold in a real estate market which still has years left to recover its lights out.
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