Unintended Consequences of Condo Foreclosures

Robin Fenchel February 22, 2012

When you, the buyer, purchase a condo in a multi-unit/hi-rise building, you may not be aware of the unintended consequences that can arise due to your neighbor(s) defaulting on their mortgage(s) and/or condo/association fees.

Depending upon how many homeowners in your condominium building are in default–those of whom have stopped paying their mortgages and association dues–will directly impact the condominiums reserves and the funds necessary to operate and maintain the integrity of the building. As a result, the HOA (Homeowner’s Association) may have to vote to increase the association dues/and or propose a special assessment for each and every homeowner in the building to cover the short fall resulting from your neighbors’ defaulting on their loans and/or dues. This problem can be compounded depending upon how many of the condos in the building are in default.

You may be faced with having to cover the shortfall along with the remaining homeowners who continue to pay their obligations or be left with a building that cannot provide the basic services such as water, electricity, maintenance that you expected would be there without question when you first purchased your condo. This is not a pretty scenario, but it is one of which you should be aware.

If you are considering a purchase in a multi-unit building, you should review the Homeowner’s Association documents, such as C,C,& R’s (Covenants, Conditions, and Restrictions), Articles of Incorporation, the last 12-months of minutes, and the annual budget and audit to make sure that the association has adequate reserves which should give you an idea of the financial well-being of the building.

Moreover, you should consult with a Realtor who can give you valuable information on the number of active listings in the building that are in the process of foreclosure (short sales, notices of default), or REO’s (real estate/bank owned properties). This should send up a red flag as to the health of a particular condominium building.

Remember that what appears to be today’s good deal or “steal” may wind up being tomorrow’s bank owned property. It is wise to consult a real estate professional who is active in the local neighborhood before you jump in and become collateral damage in the future wave of further defaults.

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