Understanding The Framework Of Homeowners And Condominium Associations

By: Lance T. Denha, Esq.

With many investors always seeking out investment property and second homes, one aspect that investors and homeowners need to consider is the role Homeowners and Condominium Association play on a day to day basis and consequences for failure to maintain payments to the Homeowners and Condominium Association. If you live in a house, townhome, or condominium that is part of a common interest community, you are most likely responsible for paying dues and assessments to the homeowners’ association (HOA) or condominium association (COA). If you don’t pay, in most cases the HOA or COA can get a lien on your property that could lead to a foreclosure.

Almost every planned community is run by a homeowner’s association (HOA), which is made up of all the owners in the development. The HOA’s obligations are set forth in the governing documents for the development (such as Articles of Incorporation, Bylaws, and a Declaration of Covenants, Conditions, Restrictions and Easements (CC&R’s), and sometimes separate Rules and Regulations).

One issue that can cause homeowners to stop paying their dues is that they feel they’re excessive, or literally can’t afford them. The HOA calculates the amount of dues it needs to collect based on its annual budget, after estimating the ongoing operation and maintenance expenses for the common areas. These costs might include such things as landscaping services for common parks, or power and water bills for a common clubhouse.

The budget might also create a reserve fund for anticipated common area repair and replacement costs (which might include such items as the cost to repair broken fitness equipment or the cost of replacing rusted furniture around the common pool).

Typically, the HOA divides dues equally between all homeowners in a development, although in some developments dues are allocated based on the relative size of owners’ properties. This is more common in condominium developments, where, for example, the owner of a 4,000 square foot penthouse unit might pay proportionately more than the owner of a 400 square foot studio unit in the same building. In most developments, the dues are collected semi-annually, quarterly, or monthly.

The HOA or COA will likely first try to collect the debt using traditional methods, such as phone calls and letters. If that doesn’t get you to pay up, the HOA will probably try other tactics and may even go so far as to foreclose on your home. The HOA bylaws (and perhaps the Covenants, Conditions, and Restrictions) and state law often set out the collection methods that the HOA can use. Some of those methods include:

Sometimes, an HOA cannot collect all the dues needed to meet the budget because of late-paying or nonpaying home owners. If the HOA cannot collect enough to maintain, repair, and replace items in the common areas, conditions in the development might quickly start to go downhill.

To avoid such a scenario, the HOA may raise the amount of periodic dues, and possibly levy special assessments. So, as a result of your neighbor’s delinquencies, you could be hit with higher costs. Because an HOA has the right to raise dues and collect assessments to keep the common areas maintained and operating, an HOA will rarely go bankrupt. However, if dues and assessments get too high, homeowners in the development might find it too expensive to live there. The result is many homeowners might sell, or, even worse, just abandon their homes and leave the development. (Unfortunately this scenario has occurred many times in recent years, when numerous owners were upside-down on their mortgages.)

A development where the dues and assessments are sky-high due to a lack of paying home owners is unattractive to home buyers. Properties that fall into foreclosure do not help the problem. Although banks owning foreclosed property are required to pay dues and assessments themselves, they are notoriously reluctant and slow to do so. In the worst-case scenario, the development could spiral into insolvency, abandonment, and dissolution.

Possibly the most effective approach as a homeowner worried about a trend of delinquencies among your fellow homeowners is to get involved in HOA operations as soon as possible. You could run for a board position or, at a minimum, give input at the member meetings. Make your opinion heard during budget meetings, and during any discussion of delinquencies. Try to get the HOA to act before any troubles with dues escalate.