Condo Conflict - Facing a Perfect Storm!

In the cogent, if not immortal, words of Billy Joel, “they started to fight when the money got tight. And they just didn’t count on the tears”.

This is true of romantic couples being observed in Scenes from an Italian Restaurant, families in general and, these days in particular, people living in and dealing with Common Interest Developments [CID] and Home Owner Associations [HOA].

Typically CIDs provide for the individual ownership of a single apartment style unit along with the right to use common building areas. CIDs are managed by HOAs, to which all owners belong. A board of directors, from the ranks of owners, is elected and charged with collecting monthly assessments to pay for day-to-day building expenses and to save money for the upkeep and replacement of major building components. In California there are 34,000 CIDs where 8 million people live, or about 24 percent of the state’s population.*

At this point in time many CIDs and HOAs are facing a perfect storm of financial problems.

First storm, declining real estate value. Although the cost of maintenance and replacement of building parts has stayed the same or gone up, the value of the managed real estate has gone down. If a building has foreclosed units, or distressed owners letting their unit go into foreclosure, all of the units in the building see their value go down due to the fact that the “comparable sales” of units in the building hit an all time low at foreclosure or repossession of units.

Second storm, declining contributions to building support. Many condo owners have lost their jobs in this economic downturn and have seen their condo investment shrink to nothing, or less than nothing – where they now owe the bank more than their condo is worth. Many HOAs are having trouble collecting monthly dues from 100% of their members and this shifts a greater financial burden on to those who can pay. As the HOA collects less and less money each month, making it more and more difficult to pay ongoing expenses, and prepare for major repairs, HOAs are exhausting funds that were earmarked for renovations to pay for monthly expenses. So, when the need for a significant renovation presents HOAs are forced to request a “special assessment”. This means that the HOA demands that owners reach into their pockets and pay for the needed repair in addition to their regular monthly dues.

Third storm, declining access to funds from lenders. Add into this caldron the impact of the banking meltdown where lenders are now loathe to loan money to a CID that is in less than pristine financial health. So an HOA with a few homeowners facing foreclosure, or in arrears on monthly dues, can’t borrow money to pay for the major event that was inadequately anticipated or saved for.

For instance, imagine the stress of owning a unit in a 40 unit building where 4 units are not paying their monthly dues and are facing foreclosure. The HOA has effectively lost 10% of the money it needs to pay for PG&E, garbage collection and water, to name a few items. Now suppose the HOA had only about $25,000 in “reserves” to pay for major renovation and the first rain of the season reveals that the roof, which has limped along with band-aids for that last few years, is now facing imminent catastrophic failure and must be replaced at a cost of $225,000. Not a pretty picture, but one thousands of Californians are facing variations of at this very moment.

So like Bill Joel said when the money gets tight, they start to fight. We at Liaise® are serving more and more HOAs and owners to assist in finding common ground that will allow the purposeful management of this conflict.

In the old days, if an HOA had a unit owner that was in arrears on monthly dues, or had failed to pay special assessments they would follow a simple routine. Commence collection, and then legal action, and allocate all the costs of collection to the homeowner. The money would just come out of the proceeds of the sale into the ever-increasing California real estate market.

Nowadays, if a homeowner is contemplating abandoning their unit to the bank, it does no good – and perhaps a great deal of harm to the CID – to take that old worn path to resolution. Today, the last thing a CID wants to do is to force an owner into foreclosure if there is no “equity” in the property to pay for arrearages.

Liaise mediators are also finding that relationships between condo owners and board members as well as relationships amongst fellow condo owners are experiencing a significant uptick in disputes and general conflict.

Homeowner Associations and professional property managers should develop a new approach to managing this type of conflict.

The first line of defense should be to engage a professional, neutral mediator. Many times there are paths to resolution that can be revealed through mediation that could never be discovered through the immediate engagement of adversarial collection methods. A CID is after all a community. Like a community it should come together to explore possible ways to deal with community problems. This approach serves the best long term interests of the CID as well as the individual homeowner and is the most cost effective, expeditious way to calm the waters in these turbulent times.