The Condominium Parasite

Thick weeds overtake the once lush lawn, and their leafy tendrils snake across the sidewalks and onto the pool deck. The pool itself has evolved into its own sinister, soupy, ecosystem. Roaches scatter undaunted through the clubhouse and common areas.

The remaining owners, trapped by a now almost unheard of devotion to their integrity and financial obligations, feel more helpless as the days go by. What had started out as their long-awaited retirement in Paradise was rapidly becoming a prison sentence.

The parasite was invisible to them, yet it relentlessly and without remorse choked out the life of the community. By now, almost 2/3 of the 400 plus units were in default of their condominium assessments.

Condominium life in many Florida communities was beginning to look like a scene from an Edgar Allen Poe story.  But recently, struggling condominium associations have been given a new weapon to help collect delinquent assessments and remain solvent.

Before I discuss this weapon, let's take a look at one of the problems that has plagued condominium associations and their unit owners. Investors have taken advantage of the bottomed-out prices of condominium units in Florida markets and have bought large blocks of units as investments. There are reported cases of some investors owning over 100 units in a single project.

The combination of low purchase prices and low interest rates leads to low mortgage payments and makes it feasible to rent the units and make a nice return.

Condominiums have traditionally been a tough market for landlords because the condominium maintenance fee is usually higher than monthly maintenance expenses for non-condominium properties and, together with the mortgage expenses, makes it difficult to generate a net profit. Now, because of the market conditions I described above, condominium investment has become more popular.

However, it seems that in some cases the investors have not been able to meet their financing obligations. They have quit paying the mortgage and the loan has gone into default.  In most cases the bank has begun foreclosure proceedings. Since these investors are in default of their mortgages, they see no reason to pay the condominium maintenance fee. Now keep in mind that during this time, the investors continue to rent the units and collect the rent payments, all of which go into their pockets. The lender and condominium association get nothing.

A classic example of this phenomenon is the Village at Dadeland Condominium in Dade County, a 410 unit project. According to court records, at one point last year 267 of those units were 60 days or more delinquent in the payment of their share of maintenance fees, with the delinquency totaling $863,063.82. The association’s budgeted monthly expenses were $127,573, but the monthly revenue which was being collected averaged only approximately $70,000. As a result of the delinquencies, the association had not been able to maintain the common property: elevators were nonfunctioning, security garden lawn care services had been discontinued, the roofs were in a state of disrepair and the condominium pool had been closed. In addition, Miami-Dade County officials have cited the association with 63 code violations including failure to maintain portable fire extinguishers, failure to maintain smoke detectors, and failure to have fire alarms inspected.

The banks are hesitant to foreclose on the units because they would then become liable for the condo assessments as they come due. This leaves the units in a kind of financial limbo with owners raking in cash and neglecting their legal duties to pay expenses.

What is the new weapon that associations are now using? It's called a blanket receivership. A receiver is a person appointed by the court in foreclosure actions to collect rents and revenue from the property currently under foreclosure. The income collected by the receiver is used to maintain the property and may be applied against the mortgage payments.

Usually, receivers are appointed for individual properties. However, in the Village at Dadeland case, as well as others around Florida, the courts are granting blanket receivership's.  This gives associations the right to rent out abandoned units and collect rent from tenants paying owners under foreclosure or who are delinquent in association fees. The blanket receiverships only apply to units occupied by tenants and not owners. Further, the units must already be under foreclosure by the Association.

Will this solve the associations’ financial dilemmas? It may serve as a short-term solution, but the only solid answer will come from a vastly improved real estate market.

Risks of Buying a Florida Condominium - Association Solvency

This post discusses an important issue that anyone who wants to purchase a condominium unit in Florida must consider.  The downturn in the Florida real estate market has magnified this problem.

Condominium Association Solvency.

Under the Florida Condominium Law, a lender (under a first mortgage) that acquires title to a condominium unit as a result of foreclosure is only liable for the assessments accrued during the six months immediately preceding.  Keeping this in mind, let’s take a look at this scenario, one that exists in a lot of condominium projects in Florida.

A developer obtained a multi-million dollar development loan to build and sell his condominium project.  After much of the project was built, but before most of the units were sold, the real estate market crashed.   At this time unit purchasers had closed on 20% of the total units, leaving 80% unsold and unoccupied.   Because of his inability to sell the remaining units and to make the payments under the loan, the developer went bankrupt and abandoned the project.  The lender was in no hurry to begin foreclosure proceedings on the unsold units for 2 reasons: (1) If it acquired title to the units, it would have to start paying the condominium assessments for all of those units, (2)  Since there was no market for the units, it is likely that the lender would own the units for a substantial period of time, all the while being liable for the assessments.

It was easier and less expensive for the lender to hold off on the foreclosure until the market improved.  In the meantime, the association and the unit owners (remember only 20% of the units had sold) did not have enough income through assessments to pay the common expenses of the condominium.  This meant that common area utilities, maintenance, security and, most importantly, insurance could not be properly funded.  If the foreclosure sale did not occur for 2 years, then the association would not receive assessments from 80% of the units for 18 months.  This would put an incredible burden on the existing unit owners.

If you are looking to purchase a condominium, it is important that you find out the ownership and occupancy rate of the project.  Many of these problems are concentrated in the new projects.  Older, more established condominium communities generally have a more stable ownership structure, although there are defaults on mortgages for individual units out there also.

Even though you may be able to acquire a condominium unit at an exceptional bargain, you should investigate this situation and then assess the risk of your purchase.

Visit the link below for an article from the Palm Beach Post that illustrates this issue:

http://www.palmbeachpost.com/search/content/accent/epaper/2009/09/13/condo_0913.html

Buying a Condominium in Florida Today

These days, there are some incredible bargains in Florida real estate . . . especially condominiums.  Just before the downturn in the real estate market, condominium development was at near-record levels.  Now, there is an abundance of new, unsold condominium units, many being sold for pennies on the dollar.  For investors and second-home buyers, this creates an opportunity that may not come around for decades.

However, a condominium is a completely different animal than what you’ve been used to. It all starts with the ownership concept. First of all, most people refer to the apartment in which they will be living as their “condominium.” Actually, the condominium is the entire project consisting of all of the apartments, the grounds, the parking areas and, in most cases, the recreational facilities. Your apartment is referred to as a “unit.” All the rest of the condominium is known as the “common elements.” You have exclusive ownership of your unit and you share in the ownership of the common elements with all of the other unit owners. The law says that all of you have an undivided ownership in the common elements. This means every unit owner has the right to enjoy the common elements and the obligation to maintain them.

As you may guess, this arrangement, without guidelines and management, could lead to utter chaos. Each unit owner would assert his or her own personal and selfish preferences as to the use of the common elements and many would not want to pay their fair share of the expenses.

Because of the close proximity to your neighbors, the need to regulate the use of the common elements and the necessity of insuring, maintaining and repairing the common elements, certain rules and restrictions must exist. These rules and restrictions are found in the condominium documents. A brief list of the documents is as follows:

1. Declaration of Condominium. This is the main document of the condominium. The Declaration actually creates the condominium. It describes the units and common elements, defines certain unit owner rights, authorizes creation of the association and regulates the use and operation of the common elements.

2. Articles of Incorporation of the Association. This document creates the condominium association. It is filed with the Florida Department of State.

3. Bylaws of the Association. These are the guidelines for the operation of the association. The bylaws set forth the number of directors, prescribes the procedures of unit owner and board of directors meetings and defines the financial and budget matters of the association.

4. Operating Budget. This document describes the common expenses of the association, which are divided among the unit owners in the same proportion as the ownership interest in the common elements.

5. Rules and Regulations. These are enacted by the board of directors and generally consist of restrictions pertaining to the use of the common elements.

Purchasing a Condominium Unit

If you have decided that condominium life is right for you, you may wish to purchase a unit. The purchase of a condominium unit involves many of the same considerations as a single family home. However, because of the unique nature of condominiums, there are other factors to consider.

There are two circumstances in purchasing a condominium unit which are treated differently under the law. There are different requirements depending on whether you are purchasing from a developer or from the prior unit owner. This Guide will concentrate on purchasing from a Developer.

Purchasing from a Developer

If you are purchasing a unit in a new project from the developer, the Florida condominium law has provisions to make sure you are informed. Every developer of a residential condominium is required to submit the condominium documents to the Division of Florida Land Sales, Condominiums, and Mobile Homes for review. The developer may not enter into contracts for the purchase and sale of a unit until it has submitted these documents and the Division has acknowledged that the documents were property submitted.

Reservation Program

However, prior to the submission of these documents, the developer may enter into reservation agreements with prospective purchasers and accept reservation deposits. Many developers do this to create interest in a project and to test the marketability. By entering into a reservation agreement, you reserve your right to enter into a contract to purchase a certain unit in the condominium. You may cancel your reservation and receive a full refund of your deposit at any time and for any reason. The developer may also decide not the build the project, in which case it must promptly refund your deposit.

After the division has acknowledged that the condominium documents were properly submitted, the developer may enter into binding contracts for the sale of units. At this time the developer may ask you to enter into a contract to purchase your unit and transfer the reservation deposit into a sales deposit.

Buying the Unit

The developer will present you with a purchase contract and a set of disclosure documents. From the later of the date you sign the contract or from the date you receive the disclosure documents, you will have 15 days to rescind the contract. If for any reason during those 15 days you decide you do not wish to purchase the unit, you may inform the developer in writing and the contract will be cancelled and your deposit fully refunded. This period is designed to provide you with an opportunity to review the disclosure documents.

When you receive the disclosure documents, the developer will ask you to sign a receipt of condominium documents. This is a form required by the division to verify on which date you received the disclosure documents. You should make sure that you have actually received all of the documents indicated on the receipt. If so, then you should sign the receipt and write the date where indicated. It is very important that you accurately post the date, as it will likely mark the beginning of the 15 day rescission period.

My next post will discuss some of the factors you should be aware of when purchasing a condominium in this economic environment.