The Great Foreclosure Debate

Should Community Associations Use Alternatives To Foreclosure To Protect Their Cash Flow?

There is currently raging a great debate. This one has nothing to do with national health care, war in the Middle East, or the future of the Washington Redskins. No, this debate is over whether community associations should have the right to use foreclosure as the ultimate delinquent assessment collection tool. Foreclosure is the enforcement device that allows a creditor, in this case a homeowners association, to force the sale of an owner’s condominium or single family house to collect a delinquent association assessment.

The practical arguments among the various participants in this debate go back and forth something like this: Assessments are a community association’s cash flow lifeline—if owners fail to pay, the association cannot keep its commitments. Foreclosure is a radical remedy—it costs associations more than they can possibly recover, so why do it? Foreclosure for failure to pay delinquent assessments is the only enforcement mechanism that works.

The legal arguments include: There is really no contract between owners and their association that gives the board of directors the right to foreclose because the owners weren’t parties when the association was created. The CC&Rs are recorded against the title of the owner’s interest and provide for lien rights and hence the right to foreclose. State legislatures have not clearly provided for an association’s right to foreclose.

And finally, the moral arguments: A home is a sanctuary—how can we allow it to be taken away just to satisfy a small arrearage in assessments?  We should not allow owners who do not pay their assessments to live on the backs of those owners who do. Everyone should pay his or her own way. Foreclosing on someone’s home is immoral and community associations should have no right to do it. It just supports a large number of attorneys, property managers, and collection companies.

Anyone who has paid any attention to the articles, blogs, websites, and water cooler conversation about community associations and the recession have heard these arguments, or others like them. Can’t be missed. And the underlying problem is real—thousands of community associations have real cash flow problems because owners are falling behind in their assessments. Enforcement activity is up, and that often means an increase in the number of properties entering the foreclosure process. People are losing their homes for a variety of reasons, but there has been an outcry over whether community associations should be able to enforce delinquent assessments through foreclosure. But we’re getting ahead of ourselves. Let’s back up and look at how we got here.

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Who Do You Trust?

      The Essential Ingredient in Effective 
Management of Community Associations 

     When there is war inside a community association, there are usually several sides—the owners, the board of directors, management, and sometimes, lawyers. Each brings their unique perspective to the dispute, and each may distrust the views, or worse, the motives of the other. That they should all be working together to manage a project that is inherently unmanageable is beside the point—when there is a lack of trust cooperation goes by the boards and issues that should be open to easy solutions instead become a battleground. Why are we wasting good ink to discuss disputes that are often inconsequential in the scheme of things? Because lack of trust can paralyze a community association just when economics require unprecedented cooperation.

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A Reader Responds...

What About Absentee Owners Who Won't Serve?

Dear Tyler,

I am the president of our HOA board and I pointed our homeowners to your recent 'blog posting while pleading once again this year for candidates.

One of our resident owners responded with a point about another problem to add to your list and I thought I would pass it along to you.

Thanks for your efforts to educate.

Regards,

Ken Meeuwse

Pleasant Hill

It occurs to me that Tyler Berding has missed one essential problem with condominiums and their Boards in his article and that is absentee homeowners who rent their units and expect resident homeowners to do all the managing of the association.

I am aware of at least two owners in my building who have owned and rented their units since the association was first organized and have never served on the Board. They are the owners of Unit [] and Unit []. There may be others in the complex and there are other owner/renters in this building who have owned for a number of years and never served as well. I suggest that the current Board make them aware of THEIR responsibility. Since they have relied for 28 years on people like me who have served multiple times on the Board to manage the complex in which theirr investment property is located, I suggest that the Board specifically contact the absentee owner/landlords and tell them that it is their turn to serve.

If they are unwilling to do so, then I think it is time for the Association to explore what legal options we have to take into account the additional cost absentee owners represent to the Association and to resident owners such as the difficulty in getting fixed rate financing on one's unit due to the number of rental units, increased clean up costs from more frequent move in/move out in those units, lack of absentee owner participation on Board, etc. and assess absentee owners accordingly.

Those of us who have served multiple times on the Board have a right to ask those who have not and who have a unit owned here for more than a decade (whether they live here or not) to step up to the plate!


Ken, thanks for your note and for forwarding the comments above. He is correct--absentee owners are less likely to serve on the board of directors than residents. 


Tyler

The Water Emperor Has No Clothes

$54 Billion to fix the Sacramento-San Joaquin Delta—Is This the Price of Suburban Sprawl or has California Development Finally Reached its Environmental Limits?

     Actually, its not a question of what it costs to fix the Sacramento-San Joaquin River Delta, it’s a question of what can we afford to spend to send vast new quantities of water to southern California and the Central Valley. The latest estimates for “fixing” the delta have reached monumental proportions. But why do we assume that new development is a given, especially development that is not water-friendly—new tracts of suburban development with yards to water and swimming pools to fill? Why also do we assume that certain crops, like water-thirsty cotton, must be grown in the Central Valley? These and similar questions are apparently not being asked with enough volume to reach the ears of our legislators. Or is it that the California legislature is dominated by the votes of those whose constituents will most benefit by future water exports to the south?

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Aging in Place: A New Plan for the Suburbs?

Should We Re-Develop Condos to Become More Senior Friendly?

Can we save older common interest developments? Does their eventual obsolescence give us an opportunity to turn them into something else? Perhaps a new form of housing that will be absolutely necessary in the years to come? These questions and many like them have been asked on these pages for years. We have predicted the end of common interest developments as we know them.[1] We have outlined the reasons why this form of housing most likely has a finite life.[2] New Towns and other urban-style developments as successors to existing, low density, car-dependant projects on the outskirts of cities[3] Discussions about the end of the move to suburbia. [4]But now comes another idea, something so fresh, yet so immediately understandable, that it makes you wonder why it hasn’t surfaced before.

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[1] Berding, “The Uncertain Future of Common Interest Developments” 1999, 2005
[2] Berding, “ When Condominiums become Obsolete” 2008
[3] Berding, “New Towns” 2008
[4] Berding, “Back to Our Housing Future” 2008

Why Won't They Serve?

Homeowners won’t volunteer for boards of directors of community associations—another nail in the coffin?

Community associations are corporations. Their bylaws require management of the association by an elected board of directors. That board serves all of the owners by conducting the business of the association. Like any corporation, the board of directors, and its officers, have the sole legal authority to handle all of the vital functions of the enterprise—from hiring and firing property managers, to contracting for repairs, to determining the adequacy of the association’s revenue stream.

A property manager does not have the authority to conduct the business of the association on its own. No matter how good, how skilled the manager, without the legal power of the corporation behind it, business would stop. Vendors would not continue to provide critical services to the association if there was no one with the authority to write checks. Local government would begin to question whether a condominium project could continue to be habitable if no one was able to pay the water or the electric bill.

Without the board of directors, the association would cease to function. There is no alternative within a corporate framework. Yet many associations have a very difficult time recruiting board members. Board positions go unfilled waiting for volunteers. This has potentially disastrous consequences and justifies further examination. First, we’ll examine some of the reasons why it is so difficult to convince owners to serve on their community association’s board of directors and then discuss the impact of that.

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What You Don't Know...

When do Statutes of Limitation begin to run on Construction Claims?


A Developer lays a Trap for the Unwary.


[Introductory Note: Statutes of Limitation are intended to protect defendants from stale claims. They are also traps for the unwary claimant. If the time period expires before an appropriate claim is made, legal rights can be permanently lost. Here’s a story about an artful attempt by a developer to deprive a new community association of some valuable time that it needs to evaluate the condition of the project before the limitation periods run out.]
___________________

You just moved into a new condominium project. You bought one of the first units sold in the second phase. Sales in that phase are just about done and then the project will be sold out. The project is just a little over two years old, so you are satisfied that any warranty items will get fixed. How hard could it be with the developer still on the board and with a few units left to sell? Everything seems to be going as expected.


But all is not perfect. The iron fences around the project are corroding badly. And the common area landscaping has a lot of dead spots where the irrigation system apparently doesn’t reach. There are places where rain and irrigation water pond for days and mosquitoes are breeding. You’ve also noticed that some of the wood fences in the project appear to be leaning. You went to the board meeting last night. Two owners are on the board along with three developer representatives. You raised those issues with the board, and one of the developer representatives told you that it was not the developer’s problem any longer, that it was the association’s responsibility to fix those particular defects. You argued that the developer is responsible for defects for ten years[1]. You also pointed out that you only noticed these problems a few months ago. So how could it no longer be the developer’s responsibility to fix clearly defective components?

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[1] That is not exactly a true statement. California Code of Civil Procedure Section 337.15 is actually a “statute of repose” which sets the outside limit of the developer’s liability for new construction at ten years from a specific date determined in accordance with the statute. There are many considerably shorter such periods in the law, such as those discussed in this article, which will cut off a developer’s responsibility much sooner, depending upon the type of claim made and as we discuss here, the type of building component that is the subject of the claim. A complete list of components and the time limits for bringing claims can be found on our website.