Condo groups can limit bleeding from foreclosures

Article Courtesy of The Miami Herald

By NANCY WEAR

Published June 13, 2009 

A condominium association confronted by impending foreclosures on one or more units may have few palatable choices: The board can either increase the monthly assessment or impose special assessments on the remaining owners in order to pay utility and other bills. Even as the board is taking these unhappy actions, it is important to recognize how this situation could have been avoided and to take steps to see that it does not happen again.

First, conduct due diligence on potential owners. The creditworthiness of each unit owner is of critical importance, yet associations have historically relied on the prospective owner's mortgage approval -- a strategy that we now know was fatally flawed. At a minimum, associations must run a credit check on prospective owners; further background checks are both advisable and appropriate.

Every association has a screening process for proposed buyers. This is usually a ''meet and greet'' with board members. The board often talks about how everyone is a ''family,'' an assertion that should send a prospective buyer screaming for a refund of the deposit. The condo association is a business. Use this interview to ask and answer substantive questions.

Secondly, fully fund the association's reserves, as is required by the condo statute. ''Reserves'' are a fund into which a sum is supposed to be deposited each year of the remaining useful life of each element of the building that will cost more than $10,000 to replace or repair. Items like painting the building and replacing the roof must be included in ``the reserves.''

The statute, unfortunately, permits unit owners to vote each year to waive full funding of the reserves. Some boards encourage an affirmative vote on such waivers. This was a bad idea before Hurricane Andrew, which exposed the consequences of ''no reserves'' and led to the statutory mandate.

Today, there is no principled argument that can be made in favor of waiving full funding. Prospective buyers should be reluctant to buy where reserves are not fully funded, because any interference with the income stream from monthly assessments can cripple an association.

Many associations are struggling because they failed to recognize that it is not a question of whether there will be a shortfall, but only when it will occur.

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