Unpaid dues

Article Courtesy of The San Diego Union-Tribune

By Lori Weisberg
Posted on November 2, 2007

San Diego County's mushrooming number of foreclosures is starting to hobble homeowners associations large and small as cash-strapped owners cease paying their monthly dues.

As a result, residents who do pay are scrambling to balance their association budgets and in some cases cutting back on services such as landscaping, maintenance and security as their complexes face losses of thousands of dollars that may never be recouped.

Even worse, associations are facing the prospect of raising dues or levying special assessments to make up for the unpaid fees.

With 60 percent of the county's more than 1.1 million housing units covered by some type of homeowners association, and with mortgage defaults continuing to rise at alarming rates, the problem of shrinking revenues is expected to worsen.

Two of the seven homeowners at the Imperial Beach condo complex where Pat White lives with her son have defaulted on their monthly dues payments of $170.

No homeowners association seems immune to the rise in delinquencies, from small condo associations in older neighborhoods to upscale high-rises in downtown San Diego. Even large, single-family-home communities, where monthly fees cover the cost of maintaining greenbelts, swimming pools and community centers, are feeling the pain.

Especially vulnerable are smaller condo-conversion projects and developments in more affordable areas, such as eastern Chula Vista, where first-time homeowners stretched themselves financially to buy, using loans with low teaser rates that have since reset upward.

“The problem is everyone in our association is being affected, and as we look at services we can cut, it's going to impact our property values because we'll have less money for cleaning, security, maintenance and landscaping,” said Jennifer Zornow, board president at a 104-unit condominium-conversion project in City Heights.

Over the past several months, more than 20 owners there have not paid their monthly dues of $245, amounting to roughly $20,000 in lost revenue, Zornow said. The association has already reduced its landscaping upkeep.

“We will most likely need to raise the dues for everyone for the next calendar year to make up for the dues not being paid, so every homeowner will suffer for this,” Zornow said.

Compounding associations' financial woes are the added legal and administrative costs of going after delinquent homeowners.

Management companies and attorneys who represent the communities say they have noticed a sharp increase in the number of collections they are pursuing against delinquent owners.

Overview

Background: A disturbing number of homeowners across San Diego County are not paying their monthly homeowners association dues in the midst of a wave of defaults tied to rising mortgage rates. About 60 percent of the county's more than 1.1 million housing units are covered by some type of homeowners association.

What's happening: The missed payments directly affect the associations' ability to keep up common areas, make repairs and maintain adequate reserves for major improvements. Homeowners who are not in arrears worry that they will be asked to make up the difference with higher fees.

But associations have a tough time collecting once lenders swoop in and foreclose or owners declare bankruptcy.

Although associations are allowed by law to place liens on the homes of defaulting homeowners, they have to get in line behind lenders to recover outstanding debt, said attorney Jeff French, whose firm Green, Bryant and French represent 150 associations in San Diego and Riverside counties.

By then, it's probably too late, he added.

“It puts a real financial strain on these associations, and they can't make their ends meet,” said French, who's seen his firm's collections business increase four-fold. “Suddenly you're left with a situation with a higher than normal default rate, and that leaves the homeowners association high and dry.”

The associations typically will make up the difference by dipping into their reserves – legally mandated savings accounts used to fund future projects such as repainting and roof replacement. French said he has yet to see any major cutbacks.

Attorney Jon Epsten, whose San Diego firm Epsten Grinnell and Howell represents 1,500 Southern California associations, said he is hearing reports of cuts in services, including one instance where a homeowners group cut back on its insurance coverage.

His firm is handling about 3,000 collections related to unpaid monthly fees, most of those in San Diego County. That's three times more than a year ago, he noted.

Maintenance supervisor Pedro Reyes cleaned a grill at a City Heights condominium complex where more than 20 owners have not paid their monthly dues, amounting to thousands of dollars in lost revenue.

“It's kind of devastating,” Epsten said. “Our only remedy once the lender forecloses is to pursue the matter in small-claims court, which is often futile because the owners are nearing bankruptcy and have pulled every cent they can out of every equity source.”

CityFront Terrace, an upscale mid-rise downtown where monthly dues average $750, has had its share of delinquencies, although they represent 4 percent of the 320 condominiums, said Barbara Wilkinson, community manager. The unpaid fees total close to $50,000, which is still a small percentage of an annual budget of more than $2 million, she noted.

“I'm more nervous than I ever had been,” Wilkinson said, “because it used to be that the owners would talk to the board about a payment plan. But now they're in a position where they can't do a payment plan, so it appears it's going south very quickly.”

Typically, when homeowners start falling behind on their monthly fees, the association or its management company will send a reminder or a “pre-lien” letter informing them of the association's right to put a lien on their property.

In some cases, payment plans are worked out; in other instances, liens will be filed. In much rarer occasions, the association will foreclose on the property but only after a year of missed payments or $1,800 in delinquencies. If a lender forecloses, it is supposed to start paying the monthly fees, but it has no obligation to cover the backlog of unpaid dues once the home or condo sells.

The rising volume of unpaid dues is a problem that associations are facing statewide, said Karen Conlon, president and CEO of the California Association of Community Managers. She estimates that delinquent assessments have increased by at least 1,000 percent.

“We are going to be seeing bankruptcies by the homeowners and cash-flow problems for the associations, so all the other homeowners will have to pick up the slack of the missing money,” Conlon said.

That's especially troubling for a small condominium complex in Imperial Beach where two of the seven homeowners have defaulted on their monthly dues of $170, said resident Mark East, a former board president.

“The building needs to be painted, and it still has the original roof, and our checking and savings accounts are down very low,” said East, who owns a two-bedroom unit with his mother, Pat White, the board's vice president.

“The association has never been in the disarray it is now, and if we want to rent or sell these units, no way will that happen,” East said.

“We're all stuck in a quagmire.”