A Short Sale Nightmare - Why We Don’t Buy Condos
January 21, 2008
People often ask us in our Short Sale Seminars why we do not look at condos. Today we read about a story that explains it better than we ever could have. Here is an article from the Detroit Free Press that explains it all.
Overdue association fees by short-sellers hold up condo sales
January 20, 2008
By RUBY L. BAILEY
FREE PRESS STAFF WRITER
It took weeks, but real estate agent Caroline Lynch got two lenders to agree to take an $89,000 offer on a Howell condominium even though the homeowner still owed $132,000 on the mortgage. All that remained was to negotiate a discount on the $9,500 in delinquent association fees and charges from an attorney representing the association.
But neither the association nor its attorney would budge, said Lynch, who owns a brokerage firm bearing her name in Brighton.
The association and the attorney “were the only ones saying this can’t happen because they need 100% payment,” said Lynch, who added that two prospective purchasers walked away rather than pay the fees. “They’re killing sales. It’s just a nightmare.”Short sales — sales in which mortgage holders agree to take less than they are owed to avoid foreclosing on the property — are a last resort for homeowners trying to get out from under a mortgage they can no longer afford without the scar of foreclosure on their credit report. Sellers lose all equity.
Short sales often take longer to close, since banks often require mounds of paperwork and can refuse an offer. But condominium owners have an added hill to climb to get to the closing table for a short sale: delinquent monthly association fees.
Those fees are separate from the mortgage payment, but must be paid since, by law, the association can file a lien against the property. Associations use the fees to cover maintenance, amenities and some utilities.
It may sound like hardball, but the associations say they have no choice but to insist on full payment because the remaining homeowners would have to pay higher monthly fees if debts were forgiven.
Condos don’t compromise
There are an estimated 20,000 community associations in Michigan, according to Community Association Institute (CAI), which represents community organizations. Nationally, 57 million people live in homes or condominiums with associations, according to the group.”Their income is solely from the co-owners,” said Robert Meisner, a Bingham Farms attorney representing 100 community associations in metro Detroit. “If they take a beating from one place, they’re going to have to get it someplace else,” he said, referring to the money.
Some associations may negotiate fees in individual cases, but Meisner said they have little sympathy for mortgage lenders who granted bad loans or buyers who bit off more mortgage than their salaries could cover, many through adjustable rate mortgages that are resetting at higher rates and increasing monthly payments.
“There really isn’t any reason for the association to compromise,” said Meisner. “The co-owner knowingly entered into a mortgage situation. Why shouldn’t they,” meaning association officials, “be paid 100% of the fees that they are owed?
“Realtors were making a ton of money,” Meisner said. “Mortgage companies were making a ton of money. All of a sudden, because the cookie is crumbling, they expect the condo association to take a bath on it. I don’t see any reason why they should.”
Associations need the cash
Homeowners too cash-strapped to pay their mortgages will likely let the monthly fees lapse, real estate agents said. But many sellers don’t realize that the same association that can dictate the exterior paint colors, the height of a fence or the size of a flagpole also can stop the sale of the property if monthly fees are not paid.
Late charges and attorney fees compound unpaid monthly fees and associations can pursue the property owner for the money even if the condo goes into foreclosure. If a court action ensues, the homeowner will be responsible for court and attorney costs as well, according to the state’s Condominium Act.
“The homeowners are not aware of the impact of not paying the association dues or the effect of that on the sale of that property,” said La Trenda George, a real estate agent for Re Reality LLC in Farmington Hills. George said a recent condominium sold through a short sale only after the lender reduced the price by $4,000 to cover 100% of the monthly payments owed to the association.
Michelle Winbush, 41, faces a short sale and delinquent fees on her Southfield condominium. Her employer, a spa, went out of business right after she bought the home three years ago. She held on for as long as she could with a job that paid less, but fell behind on her mortgage payments and the $160 monthly association fees.
Winbush, who moved to Los Angeles this year to begin a new career as a flight attendant, is hoping the lender will cover the delinquent association fees, but if not, “I don’t have the money to give” the association, she said.
Some lenders are not willing to cover the fees and some condo owners are simply abandoning the properties, area agents and attorneys said. Those foreclosed properties further depress property values and hike monthly maintenance fees for remaining homeowners by associations desperate to cover their budgets.
“You got associations that are struggling to be able to pay their bills because of defaults,” said Mark Makower, a state CAI board member and attorney. The state chapter represents 600 community associations in southeast Michigan. “They simply do not have the funds. Everybody wants to know, ‘What do we do?’ ”
Makower suggests mortgage companies factor in monthly fees when approving a mortgage and that the fees be escrowed, like insurance payments or property taxes. Factoring in the fees could reduce the amount a buyer can qualify for, but could help assure the buyer is better able to afford the property — including the monthly fees, Makower said.
The answer can’t come soon enough for real estate agent Cindy Robinson. Robinson recently received an urgent call from a Highland Township condominium association. Her client, a young beautician who has listed her home in a short sale for $99,800, moved from the building. And the association had a question: ” ‘Who’s going to pay for these fees?’ ”
“All we’re trying to do is sell it. What a mess.”
This is why we stay away from condos in foreclosure and don’t attempt to buy them via the short sale method.
[…] take condos or townhouses with homeowner/condo associations. As you can see from the post titled, “A Short Sale Nightmare - Why We Don’t Buy Condos”, it becomes very clear why we choose to stay away from […]
Condos are very viable short sale candidates. Contact the association to determine their payoff and simply include it on the preliminary HUD1 that’s submitted to the lender with the short sale package. This way, if the lender likes the idea of selling short, the association will get paid at closing with the lenders money.
Since I can’t always pick my clients it helps to have potential alturnitives.
This however does not address the potential problem of continued “special assessments” for condos continually running at a loss because of additional vacant and/or non paying units.
Hi Rich,
For those who want the headache it may be viable. But these condo boards drive me nuts. Also since I am not looking to live in one of the units, there may be a hard time unloaoding the short sale as many have restrictions on renting the units out, what kind of vehicle can be parked there..etc…
When I get involved in a short sale I need to have the widest possible pool of available buyers and investors we work with shy away from condos because of the aforementioned reasons.
You are however, absolutely correct. All that would have been needed in this instance would for the numbers to be correct on the HUD. It seems this agent got cute and unfortunately, her buyer paid the price by not being able to get the deal they wanted.
I would, if I were her, go back to the bank and ask for another reduction and show the willingness to resolve the issue by reducing her commission as well.
Funny thing,,,she does not mention that option.