Associations are having a difficult time in our current economy. Rising utility and insurance costs are increasing more than the revenue streams. The Associations are raising dues on already burden homeowners and finding that delinquency rates are increasing steadily and defaults are becoming common place.
In fact, when looking at most associations that we manage, it is hard to find one that hasn't had at least one foreclosure in the past 24 months. The lifestyles of carefree living and enjoyment with our communities have suddenly turned into reduced amenities and services, higher fees, and less involvement from the community. What happens when the owners just stop paying and the associations can no longer meet their obligations?
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When the Association has closed down all spending accept required utility costs and all regulated and essential services, there are tough choices ahead for the remaining owners. Usually, the default rates are extremely high in these communities, reaching as much as 70% from our experience. The owners that are left in the community must decide how to pay the bills and what strategy to take to rebuild the association. It is unlikely that the community would be able to resale the homes to anyone except cash buyers.
One strategy that could be used is to dissolve the association and rent out the units as apartments. This involves a 2/3 vote in most Bylaws. As high defaults and foreclosures involve large mortgage companies and banks, finding consensus will be difficult. Another measure is to amend the Bylaws to allow increased rentals. This can be done permanently or temporarily based on the measure; but, this will also require a majority vote of 51% and in some states and Bylaws a 2/3 vote.
One measure often overlooked by the Board of Directors is that they have the authority to issue hardship permits for rentals. Hardship permits usually do not carry a maximum number and this measure can be used to circumvent the need for majority or higher votes. The associations should remember that this is a temporary stopgap measure as secondary financing agencies will require that the association be in compliance with financing regulations in order to resale the units and obtain financing. There should always be an exit strategy if this measure is used with the goal being, "to place the association on a track of regaining financial stability and adherence to financing requirements."
Bankruptcy is a last stopgap measure that can be used. During this measure, the Court will oversee the operations of the Association and depending on the chapter used can reorganize the association or dissolve the association. This will be a complex case and a competent bankruptcy attorney will be needed. It has not been our experience that this has been used frequently in our communities except by very large, builder controlled associations. There are many other methods that should be used before resorting to this measure; however, it is always advisable to seek help if the association is facing suits and judgments on debts from professional bankruptcy attorneys.
If you association is experiencing this type of issue, the sooner that the association takes command of the problem, the better. An experienced management company with resources of legal and financial accounting in-house would highly be recommended. It will take expertise in finance, legal, and management to regain control and set the ship sailing in the right direction.
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