Delinquent condo dues pressure fellow owners (© Myron Jay Dorf)

Condominium owners across the country are being pushed to the wall financially by neighbors who can't pay their condo-association dues. As foreclosures and financial troubles force more and more owners to stop paying monthly assessments, the remaining residents must pony up extra cash to keep the developments' roofs mended, garbage hauled and landscaping maintained. Some associations are raiding their reserve funds — meant for the property's major repairs — to cover monthly expenses.

Condominiums attract buyers looking to avoid the constant upkeep of a single-family home. For a fee, the association takes care of all the commonly owned grounds and facilities, usually everything outside the four walls of your condo. The way it's supposed to work is that the fees go into a pot and are used to pay all the monthly operating expenses, such as lawn mowing, pool and golf course maintenance, upkeep and repairs. The money also is used to fund reserve accounts for covering big jobs, such as painting, a new roof or new sidewalks.

But these days, more associations around the country are falling into financial trouble. "We know of associations that have 10%, 20%, up to 40% and more (of owners) not paying their fees," says Bill Raphan, assistant ombudsman in Florida's Office of the Condominium Ombudsman. "If 40% of the people are not paying and your association is 40% short of the cash you need to run the association every month, your assessment is going to go up accordingly," pushing a $300 monthly assessment up to $420, for example.

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When the remaining owners are left holding the bag for escalating fees, it pushes them, too, closer to insolvency. "Each person who is not paying, for whatever the reason is, for foreclosure or bankruptcy or whatever, it makes your slice of the pie a little bigger," Raphan says. "That makes you at jeopardy of not being able to afford your share of the assessment and becoming part of the problem."

Security or lights?
In one 250-unit complex in the Northern California town of Elk Grove, most of the 46 delinquent units belong to the developer, who can't sell enough homes to pay the bills, says Robert Rosenberg, president of Massingham & Associates, which manages the property and 339 others for homeowners associations throughout California. The Elk Grove association had to choose between paying the security service and keeping the lights on. It cut security, which has some owners screaming because, Rosenberg says, "they have had a need for security."

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"Some communities are cutting security and on-site maintenance and just, frankly, keeping the power on," he adds.

With foreclosures rampant in parts of California, associations have little money with which to solve problems, including squatters and break-ins, caused by numerous vacancies. In some associations of single-family homes, "We've sent the landscaper in to actually paint the lawns green — it's a landscaping trick you use when you don't have water — to at least make the house not stick out like a sore thumb for protection of the community, valuewise and also crimewise," Rosenberg says.

A widespread crisis
Delinquencies are pronounced among lower-income complexes converted from apartments to condos in the heyday of subprime mortgages. "Buyers with little means have been able to buy these units, typically with mortgages that were poor mortgages to begin with," says Rosenberg. "There's no equity, they can't get out of the loans and they fall into default."

In Florida, where overbuilding and speculation were rampant, delinquencies are a serious problem. And in San Diego's new downtown high-rise buildings, "we are looking at anywhere from 10 to 20 delinquencies in each building (averaging 200 units), and some have gone on for most of a year," says Sandra Melville, an agent who focuses on downtown properties.

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But even in regions where housing problems are not as dramatic, associations are feeling the pinch.

No one tracks the number of owners in financial trouble, but the implications are huge: 60 million Americans live in about 300,000 communities and condominium buildings governed by homeowners associations, according to the Community Associations Institute, a 28,000-member industry group representing boards, managers and other professionals.

"It is a crisis," says Norman L. Rosensteel, president of Associated Management, which manages 90 homeowners associations with about 22,000 homes in Nevada. In Las Vegas, his company has filed liens for delinquencies (120 days or more overdue) on about 10% of its units. That doesn't count delinquencies due to foreclosure.

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However, he has seen worse, he says. In 2000, soaring electric rates doubled associations' power bills. And in the bad hurricane season of 2005, insurance rates went through the roof for a while — one 400-unit complex saw its $100,000 premium raised to $350,000 annually. And yet, few associations ever go bankrupt, because they can always resort to increasing fees, he says.

Homeowners associations collect $41 billion in fees to fund operations each year and have $35 billion in reserves for long-term maintenance and replacements, according to the Community Associations Institute. Prudent associations have always budgeted for delinquencies — figuring on around 2% to 5% nonpayment — but none ever predicted the rates of 10% or 15% that now are straining communities' finances, says Frank Rathbun,  a spokesman for the institute. He estimates thousands of associations are currently coping with delinquencies.

Future not looking bright
With foreclosures rampant and a glut of condominiums for sale, the delinquent-dues problem could keep growing. The National Association of Realtors reported about 652,000 units on the market in April — a 14.2-month supply and about 41% more than in April last year. A third of the 39 condominium developers surveyed by the National Association of Home Builders reported that from 21% to 60% of condo buyers canceled sales contracts in the last quarter of 2007.

Yet tens of thousands of new condos, started before the crisis point was reached, still are  pouring onto the market, adding to already swollen inventories and pushing values further down in cities such as Atlanta, Miami, Phoenix, Fort Lauderdale, Fla., and San Francisco. The median sales price of a condo in the U.S. dropped 11% in April, from $256,100 last April.

Delinquencies are rife in former boom markets, including resort towns such as Las Vegas, and in South Florida, Arizona and parts of California, where rapidly rising prices attracted speculators who are now more likely to walk away from units than stay and pay dues.

In Florida, at least, the delinquency problem includes people who buy a condo, live there as long as possible while dodging all mortgage and dues payments and then finally flee, says Raphan. "The condominiums (associations) didn't protect themselves," he says. "They took people in who came in with 100% (financing), with zero down." Some freeloaders hang on without paying for as long as a year, leaving neighbors to pick up their portion of the shared expenses.

In Florida, many of the state's 25,000 homeowners associations are filled with retirees living on fixed incomes. "When people moved down here when they retired, we had the lowest insurance rates, the lowest gas prices," Raphan says. "These people did not anticipate being in this kind of position."