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Homereal estateUnderfunded US homeowner associations get heavy

Underfunded US homeowner associations get heavy

For six years, Ingrid Boak, who travels a lot for work as a racehorse trainer, ignored mail from her homeowner association.

Boak, of Lexington, Kentucky, says the letters were requests for $48 in annual fees for upkeep of the tidy neighborhood of one-story brick homes. Because she didn't use the clubhouse or pool, or participate in social activities sponsored by the association, she didn't think she needed to pay. Last September, while she was away, a neighbor called to tell her about a handwritten sign tacked to her front door. It said her house had been sold.

Masterson Station Neighborhood Association had foreclosed on her $120,000 home because she had $288 in unpaid dues, according to the association's lawyer, Nathan Billings. Boak was sent nearly 30 notices before her property was foreclosed on, he said; the dues were mandatory association fees.

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Boak says she does not remember seeing a foreclosure notice, and no one served her papers in person. She likens the experience to her father's in East Germany, where the communist state took away property rights. "Now I'm 75, and the same thing is happening to me, in America," she says. With her once-good credit damaged, she is unable to buy another house, and now rents her old one from the new owner for $900 a month.

The Community Associations Institute, an advocacy group for homeowner associations, says foreclosures are a last resort, but also a matter of fairness: Neighbors who pay shouldn't be penalized by neighbors who don't. "It's a community, but it has to be run like a business," says spokesman Frank Rathbun.

Fewer potholes, fewer rights

Homeowner associations first took off in the 1970s as local governments looked for a way to offload costly services, such as snow removal and road repair. Municipalities have encouraged their growth since through tax incentives and zoning laws.

Today some 63 million Americans live in homeowner associations, up from 2.1 million in 1970. Four out of five buyers of new homes, including condominiums, end up in such communities.

(Read more: US apartment vacancy rate drop, rents rise)

Supporters point out that they provide services and amenities that preserve the community's character and property values. Some 70 percent of residents say they have a positive experience living in them, according to the Community Associations Institute.

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"I live in a community association that provides a wonderful home for me and my family, a wonderful neighborhood and community pool, and that's the way many Americans feel," says Robert Nordlund, a resident of Calabasas, California, and founder of Association Reserves, which helps associations with budget and operational issues.

But people who buy houses in an association often don't bother to read the agreements that spell out what covenants owners are obliged to observe. They may unknowingly forfeit the right to fly a flag in the front yard, let a shrub grow any old size, or allow their kids to shoot hoops in the driveway. Homeowner associations typically have the right to place liens against wayward residents. Either through a court or state-regulated process, they can then foreclose on houses worth hundreds of thousands of dollars even for a few hundred dollars of unpaid debt, much like a municipality can for unpaid property taxes or a bank for a few missed mortgage payments.

Failure of funding

Foreclosures on delinquent properties by homeowner associations were almost unheard of before the financial crisis of 2008. Now lawyers and real estate researchers say they are becoming more common as association funding bases shrink because of previously foreclosed homes' standing empty.

About 70 percent of association-governed communities are underfunded, up 12.5 percent from 10 years ago, according to Association Reserves. The average association has financial reserve accounts—the amount required to maintain infrastructure and common areas—that are only funded at 52 percent, down from 60 percent a decade ago, its research shows.

Tyler Berding, an attorney whose firm is consulting with a San Francisco condo homeowner association, suggests the problem is one of governance. "It's very much akin to the public pension crisis," he said. "Homeowners' associations are simply not putting enough money away to make the repairs and replacements they will have to make over time." The condo in question is having to levy a $70,000 special assessment against each resident to restore the building.

Dog DNA testing

Another reason for underfunding is the inexperience of administrators, often volunteers from the community itself who possess some of the same powers as banks and governments but operate with little of the oversight. Even though these board members oversee what are often multimillion-dollar operations, they require no licensing or training to do their jobs.

Without that discipline, many are now responding to the homeowner association funding crisis by aggressively going after residents for unpaid bills and penalizing them for infractions that would have been overlooked in the past.

Brian Hanrahan of Columbia, Md., had a truck that was running fine. But his condominium association board, believing otherwise, towed it away, using a rule that allowed the removal of inoperable vehicles. The association slapped him with a $200 bill for the towing, which Hanrahan decided to fight in court.

The ensuing litigation cost the association about $175,000. In court documents it said about $70,000 of that was Hanrahan's responsibility because of what it spent "enforcing the governing documents."

Hanrahan won the case and subsequent appeals in a Maryland court. According to his lawyer, Larry Holzman, the case was settled for an undisclosed sum. Holzman has since been hired by the association and declined to comment on its behalf.

Another association, the Villa Medici Condominiums in Jacksonville, Fla., decided to cancel its dog-waste removal service to save money and force errant residents to comply with community rules. In November the board instituted mandatory, $35 DNA testing for all dogs by a company called PooPrints, as a way to identify members who do not pick up after their pets. Delinquent owners face a fine of $100 a day, which can eventually rise to $1,000 for repeat offenders.


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