The Wall Street Journal

By Dan S. Barnabic, July 17, 2015

After extensive research, it is evident to me that 15 years after construction, condo complexes enter a phase where major elements start giving up. In many cases, they will require expenditures that might not be covered by their fiscal budgets or reserve funds.

6 needed rules to keep condo units viable

By Dan S. Barnabic

rules to keep condo units viable

This is where the condo owner may be faced with perils of unexpected and considerable demands for special assessments to replenish depleted budgets and reserve funds. Such situations may very quickly turn into nightmarish scenarios. Unable to collect special assessments from their unit owners, the homeowners association, HOA, borrows the money from outside sources, a common loan guaranteed by the complex’s receivables. Such a complex becomes prone to being wound down, unable to meet its financial obligations to carry or, otherwise, obtain such a loan.

I spoke with Jack McCabe of Deerfield Beach, Fla.-based McCabe Research and Consulting recently and he’s not aware of any registry that tracks how many condo corporations have been wound down (terminated). His own research shows that since the last crash in 2007, there may well be over 400 condo complexes that ceased to exist in the state of Florida alone. Many of them were conversions of existing rental buildings to condominiums. Conversion complexes with many unsold units become undesirable. Their value diminishes over time. McCabe pointed to many examples where units that originally sold for $250,000 lost 75% or more in value — with some now in the $50,000 range and no prospects of appreciation soon.

Researching records of condominium complexes that ceased to exist in some other states yielded no results. It seems as if the relevant authorities that (should) track such failures don’t want to publish them for fear of scaring potential buyers away. But the records should be available — if anything, to examine the exact reasons for their demise.

Persistently drawing attention to the problems of condo ownership makes me look as if I am against them. Not true. I wrote The Condo Bible (available at your local library) to explain the pros and cons of condo ownership and provide practical solutions to changing or amending the regulations and bylaws of condo corporations — all to safeguard the interest of unit owners and enhance the value of their units.

Here is my list of the most pressing changes or rules that regulatory authorities and condo corporations should adopt and or implement to preserve the value of their condo units.

1. One proxy, one vote.

This should become a norm and the law. The biggest problem of not being able to remove undesirable HOA board members is the fact that such members make arrangements with unit owners that may be absent or, otherwise, not interested in the day-to-day operation of the complex, to vote for them via proxy. By taking advantage of a multitude of such proxies for extended periods, they get elected by majority, remaining on the board “forever.” Under present rules, this renders genuinely concerned unit owners wishing to remove dysfunctional board members, hopeless. Board members, or any other unit owner wishing to become elected, should be restricted to one proxy vote only.

2. Assembly of forum to call for general meetings of unit owners

Acts regulating the condo industry should be amended, enabling only 25% of unit owners in a complex to form necessary forums to call for the general meeting of all unit owners at any given time. The present rule of requiring 85% of unit owners for speedy general meetings is practically unachievable.

3. Licensing and bonding property managers

Apart from compelling them to be licensed, bonded, and audited, the property manager’s decisions for replacements, repairs, selection of contractors and suppliers, should be regularly scrutinized in the most rigorous way, preferably by forensic accountant(s). Making self-serving decisions, many rogue property managers choose more expensive trades and employ other unfair business practices, depleting the HOA’s budgets in the process.

4. Capping common loans

Common loans should be capped at 25% of the yearly budget. Anything above that may lead to over-borrowing, leading to serious consequences. Many owners aren’t aware of the dire consequences that default of a common loan can cause. In troubled complexes, where unit owners fall behind on their monthly maintenance fees, a common loan may easily go into default as well. The lender can step in and commence insolvency proceedings. This is a precursor to the eventual winding down of the complex.

5. Money-back guarantee

Any new or converted condo complexes that haven’t sold at least 90% of their units should not be allowed to cash the proceeds of already sold units. Upon the sale, individual deed to the unit should be kept in escrow until 90% of the units are sold. If the complex isn’t 90% sold within two years from the issuance of the occupancy permits, moneys should be returned to the buyers upon demand. In the interim, buyers can move in by paying the monthly maintenance fees, plus the occupancy payment fee (equivalent to the intended mortgage payment) for the balance of the selling price.

6. Renting out of units.

Renting out of units should be capped at 10% for each complex, except for complexes which are located in exceptionally desirable tourist areas, often used as hotel/condo residences. A heavily rented out complex becomes undesirable to potential buyers. Units lose value and banks usually refuse approving mortgages to new buyers.