Bankruptcy Doesn’t Dismiss Outstanding HOA Fees

Housing represents the largest equity holding for most people in the world. Housing represents the majority of people’s working lives, and often is their security for retirement.

With that in mind, that’s why I fully support all legislation that prioritizes and guarantees that condominium corporations and HOAs have first standing to any monies recovered in foreclosure, bankruptcy or other sale. See, it’s important for government to protect people’s housing because it represents such a vast amount of equity. Government takes steps to protect people’s equity when it’s in a bank, and it does that when your money is “banked” in your house as well.

An owner failing to pay their fees harms not only their own property, but jeopardizes the housing of other, responsible, owners. Simply put, there’s no right for an owner to take a free ride on his neighbours shoulders by failing to pay their contribution, and having it shouldered by others.

Many states and provinces have very proactive laws that ensure HOAs and Condominiums have first standing in foreclosure. In Alberta, Canada, the condominium corporation – on the sale of a property – gets paid any outstanding fees before mortgages and even government taxes. Law makers realized that by ensuring that condominiums receive any money it is owed, it protects the other owners and has the highest return on economic stability.

In a similar vein, an owner in Odenton, Maryland, has found that bankruptcy doesn’t remover the requirement to pay their HOA fees. Indeed, and I congratulate the law makers, they have made those fees “nondischargeable” (a judge cannot dismiss the fees). By doing so, they have ensured the fiscal health of all the other owners. Even though Joan Sullivan no longer lives in the HOA, she is paying installments on the debt she owes.

And that’s a good thing.

When Investors Abandon Units Owners Suffer Greatly

Ten weeks ago, Bank of Canada Governor Pat Carney warned that housing prices are now 4.5 times average household disposable income, or 30% higher than the 3.5 average of the last quarter century (In Vancouver they are 9.6). Further, he indicated that this is being driven by greed among speculators and investors. In Toronto, 60% of construction sales are by investors.

If the market value of condominiums comes down and as such triggers lower rental rates, investors will abandon under-water mortgages and incomes that don’t meet their bills. It’s hard to see this in the active market we have now, but all overly inflated values must mute, or drop, in value at some time.

Legislation in many regions of North America fail to do a very good job protecting owners in multi-residential dwellings when other owners stop paying their condominium fees, triggering a foreclosure on the deliquent units in order to recover the owed money to the corporation. For palces with poor legislation, when a unit is foreclosed on, the proceeds of the sale first go to the mortgagee, and not the condominium. The causes a chain of events that only further depress the value of the units, and jeopardize a large number of other owner’s homes.

For West Meade Condominium complex in West Nashville Tennessee, the chain of events has happened – 57 investor owned units in a 112 unit complex stopped paying their contributions, leaving the condominium $355,000 short on budget and repairs. Because there isn’t the money for maintenance, the building (and the value of all the units) is suffering. Because of decreased property value, the 57 units which have been court ordered to sell will likely garner less than the mortgage values. This leaves 55 upstanding owners in the hole for that sum on top of their own commitments to the corporation.

West Meade Condominium, without the owed amount, will be unable to meet ongoing insurance and utility bills, forcing the condominium into bankruptcy. Imagine as an upstanding owner having to move out of your home because of another owner’s fiscal imprudence.

In better jurisdictions, the condominium has first standing to collect fees owned. That means before the banks, and even before back taxes, the condominium gets paid out of the proceeds first. This is a fantastic situation. By giving the corporation first standing in a foreclosure (and also creating generous legislation allowing condominiums to bring their units to foreclosure on non-payment of contributions), the government protects the other owners from fiscal ruin, from non-maintained buildings, and from spiraling downward housing prices.

Good legislation for condominiums is important – especially given the fact that some owners can cause unchecked misfortune to others due to the nature of shared housing. With housing being a primary equity and destination of most people’s productive lives, housing requires more thorough consumer protections.

Banks are a form of commercialized savings. Housing is a form of self-directed savings which has significantly more public equity than all the banks combined. We’re willing to create massive legislation to protect bank based savings, we need the same friendly legislation for the most common and accessible public form of savings as well – people’s houses.