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.

In Canada Many Corporations Get Paid Before Banks and Taxes

Reading up on Condominium news from all over, this article in the New York Times talking about condominium corporations that vet purchasers caught my attention for numerous reasons.

Near the end of the first page is the comment:

In case of a default, the city is first in line to recover outstanding real estate taxes or other charges, followed by the mortgage lender. The condominium is third in line, and usually all it can do is file a lien against the property and hope that it will be repaid when the apartment is sold.

In Alberta, liens by the condominium corporation against a unit have first standing – that is above banks and taxes. There has been a very strong focus in Canada that the corporation should be given the powers to ensure the viability and upkeep of the common property. We have relatively lenient lien laws and the ability to foreclose and collect (it’s not simple, there is still a process, but it is a proven and supported process with case law). That has made the survivability of corporations much higher than in the US when owners default on paying contributions and special assessments.

This inability of the corporation to have the required standing and power to recoup outstanding HOA fees (in the US) seems to have triggered a very aggressive position by boards to keep out “possible deadbeats. “

… increasing number of condominium boards are hoping to weed out financially questionable buyers by requiring extensive application packages. Demands can include years’ worth of federal tax returns, detailed lists of all assets and liabilities, several letters of references, and even board interviews.

It’s not clear from the article if the corporations actually have the power to even ask for these documents or this process. They do have the power (which is not available in Canada as far as I know) to reject a purchaser if they (1) the corporation purchases the unit or (2) designate a different buyer at the same price. I get the feeling that it is from this right of changing the purchaser that they generate belief (which may be allowed legislatively) to challenge a person’s right to purchase in the corporation.

This ability to deny rights of purchase is highly concerning to me – and part of my concern is, I admit, not knowing the legislation. But what are the grounds that a corporation in NYC deny an owner – and do they even have to give a reason? Could we face a board that wants to keep a development all racially pure (whatever strain of race that is) and just buy the unit or appoint a new purchaser without reason? It is a concern that a condominium has the right to choose who can, and cannot, live in their building. In Canada, if you have the cash, and can abide by the by-laws (which can not filter on race, creed, or other human right) you can have the unit.

I once said that condominium are very very localized government. Could you imagine say a city that had the same right to deny purchasers to live in their city? That every resident had to provide financial stability documents before living there even if they can pay the price of the unit. How very unsettling.