Skipped dues crunch home associations

A modest housing tract, set amid pecan trees here in suburban Phoenix, faces big problems: About 40% of its homeowners aren't paying their association fees, leaving neighbors with higher assessments and reduced services.

"We're looking at a very deep hole," says Kent Miller, president of the Los Arbolitos Homeowners Association in Avondale. "I don't know how we're going to get out of it. We've put liens on all the (delinquent) properties, but it doesn't do any good."

It's a scenario being repeated across the country. Delinquent fees at condo and homeowner associations have become an outgrowth of the mortgage crisis. Housing cooperatives, in a squeeze because of unpaid fees from struggling homeowners, are scraping to pay for landscaping, maintenance, pools, recreation centers and other amenities.

"It's happening all over," says Frank Rathbun, a spokesman for the Virginia-based Community Associations Institute. "It's a national problem."

The institute estimates there are 300,000 homeowner and condominium cooperatives nationwide, representing one in every five Americans. Assessments, which resemble self-imposed community taxes, total about $40 billion a year.

Though it's not known just how many delinquencies have hit community associations nationally, the problem has escalated with a surge in foreclosures. The number of homes in the USA facing foreclosure in April jumped 65% over the same month in 2007, RealtyTrac reported this month.

To cope with unpaid fees, association leaders have tried to become creative. Many are negotiating discounted service contracts, running volunteer cleanups, cutting insurance coverage and attending seminars on how to collect money from members.

In Phoenix, Shawn Stone, a lawyer for homeowner associations and property managers, says the problem is most acute at new developments. Some homeowner boards, Stone says, have been able to collect assessments from only half their members. "It's not going to be too long before we'll see situations where associations are going bankrupt."

In Florida, homeowner groups surveyed by the Community Association Leadership Lobby complained that even some banks are failing to pay association fees after foreclosing on homes.

"The whole issue of foreclosures is dire and getting worse," says David Muller, a Sarasota lawyer who co-directed the survey. "It's causing the rest of the owners, who aren't delinquent, to pay even more money."

The "snowball effect" began, Muller says, as buyers, many of them speculative investors, started snapping up homes using subprime loans. As housing values plunged and mortgage bills ballooned, some buyers owed more on their mortgages than the homes were worth. So they stopped paying community association fees, then walked away.

In 13 states, banks or mortgage companies generally must pay at least a portion of the delinquent community fees when they foreclose. In other states, the association's only recourse may be to sue for unpaid fees, thereby racking up legal bills in what often turns out to be a futile pursuit of dollars owed.

"At one place in Florida we had seven (foreclosed) homes on one street," says Steven Brumfield, vice president of operations at Wentworth Property Management, which serves 950 community associations in more than a dozen states. "The association could not even afford to cut the grass, there were so many of them. They ended up with a street full of homes that looked horrible and wouldn't sell."

Eric Glazer, a property management lawyer in Florida, says he's had to deal with some banks that failed to pay association dues after taking over properties through foreclosure. "Just this morning, we found ourselves in court, and we got a default judgment against a bank," he said last week. "Words can't describe how bad the problem is here."

Karen Conlon, president of the California Association of Community Managers, estimates that her state's delinquency rate soared 1,000% over the past year. Fees at her condo association were raised 18.5% to account for a shortfall.

"We're seeing cutbacks," she says. "Instead of having flowers planted six times a year, it may be just two or three times."

Jim Hanley, president of Scottsdale-based Rossmar & Graham, says he's changed collection tactics with the 120,000 units his firm manages. Annual coupon books have been replaced with monthly billing statements, so homeowners can get constant reminders of what they owe. A database is now linked to an automated system that calls people once they're delinquent.

"Associations that are managed well aren't bulletproof," Hanley says. "But they're ahead of those that are going along on a shoestring."

Collecting monthly dues has become so problematic that at least one company is trying to capitalize by offering to take over the job. The company, Association Financial Services, based in Florida, says it guarantees 100% payment of residence fees.

In exchange, the company says it charges homeowner associations a fixed fee for each assessed housing unit. It also gets to pocket any late fees and other charges imposed on delinquent homeowners.

The threat is particularly severe for some smaller housing collectives. In Avondale, Miller says, about 120 homeowners in Los Arbolitos, out of 309 total, have fallen behind on payments. Volunteer board members had to scrimp to cover the deficit for landscaping, electricity and property management.

"We're cutting back on water, but we've got 17 acres of grass landscaping, and what about this summer?" he says.

Wagner is a reporter at The Arizona Republic