Zombie condos and cratering condo HOAs

Foreclosure sign

Nationwide, an appalling 75% of condo developments don’t meet new FHA rules. This makes getting a mortgage on such units more difficult and thus harder to sell. Compounding the problems, banks are reluctant to foreclose on condos., so the condos become zombies, especially when their value is less than the loan balance.

Owners who can’t pay the mortgage generally can’t pay HOA fees either. Fees in some troubled condo complexes are rising sharply due to deferred maintenance costs. Some modest condos now have monthly HOA fees of $600 or more, which may actually be more than their mortgage. So they stop paying, especially if they are in foreclosure. This puts even more financial pressure on condo HOAs, so they close pools and tennis courts, making their condos ever harder to sell. The downward spiral continues. The housing market in general has recovered quite a lot since the 2008 crash. Condos, not so much,

Part of the problem is banks and mortgage brokers gave loans to buyers who couldn’t really afford them, especially when HOA fees are added in. And if the HOA was in dicey condition to begin with, then monthly fees were almost sure to rise.

We live in a house in Vegas that is part of a tiny HOA. Sue is a CPA and read their financials before we bought the house. Always do this  before buying property in a HOA. Our fees are tiny, just $35 a month. There was a board vacancy when we bought so I volunteered, just in case the board might be up to something. (It’s not. Our meetings are friendly and take 45 minutes.)

Do not rent a condo in a troubled HOA if you even suspect the owner might be in foreclosure or is behind on payments. It probably won’t end well.

Before 2008, the FHA approved prospective condo buyers based on their individual financial stability. The new rules required that an entire community meet a minimum level of solvency.

The agency will not provide loans for condo communities if at least 15 percent of current owners are 60 days or more behind on their monthly fees. The FHA also requires that a community’s cash reserves be equal to at least 10 percent of its annual budget.


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