Condo boards in quest of cash
Members of the board of The Grand condominium north of downtown Miami were increasingly frustrated as they waited for lenders to take over units facing foreclosure. Each month the units were in limbo was a month that desperately needed maintenance fees went unpaid.
Finally, the board decided on an unorthodox solution: Be the first to foreclose on the unit, then find a tenant and recover some of the delinquent dues through rents — at least until the lenders take back the unit.
As operating expenses and maintenance fee delinquencies rise, more condo and homeowner boards facing revenue problems may have to follow The Grand’s lead. But boards face intense competition for tenants, could prematurely lose a unit to the lender and risk letting the lender off the hook for maintenance fees.
Still, some attorneys who represent associations say it is a necessary and temporary measure to pay for critical items like repairs, security and landscaping.
Miami attorney Dennis Bedard is advising condo boards he represents to foreclosure on units whose owners are behind on maintenance fees and begin renting out the condos.
“It is a golden opportunity for associations to get some of their money back,” Bedard said.
So far this year, The Grand, a Bedard client, has foreclosed on and rented 12 of 810 condos in the high-rise building at 1717 N. Bayshore Drive.
Because the former owners were usually behind on mortgage payments, lenders were often in the process of foreclosing against most of the rental units. The rentals are usually month-to-month and below market rates, partly to compensate tenants who may have to vacate quickly once a lender takes possession of the condo.
“We sign a lease with them that says the unit is subject to foreclosure by a lender,” said Brendan Grubb, the property manager at The Grand.
Condo dues at The Grand range from $570 to $1,000 a month and the rents the association collects exceed that, Grubb said. Grubb would not disclose the exact rents.
“We’d prefer not to do this; we don’t want the association to be in the rental business,” Grubb said. “But in some cases, we don’t have an alternative. We go to every extent to work with [delinquent] owners.”
The Grand, built by veteran developer Tibor Hollo, was completed in the late 1980s during the height of the savings and loan crisis. Hollo lost the project to a lender. By the mid-1990s, The Grand had sold out, becoming a favorite of foreign buyers.
During the condo boom of the first half of this decade, speculators flocked to The Grand and other high-profile South Florida condos that were recording rapid increases in value. Other buyers took out risky adjustable rate mortgages, whose monthly payments reset at unaffordable levels.
As the condo market tanked and values declined, some owners quit paying their maintenance fees and mortgages. Soon, condo associations had cash flow problems and lenders began filing foreclosures.
Historically, it would take about four months for a lender to take back a distressed property. Now, with a wave of national residential foreclosures, the process can last as long as a year. Some condo boards also claim lenders purposely drag out the process to avoid taking on the added expense of condo fees.
Now some condo boards have decided they can’t wait for banks to take back the units and sell them to financially stable owners. Instead, they’re fast-tracking their own foreclosure actions with the goal of finding revenue-producing renters for the units.
“Unfortunately, it is the best option but not a great choice,” said attorney Steven Fein, with Fein and Meloni in Plantation.
Filing a foreclosure against a delinquent owner can cost an association from $2,500 to $3,000 in legal and filing fees per unit, he said. The foreclosed unit comes with a first mortgage in place, but the association has no obligation to pay it. So, the association could eventually lose the unit to a lender foreclosure.
“It is a gamble,” Fein said. “You just don’t know when the lender will foreclose.”
Fein said The Townhomes of Doral Oaks Homeowners Association is one of his clients willing to take that risk. In the spring, the townhouse community rented out a unit that was in foreclosure. This month the board received notice that the lender has begun foreclosure action against the unit. In the six months the unit has been rented, the association has recovered Fein’s legal fees of about $3,000 plus addition revenue, he said. The former owner owed the association close to $3,000 in maintenance fees, Fein said.
The Doral Oaks board plans to continue to rent out the townhouse until the lender seizes the property, which he estimates could take six months to a year.
Representatives of Guarantee Management Services, the community’s property manager, did not return messages seeking comment before deadline.
Foreclosing on delinquent owners is not new to condo and homeowners associations. But becoming landlords to recoup maintenance fees is a strategy with a lot of potential, said several attorneys who represent community and condo associations.
Attorney Stuart Zoberg, who handles collections for several associations across South Florida, said the idea of renting foreclosed units is so new that he only began drafting leases for his client associations a few weeks ago.
“I don’t have any success stories yet,” said Zobert, with Katzman Garfinkel in Fort Lauderdale.
Real estate agent William Betancourt said he recently noticed the trend and began calling condo associations to offer to find tenants for them. He hasn’t had much luck. Most associations said they were handling the rentals themselves, said Betancourt of Condo Vultures Realty in Bal Harbour.
Associations are not the only ones trying to rent distressed properties, real estate broker Marcus Barrios said. He said financially struggling investors who own condos and townhouses across South Florida are seeking tenants and offering below market rental rates, too.
But finding tenants willing to take cheaper rent in place of stability isn’t easy.
“They offer discount rent rates and cut down move-in expenses but people rarely take that option,” said Barrios, with Realty World Executive Homes in Miami. “It is hard to live that way, knowing the bank is going to knock at your door and ask you to move.”
Although some condo boards may be tempted to become landlords, they face obstacles.
Foreclosing a unit can take an association six months, said Coral Gables attorney Helio De La Torre. Finding a tenant may take several more months. By the time a tenant is in place, the lender may be ready to take title to the unit, he said.
In that case, the association would never get to recover the legal fees or recoup the unpaid maintenance fees, said De La Torre, with Siegfried Rivera Lerner De La Torre & Sobel.
Some observers said the strategy could backfire on condominiums. When a lender forecloses on a condo, the lender is obligated to pay six months of delinquent condo fees or 1 percent of the mortgage, whichever is less, Hollywood attorney Ralph Ruocco said. His law firm, Glazer & Associates, specializes in association law collection.
However, if a condo association takes the unit through foreclosure, the lender is relieved of the obligation to pay.
“The moment the associations take title to a unit, it wipes the slate clean,” he said. “The lender no longer has to pay anything.”
Ruocco said his firm does not recommend boards foreclose on delinquent owners of a unit that have a first mortgage.
Glazer & Associates would move forward with a foreclosure if his client insisted but he would stop the procedure if the lender initiates a foreclosure procedure against the delinquent owner, Ruocco said.
Jan Bergemann, president of Lakeland-based Cyber Citizens For Justice, said associations should not become landlords because of liability issues.
“You put a tenant in there and you become liable for any damage the tenant may cause,” the community association advocate said.
Daily Business Review - Paola Iuspa-Abbott - October 30, 2008