rental condo HOA might become insolvent

Multi-Family and Apartment Investing
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rental condo HOA might become insolvent

Carol T.
Garner, NC · Member since 2012 · 5 posts · 0 votes

Has anyone had an experience with a rental with an HOA in financial trouble? We bought our first condo rental, in a 40 year old complex near a major university. The property is mostly investor owned as rentals are now 78% of property, so potential owner occupants cannot get loans due to the high rental status which has caused investor numbers to go up further.
HOA has had difficulties especially because the old 40 year old condo law it falls under limits increase in dues, with an older property like this plumbing issues started happening and they cannot get everyone to agree to sub metering the water which would cost the renters, not the owners,and reduce cost to HOA. but mainly sub-metering would allow for spotting water leaks quickly, avoiding the large problems that have driven insurance sky high for HOA, etc..
The feeling is that if we cannot get water sub-metering, eventually the HOA will become insolvent.There is certainly no money for decent upkeep on the property till that happens. I was told that HOA cannot go officially bankrupt that a judge would be assigned and that it would probably open us up to more current NC, condo laws.
Has anyone had such an experience and know just what the legalities are in such situations? I am aware of our current issues and rules but know nothing about what more current NC HOA Laws and if we later become subject to more recent HOA laws what that could do to us. I had seen newer condo developments where HOA dues were triple ours although they had no pool, park, water or amenities. I do not know if this was caused just by the complex going bankrupt etc...and of course in these there are plenty for sale for cheap and we avoided with such high HOA dues.

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  • Phillip Dwyer
    Real Estate Agent · Henderson, NV · Member since 2011 · 1k+ posts · 550 votes
    13y

    Jeff S. What do you think?

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  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    13y

    Our condo complex with 340 units was concerned about a possible collapse when the economy was tanking but we have weathered the storm and sales have resumed.

    Carol T. associations can be full of misinformation and it is sometimes hard to distinguish reality from rumors.

    There are some facts to deal with and the financial situation needs to be understood, not speculated on: "The feeling is that if we cannot get water sub-metering, eventually the HOA will become insolvent." Are your operating expenses exceeding your operating budget so you have to use reserves to pay your bills? If that is the case you need to amend your bylaws or something to allow for a dues increase. Are special assessments prohibited too? There has to be a way to get enough money to the association to pay its bills and make repairs. It is hard to imagine all the condos in NC have this same problem.

    We have one water supply and it is not financially feasible to install separate meters.

    One thing for sure is you need some good strong leadership.

    It is hard to help much w/o a clearer understanding of your finances.

    Good luck.

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  • Carol T.
    OP
    Garner, NC · Member since 2012 · 5 posts · 0 votes
    13y

    I was told that part of the problem is that because created 40 years ago is under a different set of laws managing HOAs by our Bylaws they cannot increase monthly dues more than 5% per year. We usually have only about a months expenses ahead a lot of cost being water bill which will soon greatly increase in the city if not sub-metered, and plumbing issues costs to main pipes.
    They did a special assessment for roofing a few years ago but it took so long to get agreed that there was so much damage and so overdue that it ended up costing more. The leak situation, some of which is mainly bad tenants and lazy owners who do not keep up or report leaks. Because all we do is put out fires, there is no money for upkeep or needed repairs. The main reason they believe we need the water sub-metering besides it being such an HOA cost, would be each unit would be able to be monitored and if a leak was constant or a big problem developing could be handled before 3 floors damaged and before major damage done. HOA insurance is now so high because of major leaks etc that now have to buy from Lords of London and HOA and complex has a $25,000 deductible to common area or pipes that damage unit. So really cannot afford to take care of the usual Condo association responsibilities due to the insurance situation. Even if the HOA would normally be responsible. If sub- metering done we were told that we could get better and cheaper insurance. They are even willing to reduce HOA dues if done. Since less than 23% of owners live on property most of the water bill that is costing so much would only hit renters, and if their water is high they are more likely to tell landlord if something needs attention.
    Now you are thinking we made a stupid investment. You would not believe what we paid for this HOA foreclosed unit! They sold to us at such a low cost because we planned to improve and make it safe and be diligent landlords and no problem as some owners are. I am pretty comfortable as we are a 3rd floor unit so no one to leak into our unit. But lucky that though 3rd floor unit only one flight of stairs as everyone else is ground or basement in this building so a good situation. With the present state I would only buy top floor units in this complex due to the hassles till HOA is able to keep up with needed work which there is no money for. My son is able to rent even his basement units there for good rents- that he paid triple what we did for the property.We are choosing to improve more than must to attract an even better tenant.But doing well with the budget. We knew the facts of complex and our son has owned units there so was aware and attended Board meetings. The location will always be in demand due to location and with what we paid-Cash will have a large return on our investment.We bought good insurance and protected ourselves legally.

    I am most interested in knowing what would happen if we came under the newer NC condo HOA regulations- What would that mean to us? What are they in NC? I am under the impression that if we sub-meter or became unable to pay HOA expenses we then would be moved into those current NC Condo HOA Regulations and someone take over, make decisions to get HOA solvent, force the hand of owners who will not agree to water sub-metering, that in itself would free up money for upkeep and needed preventative issues and improvements which there is no money for now, and get HOA and complex out of the bind it is in before it gets worse.
    BUT! I WANT TO KNOW THE DOWNSIDE OF THOSE REGULATIONS if any! I see other newer more attractive condos with obvious problems, despite low prices, HUGE HOA dues with no amenities, services, pool, park,etc... Many are on the market, but they do not sell, as an investor would not be able to recoup enough rent with such high HOA dues. None are in as prime a location as we are. I assume that these developers must have gone bankrupt to put in this situation.
    If we started falling under CURRENT NC CONDO HOA LAWS, owners would still retain thier voting rights, correct? I want to know about the NC Condo HOA Laws. And would love to hear from any experiences in similar situations. Or horror stories if that is situation, or what you have learned from a similar property. anyone know the situation in NCs as now more about those laws in NC. A

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    I can't speak to old vs. new condo laws. Really, if you want good legal advice, you need to see a lawyer.

    But fundamentally there's a huge flaw in what you're saying. The HOA wants to install submetering and, I presume, have the residents start paying their own water. Installing the submetering isn't going to be free. So, the owners are going to have to pay for this installation. I'm guessing that's hundreds, in not thousands of dollars per unit.

    Then, they have to start paying their water bills. Rest assured the tenants aren't going to just agree to a sudden increase in their rents, so the owners are going to have to pay the water or decrease the rent.

    Yet, it appears the HOA dues will not change: "free up money for upkeep and needed preventative issues and improvements which there is no money for now". So, the HOA wants to make an expensive change, then have owners pay for their own water, yet keep the dues the same. That's simply a way of getting around the limitations on how much they can raise dues. By pushing the water bill to the owners, they have effectively raised the dues.

    No wonder owners are resisting. The HOA is using scare tactics to try to push through a sneaky increase in HOA dues. Better, IMHO, to be up front and actually make a case for why this is needed and why the HOA needs more money. You're implying you bought the unit very cheaply. And did so expecting to have to pay for improvements. Sounds like you're willing and able to pay for this change. Others may not be in the position. I'm sure many owners bought during the bubble and are not is as good a position. Combine that with these HOA scare tactics and I'm not surprised owners are resisting the change.

    Submetering is a red herring. The real issues, from what you write, it a lack of maintenance and a lack of money.

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  • Kyle Meyers
    Residential Landlord · Indianapolis, IN · Member since 2010 · 592 posts · 138 votes
    13y

    I have a rental condo in an HOA where we considered sub-metering. Our reasoning was based on savings from conservation since people would not waste as much water and would fix running toilets and dripping faucets. We got estimates from the water company and some sub-metering companies of what the normal usage should be and our use was much higher. We were able to find a sub-metering company which offered a monthly rate to rent the meters instead of purchase and we estimated owners would pay less each month even with the submetering charges than they had been paying for water because of the savings from conservation. As you are experiencing, we had a lot of backlash and many owners seemed tho think this was a scheme to take more of their money. We could not get approval from enough owners to get the submetering done and we will likely have to raise dues or have a large special assessment in a few years because we are unable to properly fund our reserves. In our case, we have a bank loan from several years ago when we did not have enough reserves for needed repairs and if we are unable to maintain the financial levels the bank requires the bank could take over the association. If that were to happen they would increase the dues. If your association does not have a loan, I believe a similar takeover could occur through receivership, but I don't know all the legal information about that. I think your association needs to consult an attorney about changing the bylaws or whatever it is you need to do in order to increase dues to a sustainable level.

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  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    13y

    Carol T. can't speak to condo laws in your state. In Oregon there is a lot of confusion about condo laws with most believing the current laws apply to all condo associations when that is not the case.

    The current state statutes only dictate rules to the newly forming associations. Once an association is formed it is bound only to it's own bylaws and new state statutes are not involved. The state does not regulate condominiums in Oregon.

    This is much like an electrical or plumbing code. You don't have to update your wiring or plumbing each year to comply with code as long as it was built to code when it was built. Our associations are the same way. It sounds like that is what you are referring to when you talk about new regulations. If your association falls entirely apart and a new set of bylaws etc is established then you may have to fund it differently then you are now. Chances are your old bylaws don't require a reserve account or are very loose in it's definition and a newer set of requirements will require a large cash infusion on a building that is 40 years old.

    What you need to have happen is for property values to increase so you can offer good deals to people that want to rebuild the place and aren't scared of spending some money. This could be done with a developer too.

    I hope this is not a large portion of your net worth and you can withstand a worse case scenario. We had a maniac board chairman that wanted to spend $10,000,000 residing our complex during the worst time recently. This would have been a 30k special assessment (if everyone paid which would not have happened) or a huge bank loan, or most likely a combination of both. There were some real discussions about how an association could collapse and how that would pan out. It was an ugly prospect. Luckily that didn't happen and that chairman took off.

    It is good that you are able to have special assessments. I know a guy that is involved in an association where they all agreed to maintain no cash reserves and when repairs were needed they would all just pony up their share. They could all afford it so it was fine. That would work for me too. I hate having an association hold my money.

    We have a RE division that publishes the latest state statutes. Why don't you get a copy and see for yourself. Pay special attention to the requirement for a reserve account and then take a look at yours.

    Good luck.

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