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Preventive Medicine – How to avoid another foreclosure crisis

BY PETER S. SACHS – THE ASSOCIATION BARRISTER 

If your homeowners or condominium association suffered high delinquency rates because of the housing crisis, your board should be taking steps now to insulate the community from a similar problem in the future. While the community is likely currently enjoying low delinquency rates, fewer collections and foreclosures, and high property values, this trend will not continue forever. We all know that what goes up must also come down.

In the 2000’s, banks loaned 104 percent of properties’ values to persons buying real estate based on speculation. The banks also closed “liar loans” based upon stated income, without documentation. Our community association clients suffered, as costs of operating associations never go down, but fewer owners contributed to the association in the form of assessments. To make matters worse, it cost the association money to pursue owners who paid late, who didn’t pay at all or who abandoned their properties when values declined.

Associations may prevent the crisis from severely affecting the community by screening purchasers similar to the manner that banks screen persons applying for mortgages. While you might think this is redundant, some banks have recently reverted to their old habits of lending to persons with low credit scores, lending more than 80 percent of the property’s appraised value and lending to persons with a history of collections and foreclosures. The association cannot make the mistake of relying on banks to properly screen prospective purchasers.

One way to help avoid falling prey to real estate speculators who cut and run when property values decline, is to amend the association’s governing documents to provide better leasing restrictions. For example, the Declaration can be amended to provide for minimum and maximum leasing terms, to provide for a maximum number of times a person can rent in a given year, to provide for a screening process with the clear authority to approve or disapprove based on reasonable grounds, and to provide restrictions on investor owners renting in the first year or two of ownership. Similarly, the Declaration may be amended to require purchasers to put 10 to 20 percent down to buy a lot or unit.

Of course, amending the Declaration generally requires a supermajority vote of the owners. It is important that associations consult with legal counsel to determine their ability to amend the Declaration to provide for such leasing restrictions.

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Peter S. Sachs is the managing director with Sachs Sax Caplan in Boca Raton, Fla.

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