How To Lose Debt

One of the downsides of living in a condominium complex is that you have to pay maintenance fees.  You have to pay those fees whether they do a good job shoveling your snow, or cutting your grass or not.  Some of these fees go directly to the management company overseeing the finances of the condominium association, an inherent conflict of interest. Think about it, the management company gets to pick the vendors who cut the lawn, etc. and you pay.  Doesn’t seem right now does it?

They could be picking the one that charges the most, or the one that is a cousin of the management company owner.  If you dislike this situation, if the association votes for it, the association could self manage.  This is assuming that there is someone in the association that has the skill, or the desire to take on a time consuming, thankless job like that.

So, short of self managing, there is not much more you can do.  If you refuse to pay your condominium fees, they will put a lien on your property, and could potentially force the sale of your property.  The lien would, of course, be for both the delinquent condominium fees, in addition to the legal costs the association spent on collecting the money from you.  Now that makes sense, doesn’t it? You get to pay their lawyers.

However, you have one more option.  You could join, that is, be elected to the board of directors of the condominium association.  The board does not necessarily control the day to day expenses of the association, unless of course they self manage, but the do exhibit some influence over the management company. It is in the management company’s self interest to appease the wishes and desires of the condominium association’s board of directors. Isn’t that power?

Now this is not to say that you can absolutely control expenses by joining the board of directors.  My wife and I owned a cabin cruiser and a boat slip at a marina some years ago. There was nice man managing the association, and he was also on the board of directors.  There was a group of slip owners, the ones with the biggest boats as you can imagine, that wanted to take a mortgage out to build a huge club house.  We called it the Taj Mahal.

When the manager/board member worked against the idea, they eventually ousted him, and took control of the board themselves.  While they didn’t successfully get a motion to take a construction loan out to build the club house, they did raid the coffers for electricity work that they did themselves in years past. No competitive bidding, questionable receipts, but then, they controlled the board of directors. They even installed some of their cronies to ensure that they controlled the majority of the board.

Now picture this, a group of individuals that are controlling a board of directors can agree to indebt the association where a single owner, or even a group of owners do not have the legal power to stop them.  Does that sound right to you?  You have to understand that they are not putting me in debt; they are putting the association in debt. So what does that mean?

Well, for one, associations, groups, and other legal entities pay more interest than you or I would pay when taking out a loan.  Why? Primarily because it is a riskier loan than one that is tied to an individual.  Associations have been known to have gone bankrupt.

In addition, they tend to have disagreements between board members, not unlike at our yacht club, and some board members may even decide by vote to stop paying the mortgage for one reason or another.  So, while they are not directly putting me in debt, they are impacting the re-sale value of my condominium, in this case a boat slip, by consuming a large loan to build a clubhouse. Now you could say that I get the benefit of the new clubhouse and therefore it all works out in the end. Sounds logical, but it’s not true.

Many of my potential buyers would be scared away by having a large loan out on the association.  Why, you ask?  When you purchase a condominium, you purchase with the unit, a percentage of the common ground, etc. equal to your unit’s percentage of the overall association, including its savings balances and debts.  With it, also comes the risk that if someone falls down and breaks their leg and sues, the legal fees including any settlement amount or judgment are common debts of the association.

Anyone can sue anybody, so if the association goes bankrupt and stops paying on the note, you can bet the bank will take each individual unit owner to court to try to recover their money.  Even if they are unsuccessful in collecting the money from you personally, it will impact the value of your condo unit on the open market. No one would want to buy it with a huge judgment or even legal issues.

Now there are two reasons that I am sharing all of this insanity with you. The first is that when you purchase a condominium, you must review the association’s financial statements.  If the association has little capital on hand, it may forewarn you of an impending increase in condominium fees.  The second reason I am sharing this with you is that you have inherently less control over your costs in a condominium situation, than you do when you own a house.  Why? Because someone else is spending your money, that’s why.