By Taniesha Robinson
March 3, 2011
A significant portion of Chicago-area foreclosures are nearly invisible to the casual observer. While boarded-up homes are obvious, foreclosed condos – which make up one in five foreclosures – leave few visual clues.
Condos have carved out a distinct ditch in Chicago’s housing downturn. And that ditch has been dug deeper in the past year. New foreclosure filings on condominium units in the six-county metropolitan area grew from 17 to 19 percent of all filings from 2009 to 2010, according to research by Chicago-based Woodstock Institute. This rate jumps to nearly half of all foreclosures in some northern suburbs.
“Growing numbers of foreclosures on condominiums pose new challenges to those working to prevent foreclosures,” said Geoff Smith, the institute’s senior vice president.
Although vacant units may not create vivid community eyesores, the unique challenges they create have left developers, owners and building associations scrambling to keep these communities afloat.
Pressure on those left behind
Just as several vacant or foreclosed houses on a block depreciate the value of surrounding properties, vacancies within a condominium complex lower the value of occupied units. For condo owners, however, the loss can be compounded with an increase in assessment costs, the money collected for the building’s common bills and maintenance fees.
“It’s really frustrating because you tie your lot in with your neighbors,” said Monique Patterson, an attorney who lives in an eight-unit condominium on the South Side.
Patterson bought her condo in 2009 after the previous owner lost it through foreclosure. She said since then, the building has had vacancies and several owners have missed assessment payments, which cover costs of waste management, water and other utilities.
Julio Soriano, a community housing specialist at Chicago-based Lakeside Community Development Corporation, said unit owners facing foreclosure or financial hardship may shirk assessment fees to pay their mortgage, and surrounding owners end up paying the difference.
Condo associations are pulled in different directions because they want owners to be able to pay their mortgages to prevent foreclosures, but they also must collect and maintain assessments, Soriano said.
Policies make the problem worse
There are a number of recent policies keeping condominiums between a rock and a hard place.
The first, second and third quarters of 2010 had more foreclosure filings than their respective quarters in 2009 for nearly every Cook County area. A comparison of the fourth quarters, however, shows a decrease in filings largely because banks halted foreclosures in late 2010 after many were cited improperly processing foreclosure paperwork, according to a recent Woodstock report.
“In addition to foreclosures, banks postponed sales of foreclosed properties, evictions, and cash-for-keys transactions,” Soriano said. “The postponement affected many units in condominium buildings that the banks had not foreclosed on and where the unit owner was not paying assessments.”
Not only has recent policy made it difficult to remove people who aren’t paying assessments, but it has also strained efforts to sell vacant or foreclosed condos.
The Federal Housing Administration and lenders have tightened criteria for loans, requiring buildings to have a certain occupancy rate before a loan will be insured to a potential buyer.
This makes it difficult for a building with many vacant units to reduce their vacancy rate.
Glut of units to blame
Although recent policies may seem to be helping sustain the Catch-22 condo associations are in, real estate professionals point to development in the past decade and investor-buying of units as the root of the problem.
“I think one of the dynamics is what took place in Chicago 10 to 15 years ago,” said David Hartwell, a Chicago attorney who represents condominium and homeowners associations on litigation matters. “There was a huge influx of development.”
Hartwell said that led to a glut of units and developers began pandering to investment buying rather than home buying. Now that there’s a decrease in demand for purchase and rental units, investors are “just tossing the keys on the desk” and abandoning units, Hartwell said.
“My guess is that you had some people [buy units] for investment purposes and they wanted to flip them and couldn’t,” said Gael Mennecke, executive director of the Association of Condominium, Townhouse, and Homeowners Associations for Illinois counties.
Hartwell added, “The people that get hurt are the people who are still hanging on.”
Condo boards’ legal options
Condo boards dealing with financially strapped owners can offer repayment plans to owners and, if that fails, take legal action when necessary.
“The board of directors has a fiduciary duty under the Illinois Condominium Property Act,” Soriano said. “One of its responsibilities is collecting assessments.”
Soriano said that small condo associations without legal teams often think they don’t have any options when owners aren’t paying assessments and are somewhat relieved when they hear of the Illinois collection procedure.
Patterson, the South Side condo owner, said legal action is the only thing that’s allowed her building’s association to break even and stay afloat.
“The only muscle we have is the law firm,” Patterson said. “We pay them a fee, but we end up getting the money back.”
For many small associations, legal fees may put too much financial strain on an already struggling community. When a building’s assessment is running low, any extra costs that come up – whether it’s for legal fees, repairs or a new vacancy in the building – can pull the rug from under a community.
And that still seems to be a real possibility in Patterson’s condominium.
“As soon as it seems we stabilize and catch up in one respect, something else happens,” she said. “As soon as the money comes in, it goes right back out.”