Richard White: Rental prohibition could affect property values

Q. In 2005 we bought a second house as an investment in Georgia, using it first as a second residence while our son lived there. However, in 2007 we changed it into a rental property. Later, the HOA passed an amendment to their bylaws that basically forbids renting out houses in this development consisting of some 134 single-family residences. Does the HOA have this kind of power to retroactively make such profound changes? If this had been made known to us we would have never bought the property in the first place. Furthermore, I also consider that one would have to disclose such a limiting rule when planning to resell, and I believe that could chase potential buyers away or diminish property values. — M.H.

A. Your point is well taken about possibly changing the value of your home. I advise you to question the board in writing if they feel that the rule change affects the future use of your property to rent. As to notice a prospective buyer, you will need to tell him/her about all the rules, the documents and any amendments. Many association members feel renters are bad and you only get people that have lower values. I have found the opposite to be true in that only a few of the tenants are disrespectful of property rights. The biggest problem is inexperienced landlords and absent owners. You get one or two bad tenants and you get a knee-jerk reaction. Here is a basic real estate presupposition. In order to get the highest value for the home in the shortest time, you need large numbers of qualified buyers who want a property design and amenities you can offer. The question is, will the rule change attract buyers or repel them? Since I do not know the association, I do not have that answer.

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Q. At an annual meeting for a HOA, if there is not a quorum to hold the meeting, can the board just roll over into the next year or does another meeting have to be scheduled until a quorum is reached and an election can be held? I ask because as I read the statute, business cannot be conducted unless there is a quorum but, if there is not a quorum, the board should not be able to re-assign themselves to the board automatically. In my HOA which I just moved into, this practice has been going on for many years, since they do not push for an annual members meeting. — A.D., Sunrise

A. FS 720.306 only requires a 30 percent quorum. If the board or a concerned owner goes out and does a little door knocking campaign and asks that the owners sign the proxy or come to the meeting, you should not have the state of affairs you describe. Most documents will say something like an incumbent director will remain as a director until he/she is replaced. From reading your question, I perceive two pessimistic answers. The first is that your neighbors do not care and want others to do the work. The second answer is that the board wants to do it themselves and wants the power. The solution has a simple answer, get the members involved. While simple, it will require work.

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Q. Residents in our mobile home community recently formed a social club. The purpose of the social club is to have social events for the purpose of just having fun. There is a small fee to join but all residents and renters can attend each event by paying a small event fee. We requested use of our clubhouse and supplied dates for our planned events. There is no conflict with any events the HOA is providing or any other group scheduled at these dates. The board refused to allow us to schedule these dates, although they are available. The park manager and owner are now requiring us to lease the clubhouse. No other group is asked to do this such as the Red Hats, Golf League, etc. Our prospectus allows us as residents to use the clubhouse when requested and state that neither the board nor manager can deny us unreasonably. They claim they both have every right to do this. Can the owner/manager or the board deny us the use of the clubhouse or charge us a fee for the use of the clubhouse? This has been going on for several months and we have not been able to have one single event. This is starting to feel like discrimination. — F.E., Palmetto

A. In recent years, many situations have come about that force associations to be more cautious about private parties. Even if you are members of your mobile home community, the party that you describe could be considered a private party. It is not an association event but members are arranging the party that is not sponsored by the association. Not only are there liability situations, there is possible damage, use of the common areas (called wear and depreciation), and the use of the utilities. It will be an additional expense to the association although small. Say someone started a fire when they tried to heat food in the kitchen. Who will pay for the repairs? Say someone tripped and fell over a tripping hazard and broke a leg. Who would be responsible for the medical bills? The worst is if alcohol was served and someone was injured on the way home. Many people would be named as defendant in a trial including the association. These reasons and many other situations cause the board to require a lease to be created and used for such parties. It is not an uncommon thing for attorneys to recommend to boards to have a lease and rental policies approved for members to use the common area facilities.

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Richard White is a licensed community association manager in Florida. Questions should be mailed to him at 6039 Cypress Gardens Blvd. # 201, Winter Haven, Fl. 33884-4415; e-mail CAMquestion@cfl.rr.com. To be considered, questions and comments should include the author’s name and city. Questions should be about association operations, not legal matters.

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How to protect against a homebuilder’s bankruptcy

When a homebuilder goes bankrupt, the company’s creditors aren’t the only ones who suffer. Often, so do those who have paid sometimes hefty deposits for houses that remain unbuilt and new homeowners living in a development with half-built homes and incomplete amenities.

In the past year, the tumbling housing market has claimed such large builders as Fort Lauderdale, Fla.-based Levitt & Sons, a unit of Levitt Corp., Elliott Building Group in Pennsylvania, Turner-Dunn Homes Inc. in Arizona, Kara Homes Inc. in New Jersey and Neumann Homes Inc. in Illinois.

When these builders file for bankruptcy, subcontractors stop working, unfinished homes in various stages dot the communities, crippling liens are placed on occupied homes, clubhouses are incomplete and swimming pools and parks are never built.

People who have placed deposits on homes either never get their money back or face delays of months or years before it is returned.

“The houses sit until someone comes in and decides to complete them,” says Tracy Cross, of Tracy Cross & Associates, a Schaumburg, Illinois-based real estate research firm. The buyers “can’t move in, they can’t get their deposit back and they can’t get out of the contract.”

In November, Levitt and Sons became the nation’s largest builder to file for bankruptcy. In its bankruptcy filing, the company lists assets of less than $1 million and debts of more than $100 million.

Some home builders such as Centex Corp. and Pulte Homes Inc. aim to survive by selling houses at bargain prices, scrapping growth plans and slashing jobs. But as the housing market continues its downward slide, other home builders could find their companies in jeopardy.

Problems for homeowners and buyers

Attorney Brian Meltzer, of Meltzer, Purtill & Stelle LLC, in Chicago, Ill., has represented home builders for more than 30 years. He notes that these bankruptcies create numerous problems for homeowners. One of the most pressing issues will be warranty service issues on their homes.

Cross believes that homeowners living in a bankrupted new home community have few options when their home has a major problem. If the foundation has cracks, the floors aren’t level, the roof is leaking or the foundation is shifting, the homeowner will have to pay for the repairs. If a new entity takes over the development, it can help the homeowner — but it has no obligation to do so.

As for the houses partly under construction, what most likely happens is that the lenders or another entity step in and hire the trades to finish those houses. The home buyer will then get the house he or she contracted for. In the meantime, the home buyer is “stuck” and can’t get out of the legally binding contract.

How can potential buyers protect themselves?

Both Cross and Allen C. Balk, at Meltzer, Purtill & Stelle LLC, recommend checking out the builder before purchasing a home. Look at the progress in the subdivision. Drive around. Is anyone working? If it looks like there isn’t that much production, it may be indicative of other issues.

Knock on doors and ask people if they are happy with their home. If you decide you want to live in that community, purchase a completed inventory home, which eliminates much of the risk.

Look up the company on the Internet. If it’s a public company, you’ll be able to find out how it’s doing in different markets. Find out if land is being revalued.

Buyers should also make sure that their earnest money is in a third party escrow account because if there is a bankruptcy there is a right to terminate the deal.

“If the money is not in such an account, you become an unsecured creditor,” he added. However, this provision can vary from state to state so it’s up to the buyer to find out if this is done in their state.

Buyers sometimes can add a “springing provision” to their contract. This is a clause in the contract that allows the buyer to walk away if the builder files for bankruptcy protection. Most contracts don’t contain them. This clause only “springs” into effect with a bankruptcy filing.

“There is nothing wrong with asking your lawyer to put this in the contract,” says Balk. “It’s important to check with your state to see how enforceable this clause is.”

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There goes home equity

RENO, Nev. — As his wedding day approached last spring, Marshall Whittey found that his money could not keep pace with the grandiosity of his plans. But rather than scale back, he chose instead, like millions of homeowners across the country, to borrow against the soaring value of his home.

He and his bride, Holly Whittey, exchanged vows on the grounds of a sumptuous private estate in the Napa Valley. They spent their honeymoon at a resort in Tahiti.

But now, in an ominous portent for the national economy, Whittey has grown tight with his money. His home is worth far less than it was a year ago, and his equity has evaporated. And like many other involuntary adopters of a newly economical lifestyle, he can borrow no more.

“It used to be that if I wanted it, I’d just go and buy it and finance it,” Marshall Whittey, 33, said. “I’m feeling the crunch, and my spending is down significantly.”

The Whitteys and others like them are at the center of deepening worries that the economy is headed for a substantial slowdown, possibly even a recession, as the artery of cash from Americans borrowing against the value of their homes has sharply narrowed.

“Everybody was basically using their house as an ATM machine,” said Dave Simonsen, a senior vice president for NAI Alliance, an industrial real estate firm in Reno. “Now they are upside down on their house without that piggy bank to go back to.”

From 2004 through 2006, Americans pulled about $840 billion a year out of residential real estate, via sales, home equity lines of credit and refinanced mortgages, according to data presented in an updated working paper by James Kennedy, an economist, and the former Federal Reserve Chairman Alan Greenspan. These so-called home equity withdrawals financed as much as $310 billion a year in personal consumption from 2004 to 2006, according to the data.

But in the first half of this year, equity withdrawals were down 15 percent nationally compared with the average for the last three years, and consumption supported by such funds plunged nearly one-fourth, according to the Kennedy and Greenspan data.

This summer, the size of withdrawals fell even more sharply to about one-third below the level of late last year, said Mark Zandi, chief economist at Moody’s Economy.com.

“This slide in equity withdrawal is very recent,” Zandi said, “so you wouldn’t expect the drop in spending to occur until now, or Christmas.”

Only a year ago, money taken out of houses was still more than 9 percent of the nation’s disposable income, Zandi calculated, using a sampling of Equifax credit reports to supplement Fed data. By this fall, it had dropped to about 5 percent, a difference of about $350 billion a year.

Much of the attention in the recent collapse of the housing boom has focused on those in danger of losing their home or facing higher monthly payments in their adjustable mortgages. But the broader effect on the economy is likely to come from the much larger group of homeowners who can no longer count on rising home values to bolster their wealth.

Consumer spending accounts for about 70 percent of all economic activity in the United States, or about $9.8 trillion, so even a slight dip in home borrowing takes huge amounts of money out of the flow. The prospect of a slowdown, combined with the squeeze on households from higher oil costs, is sending shivers through the retail world, as apparel merchants, furniture dealers and electronics stores brace for the possibility that the all-important holiday shopping season will disappoint. Automakers are bemoaning sluggish sales.

“A fall of 2 percent in consumption would be big enough to trigger a recession,” said Christian Menegatti, lead analyst for RGE Monitor, a consulting firm in New York.

Many a premature obituary, of course, has been written for the American consumer — only to see spending continue apace. Just last week, the Commerce Department announced that the economy grew a healthy 3.9 percent during the summer, largely on the back of growing consumer spending.

Other forces, like increased exports and continued gains in jobs and incomes, may compensate enough for the loss in home borrowing to avoid an economic downturn next year. But many economists say a slowdown in spending is overdue as Americans are forced to curb their appetite for goods to restore balance to an off-kilter global economy.

The United States has for years been running huge trade deficits while borrowing heavily from China and Japan. This makes Americans vulnerable to the possibility that foreigners could slow purchases of American debt, sending the dollar plummeting and forcing the Fed to raise interest rates. Some say the best way to avoid such a situation is for Americans to start saving more and spending less.

“If you take the 10-year view,” cutting consumption is “the least bad outcome,” said Robert A. Barbera, chief economist at research firm ITG.

In the near term, though, any dip in consumer spending is likely to sow pain. Strong sales for American companies abroad may keep the United States out of a full-fledged recession even if spending slips at home, Barbera said, but nonetheless “it will feel like a recession.”

Sprawled across desert flats and framed by the rugged peaks of the Sierra, Reno encapsulates, in concentrated form, the forces at work on American consumers. In Nevada, and in neighboring California, home equity finance was about 20 percent of all disposable income at the end of last year, according to Economy.com. This September, it was down to about 9 percent.

While best known for its gambling, Reno has in recent years diversified, using low taxes to entice major companies like Cisco Systems and Microsoft. With land cheap, the area has been a magnet for Californians who sold homes for spectacular gains, then moved here to buy more space for less money. The metropolitan area’s population has swelled to 409,000, up 50,000 since 2000.

Many of the newcomers settled in developments on the edge of town. Ranch land that less than a decade ago was still a moonscape of sun-baked soil dotted with sagebrush has been transformed into golf courses and Spanish-style houses on streets with names like Painted Vista Drive and Rio Wrangler.

Free-flowing credit and rampant speculation drove residential sales. From May 2002 to September 2005, home prices in Reno and the adjacent city of Sparks more than doubled, according to First American Loan Performance.

Since then, however, the median house price has slipped 15 percent.

Local businesses are already suffering the effects of consumers who are less inclined to buy. A Volkswagen dealership downtown said sales were down two-thirds from a year ago. At the Flowing Tide, a bar and restaurant in south Reno, the co-owner Justin Moscove said business was down 10 to 15 percent.

At the Meadowood Mall, near the airport, shoppers were scarce. “We’re dead,” said Cendy Rodriguez, manager at Lane Bryant, the plus-size women’s clothing store, who said business was down 25 percent over the last two months. “I don’t think it’s going to be nowhere near the Christmas we had last year.”

At Sierra Nevada Spas and Billiards, Ezra O’Connor, the sales manager, complained that not even drastically lower prices were attracting shoppers. “We’re way down, 35 percent down from last year,” O’Connor said. “People just aren’t wanting to spend.”

Marshall Whittey once seemed an unlikely member of that cohort. A sales manager at a flooring and tile company, he exudes the unflappable air of someone raised amid the easy money of the casino world. Until recently, he and his wife regularly embarked on shopping sprees of $1,000 and up.

He bought a 21-foot boat and two flat-screen televisions for their home. He sold his old truck and bought a new one, he said, “just ’cause I didn’t like the color.” The Whitteys could live in such fashion because his company was making good money and his house was appreciating.

But today, the value of his own home, which reached $500,000, has fallen and a separate investment property he bought seems likely to fetch far less than the $580,000 he owes the bank. His commissions have diminished, so his income is down. His neighbor recently fell behind on house payments, prompting the bank to foreclose. Anxiety reigns.

“We used to go out to eat three or four nights a week,” Marshall Whittey said. “Now, we don’t go out at all.”

Even among those who indulged lightly in the credit bonanza, tightness is increasing.

Stephanie Lerude, her husband and their two boys have lived for five years in their ranch house on a quiet street in an older part of Reno. Wicker furniture sits on porches, basketball hoops dot driveways and orange leaves crown the tops of cottonwood trees.

Three years ago, Lerude and her husband, a lawyer, opened an $80,000 home equity line to invest in three commercial properties. She uses one as the office for her company, which provides gift baskets for real estate offices.

Their payments are manageable, and their house is worth about $540,000, about $100,000 more than they paid for it. Still, they are limiting purchases and postponing a kitchen renovation because of what they see happening all around them.

“I’m just not a big consumer,” Lerude said. “We’re trying to do less.”

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Fed to unveil plan to curb shady home lending practices

WASHINGTON -- A Federal Reserve plan being unveiled Tuesday would give people taking out home mortgages new protections against shady lending practices.

The rules to be proposed are especially geared to providing some future safeguards to the riskiest "subprime" borrowers, already painfully stung by the housing and credit debacles. The proposal is expected to apply to new, or future, loans made by all types of lenders, including banks and brokers. The plan could be finalized next year.

The Fed, which has regulatory powers over the nation's banking system, is considering:

— barring or restricting lenders from penalizing subprime borrowers — those with tarnished credit or low incomes — who pay their loans off early.

— forcing lenders to make sure that borrowers, especially subprime ones, set aside money to pay for taxes and insurance.

— barring or limiting loans that do not require proof of a borrower's income.

— setting new standards for how lenders determine a borrower's ability to repay a home loan.

Fed policymakers also will look into improving financial disclosures so people better understand the terms and conditions of their mortgages. It will consider ways to crack down on misleading mortgage advertising.

The Fed's response has taken on heightened importance given the meltdown in the housing and credit markets that has led to record numbers of home foreclosures. The crisis has raised the odds that the economy might fall into a recession, roiled Wall Street and given Democrats and Republicans much fodder to blame each other.

The plan, if ultimately adopted, offers Federal Reserve Chairman Ben Bernanke, who took over the helm in February 2006, an important opportunity to put his imprint on the Fed's regulatory powers. Some critics have complained that Bernanke's predecessor — Alan Greenspan, who ran the Fed for 18½ years — failed to act as a forceful regulator especially during the 2001-2005 housing boom, where easy credit spurred lots of subprime home loans and many exotic types of mortgages.

When the housing market went bust, the carnage was the worst in subprime loans.

Of the nearly 3 million subprime adjustable-rate loans surveyed by the Mortgage Bankers Association from July through September, a record 4.72 percent entered the foreclosure process during those months. At the same time, a record 18.81 percent of the subprime adjustable-rate loans were past due.

When home values weakened, borrowers were left with loans balances that eclipsed the value of their homes. They also were clobbered when their loans reset with much higher interest rates.

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Wide sweeping fraud sting reaches Marco

A mortgage fraud case has ensnared 31 people who established a network to obtain more than $14 million in fraudulent loans from 28 homes in South Florida, including 15 on Marco Island, federal prosecutors announced in an indictment handed up this week.

Federal officials said the scheme involved homeowners, mortgage companies, appraisers, real estate agents, bankers and “straw buyers” who would artificially inflate home prices and then pocket the difference.

The indictment follows a months-long investigation that involved several law enforcement agencies, including the U.S. Secret Service and the City of Marco Island Police Department.

“Mortgage fraud cannot be ignored,” U.S. Attorney Alex Acosta said in a release. “It has become a real and daily threat to the asset most important to most of us Floridians — our homes.”

The indictment centers on Juan and Rachael Torrens, a Miami couple in charge of several development, real estate and mortgage firms.

The Torrens would identify homeowners willing to overstate their home’s values and set them up with “straw buyers” who would allow their identities and credit to be used in exchange for a fee, the indictment said.

Also charged were Daniel Ramos, the owner of a Miami construction company; Alfred Muxo, owner of a Palmetto Bay real estate appraiser’s office; Katherine Harris, part owner of a Hollywood title company; and Roger Rosario, an assistant bank manager in Miami-Dade County.

The remainder of the charges were against 25 people who served as straw buyers.

Aside from the 15 homes targeted on Marco Island, the remainder were in Broward and Miami-Dade counties.

Marco Island Police Chief Roger Reinke said there could be more charges coming for mortgage fraud on the island.

“The investigation continues,” Reinke said. “That should speak for itself.”

Mortgage fraud inflates home prices that can have an effect on the values of neighboring properties, making it harder to buy and sell homes.

Gerry Rosenblum, a past president of the Marco Island Area Association of Realtors, said fraud has had a “fairly significant” effect on Marco Island’s real estate market.

“A lot of what drove the market up was a lot of this type of mortgage fraud,” Rosenblum said. “That had a real impact on the market.”

“We’re glad it’s all getting cleaned up now,” he added.

Monday’s indictment was part of a Federal-State Mortgage Fraud Initiative announced in September by Acosta. The initiative has netted 55 charges in connection with several schemes involving loans totaling more than $75 million, a federal prosecutor’s release said.

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