The Colorado legislature is out of control with their housing bills. The newest bill: “Real Property owner unit association collections” will drastically increase HOA fees for every property owner and likely could bankrupt many homeowner associations.  What is in this new bill and why is it so groundbreaking?

 

What is in “Real Property owner unit association collections”?

Here are the highlights with details below:

1. Associations can only collect 50% of their legal fees (the members of the association have to eat the other 50%)
2. In order to collect past dues, the association must obtain a personal judgment and go through a civil action (which costs considerably more in legal fees along with time)
3. Bill creates a right of redemption for 6 months if the HOA must foreclose out a lien on a property. Note this is after foreclosure so best case for an HOA to collect funds is well over a year after initiating legal action.

Here are the details of the new HOA bill.

In common interest communities for real property, current law allows a unit owners’ association (association) to require, without starting a legal proceeding, a unit owner to reimburse the association for collection costs, attorney fees, or other costs resulting from the owner failing to timely pay assessments or other money owed. The bill limits the reimbursement amount to 50% of the original money owed.

Current law grants an association a lien on the unit for amounts owed to the association by the unit owner. The bill prohibits foreclosing on the lien until:

• The association has:
• Obtained a personal judgment against the unit owner in a civil action;
• Attempted to bring a civil action against the unit owner but was prevented by the death of or incapacity of the unit owner; or
• Attempted to bring a civil action against the unit owner but the association was unable to serve the unit owner within 180 days; or
• The unit owner is in a bankruptcy civil action.

The bill creates a right of redemption following certain involuntary transfers of a unit to the association or a foreclosure purchaser for 180 days following the transfer. During the 180 days, the foreclosure purchaser or association is prohibited from selling the unit. The following people have the right of redemption in order of priority:

• The unit owner;
• A tenant of the unit;
• A nonprofit entity whose primary purpose is the development or preservation of affordable housing;
• A community land trust;
• A cooperative housing corporation; and
• The state of Colorado or a political subdivision of the state of Colorado.

 

Loophole in this bill that lenders will foreclose out the HOA

It is clear from how the bill is written that they do not fully understand how the real estate market works.  Based on above it is clear that the bill is trying to focus on affordable housing.  If someone buys affordable housing they are not paying cash (or they wouldn’t need affordable housing).  They are getting a loan from some entity like FHA, HUD, etc… Remember that a mortgage supersedes the HOA.

If an owner doesn’t pay their HOA and the HOA forecloses, it is subject to the first mortgage.  The HOA would then have to step in and pay the mortgage or the lender would start their own foreclosure proceedings.  Based on a 180 day right of redemption the lender would foreclose out the HOA before the redemption period is over leaving the HOA out of luck as it is a junior lend to the first mortgage holder. The right of redemption will make it next to impossible for HOA’s to recover anything leaving them in a much worse position.

The HOA collection bill is misguided

This bill how it is written today is misguided and will make it next to impossible to collect unpaid HOA dues.   Think of a condo in Breckenridge that pays for insurance, taxes, utilities, etc…  This HOA provides a valuable service and the only way it can provide this service is from dues from the members of the association.   If someone doesn’t pay, then all the other members are on the hook for their lack of payment.  The association can’t fail to pay the insurance bill or tax bill or utility bills as they would have financial repercussions.  For example, if a tax bill is not paid then the tax deed is sold and ultimately creates a much larger problem.

Furthermore, as members do not pay, HOAs can’t pay their bills or their required maintenance creating issues for the entire association.  The HOA will ultimately have to raise dues substantially on every other paying member.

New bill will bankrupt many associations and leave paying members on the hook.

Many HOAs are barely balancing their budgets today as insurance costs have spiked, taxes have increased, and maintenance costs have skyrocketed.  As HOAs are forced to pay 50% of the attorney fees along with wait well over 180 days.  Ultimately the HOA will not be able to collect substantial amounts of unpaid dues.  The bill will create a moral hazard situation where many members strategically do not pay their HOA dues as the probability of collection is minimal that will provide them with increased leverage to negotiate lesser amounts.

Remember an HOA is not some huge corporation, all revenue from the HOA comes from dues.  With this legislation it will not be possible for members to absorb the increased dues to keep many associations viable.  Ironically the most effected HOAs will be the ones the bill is trying to help the most.  Take Green Valley Ranch where many of the properties are lower income households.  These households can’t afford a huge jump in dues as a result of this bill.

The new HOA collections bill is a very bad idea for Colorado

Every time I look at the legislative calendar, I can’t believe my eyes.  The legislators writing these bills are trying to solve a problem but without understanding the ramifications of their bills.  The HOA collections bill is a terrible idea for Colorado and will ultimately lead to bankruptcies of many HOAs that are serving lower income households.

This is a terrible idea that will have far reaching consequences.  Fortunately the legislature could make one adjustment which would state that the above law is only for fines not related to non payment of ordinary dues.  Unfortunately, I doubt the change would be made and associations and their members are going to be stuck with substantially higher dues to compensate for this law.

 

Additional Reading/Resources:

1. https://leg.colorado.gov/sites/default/files/documents/2024A/bills/2024a_1337_01.pdf
2. https://leg.colorado.gov/bills/hb24-1337

 

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Written by Glen Weinberg, Owner Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

Glen resides in Colorado, lends in Colorado, owns property in Colorado, and services loans in Colorado which provides a unique real estate prospective of what is actually happening on the ground both in Denver and throughout Colorado.  My goal from this blog is to provide an honest assessment of what I see happening in Colorado real estate and how it will impact real estate owners, buyers, realtors, mortgage professionals, etc…

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