Can A Condo or Co-op Go Bankrupt?
Can a condo or co-op go bankrupt or be foreclosed? The answer is you bet — but the good news is that such financial disasters are rare.
In general terms a condominium is a property where there are units with individual title and financing as well as common areas which are owned by the condo association. All unit owners are members of the condo association and have a right to use common areas.
A cooperative is different. With a co-op a corporation owns the entire property. Individuals own shares in the co-op, have the right to use common areas and also have an exclusive right to use their own specific unit.
Condos and co-ops generally get into trouble in two ways: First, owners do not pay their monthly co-op or condo fees. Without money the condo or co-op cannot be pay its debts and obligations. Second, a major repair is required, a repair so large that the condo or co-op does not have sufficient reserves to pay and so it bills owners for a special assessment.
If bills cannot be paid by a condo, then a creditor could force the condominium into foreclosure and bankruptcy. The common areas of the condo could be lost to a creditor. However, because the individual units are separately titled and financed the condo creditor could not seize those units to pay off the debt.
However, a condo unit can be foreclosed if there’s a condo fee or special assessment which is not paid. In that case, the fee becomes a lien against the unit and if unpaid can lead to the condo foreclosing the unit owner. (The same, of course, is true if a condo owner does not pay the mortgage.)
With a co-op it’s possible to be foreclosed or bankrupted if bills aren’t paid. Because the co-op actually owns and has title to the individual units, co-op owners could lose both the value of their shares in the co-op as well as all rights to their unit. In effect, they could become renters — if allowed to stay. In particular, co-ops often have an underlying mortgage secured by all units. If the underlying mortgage is not paid then the entire property can be lost.
What to do?
___ Never buy a condo or co-op without asking about the budget, reserves and special assessments. Ask for a letter from a certified public accountant (CPA) saying that the financing for the property is in good shape.
___ Always ask if the condo or co-op expects to charge for a special assessment during the next two years.
___ Always ask if the condo or co-op is now being sued or has any reason to expect that it might be sued.
___ Get advice from a real estate attorney when buying a condo or a co-op — and make any purchase depend on the approval and satisfaction of your lawyer.
___ If you see a building with a lot of empty units beware — a unit with a low price may not be a bargain if you might also face huge fees and assessments.
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