BUYER BEWARE, PART II: THE ILLUSION OF “PROPERTY” OWNERSHIP

BUYER BEWARE, PART II: THE ILLUSION OF “PROPERTY” OWNERSHIP

Donie Vanitzian, BA, JD, Arbitrator
(c)2006

Why would anyone buy a home with all the trappings of property ownership, mortgage, taxes, upkeep, and not have full control over it, and then risk losing it through non-judicial foreclosure? If you own a condominium, townhouse, or single-family dwelling located in a common interest development, your ownership is a risk because it is “inferior” to all other types of real property ownership. Even with taxes paid and no mortgage, it does not mean you completely “own” that property. In such developments, the owner’s asset basically consists of nothing more than the “space inside” his home and a “fractional interest in common” with all other owners.

Even if your home is damaged or destroyed (as with the Northridge earthquake) you still cannot escape liability and payments because a common interest development exists in “perpetuity” (forever) and, California courts have ruled such property cannot go bankrupt because every owner must keep paying.

An association can dominate your lifestyle, control resales, interfere with your livelihood, and curtail your activities. Just because you can afford to move “in” does not mean you can afford to “stay” or that you can afford to move “out.” Most buyers are not advised that they must have a steadily increasing income to keep up with escalating costs and trumped up fees when purchasing or refinancing. Owners who cannot afford to pay their association’s demands for any increased fees and assessments that can cost thousands of dollars per owner cannot stay. Make no mistake: all the cash capital in the association’s bank accounts is generated from each owner.

Certified Personal Financial Planner and Real Estate Broker, Thomas Foster of Marina del Rey, explains, “Once the deception of association-type living is uncovered, the obvious next move is to immediately cut your losses and get out of there. It is only then, that owners discover the trap they’re in. Moving from a deed-restricted property to one without restrictions of similar size and location may at first appear to be a ‘like-for-like exchange’ however, when it comes to pricing that’s where the similarity ends. The fact remains that unrestricted property is much more valuable than it’s restricted counterpart.”

The big question for owners who bought into this “affordable living fraud” is; can they afford the extra cost and higher property taxes to break out of the trap? Owners brag, “My home has appreciated hundreds of thousands of dollars.” That elation is short-lived. Mr. Foster explains “that appreciation is somewhat irrelevant if it is not enough for you to make a like-for-like exchange in real time. Compared to other ‘real’ real estate, your deed-restricted title is immediately devalued because you are unable to move into a comparable ‘freehold house’ for the same money in the same area. When defining appreciation, the owner must subtract all assessment payments made during ownership to see the real picture.”

Owners in this environment are burdened with a double financial risk because they essentially relinquish control of their assets to an elected board of directors. Mr. Foster cautions, “The owner’s financial crisis differs substantially from the association’s financial crisis. An association always has ‘cash requirements,’ and by law it can raise cash on demand from each owner. Even with this ability, these communities can remain in a constant flux of not being able to meet its liabilities. This means that a ‘gain’ for the association results in a corresponding ‘loss’ for each owner, subjecting seniors in particular to potential personal financial distress.”

Raising owner fees to replenish the association’s operating accounts in order to stay solvent can go on indefinitely. Environments like these are time-consuming and expensive, with little or no tangible return for the owner. Trying to protect yourself takes extensive planning and the financial means to sustain oneself during this time, with no guaranteed success. Every problem the owner encounters steals income, days, weeks, months, and years away from their life -- none can be recovered.


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--Ms. Vanitzian, BA, JD, is an Arbitrator, commercial property manager and certified mediator with the L.A. City Attorney's Dispute Resolution Program. She authors the Los Angeles Times Associations column and is a UCLA Extension Professor for the course, Protecting Yourself in Common Interest Living. Her book, Villa Appalling! Destroying the Myth of Affordable Community Living, is touted as the "Ultimate Buyer Beware" guide. Contact: VillaAppalling@earthlink.net or write P.O. Box 11843, Marina del Rey, CA 90295.