Condominium Associations Remain Vulnerable to Hostile Takeover


By Deborah Goonan

In recent years, news media have reported an increasing number of instances of investors buying up multiple condo units within a project, with the intent of taking control of the Condo Association.

Investors range from wealthy high-stakes developers of multi-million dollar condo towers to family members or individuals interested in gaining control of small Associations. See the Related Reading list at the end of this blog for a few examples. Usually, an investor or group of investors buys distressed or vacant units at low purchase prices, taking advantage of a depressed real estate market. Investors may also use various intimidation tactics to force remaining owners to sell to them.

Once they own a majority of condo units, investors accumulate enough votes to take over the condo Board, and then begin renting the units to tenants. The ultimate goal is to acquire enough votes to force a dissolution (termination) of the Association in order to convert the condominiums to rental apartments, or to redevelop for a more profitable use. In Florida alone, tens of thousands of condo unit owners have been forced to sell their units to investors at a fraction of what they paid at the time of purchase. Many have been left with no home and negative equity, including outstanding mortgage balances.

Recently, Florida’s Governor signed a Condo Reform Bill that was originally intended to reduce the amount of financial loss for condo owners forced to sell their units to investors following termination (dissolution) of the Condo Association corporation. The new law requires investors to pay condo owners an amount equal to at least the original purchase price. But there are many caveats. For one thing, the law only applies to homestead owners – those that live in their condo units more than half of the year. The protections of the new law do not apply to Florida’s many owners of seasonal or vacation properties.

Condo reform does not help all owners (Orlando Sentinel)

There are several other loopholes as well, and you can read about those here:

FL legislature passes amended version of condo termination bill, still full of loopholes

Some of you may be wondering: How can this happen in America?

It’s all because governance of an HOA is based upon corporate law. Despite what you might have heard from an industry proponents, HOAs are not Democracies.

In homeowners and condo associations, voting rights are allocated to the quantity of property owned, rather than adhering to the American principle of One Person, One Vote. HOA industry leaders, including Community Associations Institute (CAI) and Developers of common interest developments with HOAs, view each unit of property as a “voting interest” in the corporate Association.

Therefore, the more property you own within an Association, the more voting interests you have. Once you hold enough voting interests, you can elect yourself and your allies to the Association Board. As a Board member, you have broad power to control rule making, management decisions, and the general financial expenditures of the Association.

In short, the concept of tying votes to Property vs. People is a fundamental flaw of HOA governance, one that inevitably skews property rights in favor of developers and investors rather than residential property owners.

Related Reading:

HOAs often pit Investors vs. Homeowners, and homeowners usually lose

High stakes $120m lawsuit over condo termination blocked by rival

FL condo owners forced to sell at a loss in hostile investor takeover

Takeover Schemes’ Can Pose New Foreclosure Threat (NBC News)

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