Condo Takeover Schemes Can Post New Foreclosure Threat

Published on October 6, 2014 on Written by Seth Freed Wessler.

When Marilyn Mack received an email from a company she’d never heard of before asking her to send money, she assumed it was a scam.

The December 2012 email from A Sweet Lemonade LLC told her to “please provide the amount of the condo fee and bank instructions,” according to legal documents Mack’s lawyer submitted in court. Mack at first dismissed the message, but a year later, the 59-year-old transit authority worker was facing a court battle against A Sweet Lemonade and the threat of foreclosure and eviction from the Boston condo where she’s lived for six years.

Although Mack says she has always paid her mortgage on time—and unlike her neighbors in her three-unit building, survived the foreclosure crisis of 2010—she has been subject to a questionable practice that housing advocates are calling a “condo takeover scheme.” Real estate investors first buy up foreclosed condo units in a building, then take control of the building’s condo association, which allows them to set condo fees at whatever level they choose. Advocates say that by inflating these fees beyond what occupants can afford, they place longtime condo owners like Mack at risk of being priced out of their homes.

It’s not clear how widespread the condo takeover tactic is, but stories like Mack’s have emerged occasionally in other parts of the country in the wake of the foreclosure crisis. In 2012, condo owners in a Reading, Pennsylvania, subdivision were pushed out of their homes after a real estate development company bought up foreclosed units in the complex and then took control of the association. Using a Pennsylvania law, the investor then dissolved the condo association, allowing it to place the nearly 100 units in the complex for sale. The attorney who represented many of these condo owners told NBC that the developer offered the remaining owners buyouts valued at just one third of their mortgages. Finding themselves suddenly underwater, the owners lost their homes.

Housing researchers say the practice fits within a broader trend of investors buying foreclosed properties and then driving up rents and other fees, sometimes pushing longtime residents, usually renters, out of their homes.

“In the wake of the foreclosure crisis, we’re basically seeing dispossession on the back of dispossession,” said Desiree Fields, Ph.D., a Professor of Urban Studies at Queens College in New York, who has studied the foreclosure crisis and written advocacy reports on real-estate investor activity in the foreclosure market. “You have a set of people who are low and moderate income who have been able to weather the foreclosure crisis as renters or as owners, and are now facing the possibility of losing what they have.”

Who's in control?

Mack has lived in the Boston area all her life, and bought her condo in a converted house in 2008. She says she and the owners of the two other units in the building would split the cost of repairs, snow plowing, and utilities. “We made it work perfectly,” Mack recalls. But in 2010, her two neighbors lost their homes to foreclosure; the units were then owned by a bank. Mack says she kept fixing up the yard, paying for needed work on the property and bills for the whole building, and declared herself the trustee of the building’s condo association.

Then in December 2012, A Sweet Lemonade bought the condo on the second floor of the building. Five days later, Mack got the email from the company asking her to start paying fees and telling her that the company’s owner would now be the association trustee. A Sweet Lemonade started sending Mack bills for close to $300 each month for utilities and services like snow plowing and roof repair. Mack says that the company provided none of these latter services; that she continued to take care of the building herself. Five months later, those fees went up to $566, without any explanation, Mack says.

“That’s just not something that I can afford,” Mack said. “I am working extra overtime just to pay my regular bills and then they add hundreds more dollars?”

Though Sweet Lemonade controlled just a third of the units in the building at the time, in an email a month later, the company told Mack that it was “taking over,” according to court filing’s from Mack’s attorney.

“They just forced their way into control of the condo association,” said Nadine Cohen, Mack’s attorney at Greater Boston Legal Services. “[Mack] was the association trustee but [City Realty] acted like there wasn’t a trustee and took control.”

In April 2013, the third unit in Mack’s building was sold, this time to a company called BFFS LLC, which is managed by the same two men who manage A Sweet Lemonade. They are the owners of City Realty, one of Boston’s largest real estate investors. City Realty has operated under at least 60 other names and, according to legal testimony by one of the company’s owners, its management company runs 500 mostly residential properties in Boston. Local activists have accused the company of aggressively gentrifying Boston neighborhoods—most recently, buying up foreclosed buildings and then raising rents and evicting established and successful small businesses from storefront units.

“I basically felt like I was being treated like a tenant in the home I own.”

Days after City Realty took majority control of Mack’s building, the association, managed by City Realty, raised the fees to $566 each month, according Mack’s court filing.

“I basically felt like I was being treated like a tenant in the home I own,” Mack says, after working a 13-hour shift. “I lost all control and all of a sudden I was charged with fees there’s no way I can pay.”

The owners of City Realty did not reply to NBC’s request for comment.

Mack says that after the condo fees went up, she stopped paying them: “I was doing the work and they still wanted me to pay?” she said. “That made no sense.”

What she and other owners did not know at the time is that under Massachusetts law, there are nearly no circumstances under which members of condo associations can legally withhold fees. In June 2013, according to court filings, the Massachusetts law firm Marcus Errico Emmer and Brooks sent Mack a letter telling her that a lien had been placed on her condo fees, plus late fees and attorney’s fees. The figure: $3,140, which later increased nearly three-fold. One month later, City Realty filed a complaint to foreclose on Mack’s unit for the outstanding fees.

“These companies bank on current residents not knowing their rights,” says Zoe Cronin, a housing attorney with Greater Boston Legal Services, whose attorneys represent Mack and others in her situation.

Mack’s attorney at Greater Boston Legal Services, Nadine Cohen, says what her client is experiencing is “a new kind of takeover scheme that we think is picking up steam.” Greater Boston Legal Services lawyers say they are currently looking into at least six cases like Mack’s in Boston. Reporting by NBC News uncovered two more buildings where City Realty LLCs like A Sweet Lemonade appear to have acted similarly. In at least one case like Mack’s, City Realty has recently agreed to cede control of the condo associations back to the existing owners after facing challenges from Cohen.

Seven current condo owners in these eight buildings told NBC that the management companies that now run their buildings set fees far above what the services actually cost, and they say that the investment companies and their associated management companies rarely do any of the work they’re charging for. Several condo owners said their mortgage holders paid off the back fees, and then tacked those expenses onto the underlying mortgage, in turn raising mortgage payments beyond what they can afford.

It’s not clear if anyone has so far been foreclosed on or otherwise pushed out of their condo as a result of this tactic. Calls by NBC to former owners of condo units now owned by City Realty were not returned.

A Boston city official, who spoke on the condition of anonymity, said that the practice appears legally questionable, though the official said that it may be an issue of a single bad actor. “This is something we’ll keep an eye on,” the official said.

Community activists echoed this. “We don’t know how widespread it is,” says Maria Christina Blanco, of City Life, a community based organization that fights evictions and is waging a broader campaign against City Realty. “The condo issues are just part of a larger trend around the country of investors going into neighborhoods, buying up property and making it far too expensive for current residents.”

Investors' aims: To improve property or neglect it?

Though City Realty did not reply to NBC’s questions, in past statements to local Boston media, Fred Starikov, one of the company’s principals said that the business is primarily invested in fixing up properties that have been neglected.

“We purchase distressed properties that are in need of major renovations and we invest in to low-income neighborhoods and provide affordable housing. ... I believe we provide a much needed service and I believe we are doing positive things.”

Some condo owners disagree. In interviews with NBC, they say that the care of the properties has declined since the City Realty companies purchased the units and began renting them out. Some complained of trash strewn on the lawn, broken railings on porches and dirty hallways, as a result of new renters and lack of care from City Realty’s management company.

Richard Brooks, an attorney at the firm Marcus Errico Emmer and Brooks, which represents condominium associations across the state and is counsel for condo associations managed by City Realty’s owners, including, at one point, Mack’s condo association, says that he’s not authorized to speak about City Realty-managed associations in particular. But generally, he said, when investors buy condos and become trustees, they often find that current residents have not taken care of the properties or created formal condo associations.

“The complaint I hear from our clients is that the investor comes in and raises the fees to make the property better, to improve it,” Brooks says. “And then the people who were there don’t want to pay because they were fine with how it was before. But it’s really about improving the property.”

Sheila Dillon, chief of the Boston Department of Neighborhood Development says “some of the investors we see operating here have worked with tenants and made physical improvements. But some certainly have not done that and they’ve raised rents [on rental units], there’s been displacement and they’ve neglected the buildings.”

According to a report from Harvard Joint Center for Housing Studies and the Philadelphia Federal Reserve Bank, “as the opportunities for acquiring foreclosed properties have diminished”—foreclosed properties sold at auction declined by 57 percent in the last year, the Massachusetts Housing Partnership reported —“investors have become more creative in their methods for identifying potential acquisitions.”

"They’ve got an open bank account.”

“Condos are an attractive kind of property for investors,” says Chris Herbert, Ph.D., Research Director at the Joint Center and co-author of the Harvard report. “They can often be bought at a low price and rented or sold at a significant gain. It helps if they control the whole building.”

Marilyn Mack is still in her condo. After she secured legal support from Greater Boston Legal Services, she was able to negotiate the condo fees down by half of what City Realty had charged. “They were simply charging her 100 percent more than what the service actually cost,” Cohen says, including $5,000 in back fees for fixing the roof, something Mack says City Realty’s management company did not do.

“I live from paycheck to paycheck,” Mack says. “[City Realty] is in it for the money, and they’ve got an open bank account in order to do it. I wish I was as fortunate as them.”

First published October 6th 2014, 11:38 am