Blame the HOA game

Funding Reserve Funds adequately is tough to do and boards, believing their owners want low dues rates, will starve the organization. Overspending is easy for an HOA, but deferred maintenance is the "sleeping giant" of most HOA budgets, including my own organization.

I have ranted a few times about the folly of requiring owners to approve budgets and assessment increases. I've also posted about the mistaken belief that low assessments keep expenses down. They don't - they increase them over time.

Of course owners don't want to shell out money if they don't have to. But allowing them to control the decision takes it out of the hands of the board (the ones with a fiduciary duty to the association) and puts it into the hands of those who can and will act in their own self interest (even if that self-interest is harmful to the association).

It's why I call provisions like this licenses to commit financial suicide. It's insulting that they're often touted as "consumer protection". They allow owners to damage property that - for many - represents the lion's share of their net worth.

There's a condo community in my area that's on the long, slow slide to being unable to pay the bills. They voted last year to underfund their reserves (something that's required by state law - lawmakers allow us to make short-sighted decisions, but we can't pretend that we don't know). So the financial hole gets deeper as time passes. Eventually it will be deep enough that owners won't be able to close the gap. And they'll probably have trouble selling their condos if banks are unwilling to lend money to buyers. Then the investors will move in, which I think is the end game for a lot of these communities - at least the ones that are still structurally sound. The ones that aren't structurally sound will probably end up being torn down and re-developed.

This process will take money out of the hands of those who didn't have much and put it into the hands of those who already have a pile. Poor financial choices are a luxury that those of modest means can't afford.

70% funded means the HOA has insufficient funds to meet its liabilities. Even if the assessments are raised, maintenance is likely to be deferred because of inadequate reserves. And, that doesn’t account for unexpected expenses which always occur whether you live in a condo or own your own home.

If I lived in a 35% funded condo such as yours, I would call a realtor and sell ASAP. You have gross mismanagement,

Just curious: did the membership vote on adding the "feature walls"? I assume not. Or at least nobody spelled out the true cost of these lovely walls.

I've mentioned a condo community in my area that is on a long, slow slide into insolvency. That is, they're in a financial hole, and the hole gets bigger every year until at some point, owners won't be financially able to catch up. I suspect they're close to that point right now. This whole mess started some years back when their board decided to "upscale" the community by hitting the reserves.

Communities can make dumb decisions for a while. But there is a window of opportunity for course correction that closes sooner than people think. The longer you wait, the more painful financially it will be - up to the point where the membership literally can't afford to do so. A lot of Florida condo owners are finding this out now. Stroll around the web and you can find videos of owners wailing because they have to come up with a $50,000 special assessment. And they're having trouble selling because there's an oversupply of condos on the market now, and nobody wants to buy a sinking ship.

The thing to remember about reserve funding and all the percentages that are tossed around:

* It's all an educated guess based on conditions at the time the study was done.

* These conditions will change.

* So "fully funded" is also a guess and may give people a false sense of security.

* You aren't going to have to replace all of your reserve components at once. Probably. Some reserve projections go out 30 years or more.

* If you do have to replace everything at once, you're talking about a catastrophic event. Insurance will probably come into play, although that's less of a sure thing than it used to be. If the entire community is damaged or destroyed, the membership may very well opt to not re-build. (Condo CC&Rs talk about that.)

* At any rate, reserve studies assume some level of predictability. They're not very helpful when you're dealing with the unexpected. Unfortunately, the reserves are often tapped as a result of unplanned events (eg. a sewage pipe collapses). Even if the insurance company pays, the association still has to fork out the deductible - and many of us are raising our deductibles to keep premiums affordable. It's a sensible strategy, but it may not work out as planned.

* In other words, stuff happens.

Keep in mind that it is the board who identifies the components that go into the reserve study.

A reserve specialist might ask, but it's the board that says the item is or is not to be considered part of the reserves.

There are, of course, guidelines to help a board make that decision.

I know my previous associations first study did not include everything as we forgot road signage and other minor items.
Unfortunately, those minor items add up. To this day, I doubt that that reserve study has included setting money aside for replacement trees when one is removed (as the county requires landscaping be replaced according to the plans on file with the county or pay to have approve changes to those plans).