Creating an Initiative

This is one of several posts about my first six months on the board of this HOA. I created this post on April 27, but subsequent events have required that I modify it, and so posting was delayed. I'll simply state that it has been an extremely difficult six months.

I have put a separate post containing my 6-month summary with observations on "hold" because I think it's useful to provide some background information. I also put it on "hold" because of some pending changes on the board.

I'd like to make this very brief. However, it is necessary that I provide some background information. Members of the board have objected to my sometimes lengthy presentations. However, keeping people informed means sometimes doing a lot of work to extract "information" from "data" so that an informed decision can be made. We're all busy, and if we are operating from preconceived notions then it is sometimes impossible to create change, or make good decisions if information is not available. On making the formal presentations, my goal is and was to present sufficient information to support an informed decision by the board.

I realize this post is not my best work. My work on the reserve study was very good, but took several weeks to prepare. Preparing the monthly A&M reports also requires quite a bit of time. Time spent with management, maintenance and other contractors. Time to do the surveys and walk the grounds and catalog my notes, time to prepare the spread sheets and time to do the background research. Then more time to distill all of that into "short" reports of six to ten pages.

This post is a less formal presentation.

First, Setting the Stage.
This association is an unusual one. It's a large and diverse PUD. So the basis of our costs is quite broad. This HOA is also 30+ years of age. We are in "middle age" and so, some of the things that previous boards could take for granted, can no longer be. At one time, it might have been possible and acceptable for a board to operate this association in "caretaker" mode. Do a budget, pay the bills and monitor that budget, welcome new owners, and deal with owner issues as they occurred, etc.

In 2007 something happened to change all of that. It was and is the worst recession since "the great depression." It occurred in tandem with the bursting of an unbelievable real estate bubble. For nearly a decade, people piled into real estate, propelled by popular TV shows such as "Flip," Realtors, late night "Infomercials" and cheap credit and questionable mortgage practices. During that same time, some owners too were lured by easy money, turning the equity in their units into "piggy banks" and using the proceeds to pay necessary bills, but also to purchase vacations and "toys." Then the music stopped. The mortgage brokers, Realtors and bankers took their profits and ran, leaving the "owners" who had signed all of those contracts, to deal with what had been created, which was an incredible mountain of debt. It also left associations, such as this one, to deal with the aftereffects of the financial carnage, and the emotional distress of those who were victims of the situation and sometimes victims of their own greed. It may have seemed to be "easy" or "free" money, but it wasn't.

It's fortunate for this association that during the "run up" period of the real estate bubble, that our management and board shifted to create a reserve plan, and adjusted fees to fund it. After a decade, it was nearly completed when the bubble popped. Note that I am talking about the "plan" that was enacted in the period 1999 to 2008. The formal "reserve study" this association undertook in 2010, which I once described as a "debacle" and has resulted in ill-will on the board, and caused some on the board to vilify me, that is another matter. In some respects that study simply validated what that previous board had done, and indicated that more financial work remained.

By 2008, some of those debt strapped owners were probably in a panic. Loans began to reset and the real estate term "underwater" became a reality. With the stock market crash, retirement plans were hit. There was shock as brokerage statements were opened and revealed a decrease in value of 30% or more. Credit cards began tightening limits, effectively cutting off credit to cash strapped owners and small businesses. Unemployment soared, and millions more found themselves among the ranks of the "underemployed" and working fewer than 40 hours per week. CD rates tanked, cutting off a source of supplemental income to many savers, including seniors, and also a source of revenue for this association. One by one the props were removed. The 5.8% Social Security Increase announced in the fall of 2008 was probably spent to make up income shortfalls. Then in the fall of 2009 the Social Security Administration announced a 0% COLA increase, and did so again the following year. It was the "reset economy" and a time of "belt tightening."

Real estate shifted from a cash cow and a potential money maker to a real burden. Lots of people felt that they had been duped. They turned on anyone they could, and that included this association. The party was definitely over. Lots of people who expected to sell at a high price in 2010 and beyond, now find that they cannot. It's 2001 all over again and many dreams have been crushed.

There were and are upset people. As a board member recently told me, he/she ran for the board because "some people hate it here." This prompted me to send the board some information on the "emotional toll" of this recession on owners. We did not create this problem. Lots of greedy people did, and a lot of people got swept up in the exuberance. "I don't need an emergency fund," "I don't need a savings plan" and "The good times will never end, it's the era of the 'new moderation'" they said; now they have nothing. It is, however, expected that "someone else" will clean up this mess, and that includes the majority of our owners, and both current and future boards. Did we step up to the task?

In 2008, this association made a serious miscalculation, and by that, I mean both the owners who created a new board, and that board. I can only assume that everyone miscalculated the breadth of this recession. With that view the decisions would seem appropriate, including dismantling the old board, creating a neighbors club, have an annual picnic, and spreading a lot of mulch, among other things. Good things, I guess. A moderate was appointed president until the dismantling of the board was completed.

Unfortunately, for this association, the economy did not agree with the rosy assessment of the situation.

Unfortunately, the newly authorized reserve study didn't prove we were over funded, as was apparently expected. That pile of cash in our savings accounts can be misleading, if the board cannot look more distant than one or two years into the future. The reserve study instead substantiated the earlier position of management that our capital projects needed a cash injection; i.e. a fee increase for reserves. I've never gotten an answer from management as to why they "flipped" and recommended a 0% fee increase when the new board came to power, even though the documentation submitted to the owners indicated that was the wrong direction. However, there is a ready explanation. Our professional managers, maintenance and every vendor of this HOA is at the beck and call, and is employed at the whim of the board. The board is completely responsible for all hiring and firing. The board makes all decisions of substance. It was the board that set the tone, and I surmise it was the board that insisted that a 0% fee increase was perfectly adequate. It was a gamble on the part of that board, with the apparent expectation that a reserve study would support that decision. The reserve study did not. I know, because immediately on becoming a board member I  spent about 60 hours going through that labyrinth. Using it as a beginning, in consultation with management, I created an independent and second, realistic financial framework for this association. With management's appraisal of the reserve study, my framework and that study, I was able to accept a "compromise" reserve budget for 2011.

I was not able to accept a 3% budget that "kicked the can" down the road to another board. There should be no room for politics in this association. Last year, an owner approached me and stated just that. They also said "At one time there was no politics at BLMH, but that is no longer true."


Second, Why "Now?"
The association miscalculated the severity of the situation in 2008 and again in 2009. The economy did not right itself. Foreclosures and delinquencies increased.

The "neighbors club" did not expand as expected, and became instead a sounding board for a few owners, putting the board in a delicate situation. Were those few owners in the club truly representative of the association owners in the whole, or was it really a subgroup with an agenda? I decided to keep away, and avoid possible entanglements.

To answer the question "why now" for an initiative, it's necessary to consider the alternatives. We can continue in "caretaker mode" and I can continue to prepare 10 page "Architectural and Maintenance" summaries for the board, while the board waits for owners to come to meetings and tell us what to do. Or, we can become leaders and do the job we ran to do. As I have stated, in writing, many times to the board "I came here to work."

A few on the board have apparently decided that is not why they are here.

As to "why now" it's because balancing a contrived budget in the face of rising foreclosures and delinquencies, and the reserve study, is becoming more difficult. Reality is not bending to match our whims, or our perceptions! We are running out of time.

Third, Why an "Initiative."
It's the time to create one. It will take the involvement and dedication of the entire board. As I stated repeatedly, it will take each and every one of us to generate this. It might come as a surprise to the reader that a few weeks ago, I approached the entire board and stated, in writing that I was considering resigning from the board. I stated that I (hopefully) would not have to take such a drastic step. However, I didn't quit, I didn't give up, and I didn't stop, and neither did two other brave souls on this board.

Make no mistake, this is a choice, and the members of this association, or as I prefer to think of them, our "investors" have put their trust and a large portion of their "net worth" into this association. Why would they do that? Because they purchased a place to live, and because they understand both the opportunity and the potential for this association. Would I want to walk away and "leave them hanging?" Not willingly. As a board member, this is about personal commitments. I made a commitment to this association and I intend to do what was necessary to honor that commitment.

Being on the board of an HOA is a choice. It's an opportunity to "be of service." This association was here before I ever purchased a unit. It will be here after I sell mine and move on, to another place, or to "the hereafter."

So, the question is, what are we going to create from the trust that those who have taken the risk to invest in this HOA, and have empowered us to do?

A "pending former" board member recently said to me "Some people told me that they hate it here." I choose to be on the board for the 90% who like it here, chose this as a place to live, and are willing to entrust the decision making about a substantial part of their "net worth" to others who are willing to be truly of "service to others" and to this association.

If the board is resistant to collect the fees required to do necessary projects, then why are we proceeding with a roofing program or a driveway program? These large capital projects will take a number of years, and more funding. To assure that they are completed and that every owner gets a roof and a driveway, will require that sufficient funds be collected in the near future to accomplish that. It will require that the costs be re-evaluated each year and then the fees adjusted and collected to accrue the necessary reserves. If we won't or don't do that, then I'm simply spinning my wheels on the board. 

Examples
As A&M Director, I can take some initiative in projects. However, most decisions require the involvement and consent of the entire board. I can direct management to get bids. However, it is the entire board that decides if money is to be spent on these projects. We have some repairs that have been delayed for about 5 years. We have some owners with "drainage issues" spanning years. What's the purpose in these delays?

Currently, stream #1 is not in operation. A 10 foot deep pit housing a pump valued at between $3,000 and $4,000 is deteriorating. If it collapses, that pump could be ruined. Should the pit be replaced, at significant expense, or should we delay a year and "take a chance" that the pit will not collapse and ruin that pump? Pending a board decision, that stream is waiting. As A&M Director, I can have it started. "Not spending money" is easy, for a time. But if the pump is ruined, who is responsible? Will the board then look at me, should that occur, and say "How could this happen?"

Currently, a portion of stream #2 and walks is in need of preventative maintenance requiring substantial repair. Wooden structures are aging and deteriorating. Several boards, over a period of years, have deferred this to future boards. Are we to proceed or are we to simply shut down the walkways? This will require some discussion about the future of the streams at BLMH. That discussion requires some background work on the part of all of the board members, so an informed decision can be made, and so a consensus can be reached. This has been avoided for between three and five years.

Last year, two garage floors came to the attention of the board that were is poor condition. Management provided several bids and the board began voting to replace them. I took a look at the two, and provided photos and a summary to the board. However, I also asked the board to "reverse course" and delay a year. A good decision would have been to make those repairs. So, why my concern? There had been no survey of the garages, and so it was unknown if the two were the worst, or among a much larger group all requiring replacement. (All owners should be treated equally). I knew that material prices would increase. But how many garages were were actually in this "necessary to replace" group? The board agreed do delay.

Several weeks ago, I accompanied management and we did that survey. We discovered three garages in very poor condition. We also discovered eight in poor condition, which included the two from the previous year. In total, eleven garages are in poor or very poor condition. I informed the board that I wanted to replace all of these garage floors in 2011. There was no direction and no consensus. I instructed management to get bids to do this work. However, the board may decide not to proceed, or to proceed with three, or six or whatever. If all are not to be replaced, then by what means are we to select which garage floor is to be replaced and which is not.   It's the old question "are we creating winners and losers?" It's also a question "are we kicking the can down the road?" and creating issues for future boards?

Some decisions need to be made and some priorities should be set. This is a difficult job. It can be made more difficult but why should it be? Should the board be a constant reaction? Should the board be a constant waiting for an owner or owners to direct us? Should we be "tied in knots" because of the perceived personal situations and problems of a few? If a board cannot agree on priorities or the association direction, then getting the job done becomes impossible.

Comments, Corrections, Omissions, References

Note 1. It's useful to have information available to keep all of this in perspective. For example, CoreLogic recently published data that about 26% of the mortgages in the US are "underwater." That is to say that the dwellings are worth less than what the "owners" owe the bank. This also means that about three out of four mortgages are not "underwater."

It is estimated that about one third of all homes in the US are owned outright.

So about 17 percent of the homes in the US are underwater. This problem is about a small group, not the majority in the US.

There is no current information about units underwater at BLMH. However, it is possible to determine how many units have mortgages.

Note 2. This post is longer than might be necessary, but I assume the reader may not visit this blog very often. So I decided to include background information which might be obvious. In a year or two, it won't be and some details will be lost.