A reader recently asked "Where do the fees go?" The question was also asked "Are owners happy with the fees?"
I suggest that anyone interested in fee details contact the management of the HOA of interest. This is directed to anyone contemplating HOA ownership.
The official website for the BLMH association is:
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Why are the fees in an association what they are?
In my opinion the fees in any association are a combination of planning, long term trends and current financial reality. For example, the level of fees over a 10 and 20 year period. I've written about the challenges and obstacles to setting reasonable fees in a HOA. It's been my opinion that there has been a tendency in HOAs to attempt to "kick the can" down the road.
Fees at an HOA may either be "as high as they are" or "as low as they are" because of recent board action. By recent, i mean within the past 15 years. I realize that most of us have a tendency to ask "Why are fees so high?" However, it might also be prudent to ask "Why are fees so low?" In other words, the real question to ask is "Why are fees what they are?" I also suggest that owners or those contemplating a purchase in a HOA consider long term maintenance and where the HOA is in such planning.
Of course, for a time any HOA can depress fees. In other words, keep them artificially low. This can be accomplished several ways.
- Defer maintenance and capital projects for another day.
- Ignore the realities of long term maintenance and project costs.
- Fail to collect adequate fees for long term projects.
- Lower fees artificially with the assumption that a financial solution will miraculously occur some day in the future. Arguments to do this may include "The economy will be better next year" or "Owners will be better able to deal with fee increases 2, 3 or more years in the future." A board may take the position "Some owners can't handle a fee increase so we won't have one."
The problem is simply this. There will never be a good time to raise fees. Deferring fee collection merely transfers the financial burden onto future owners. By "future owners" I mean those who haven't sold their units by the time the fee increases ramp up and roll in. Can that happen? Would owners argue for lower fees hoping to clear out and leave their neighbors "holding the bag?" I've read or heard more than a few "HOA Horror Stories."
Deferring maintenance merely allows problems to compound. Ask any competent and truthful manager how difficult it is for an association to catch up once they fall behind and the answer will be "difficult to impossible." Delaying fee increases may require unusually large annual increases for a period of years. By "large" I mean fee increases greater than 5% annually. Deferring fee increases may require special assessments. The farther behind an association falls, the more difficult it becomes. Compounding deferred maintenance and deferred fees is a formula for disaster. Yet, that is precisely what some owners demand and some HOA boards create. Why would anyone do this?
It's important to remember that HOA boards are volunteers and owners. Some run their personal agenda contrary to fiduciary duties. Some do their best and yet, we all make mistakes. When these mistakes come to light, what is a board to do? The "old timers" may prefer to avoid responsibility. The new guys or gals on the board may not want the flak. After all, who wants to be the bearer of bad tidings? New boards may realize that they did not create this situation which was a decade or more in the making. They may be unwilling to take on the establishment. They may lack certainty. So it is likely that problems even if detected may not be dealt with, or may be dealt with in a gradual manner. Of course, the longer one delays the greater the difficulty.
How is it that owners ignore these problems? HOA owners may realize that "the emperor has no clothes" but they want their property values to be "as high as possible" and so some may choose to ignore the problem. Fee increases may be detrimental to sales. Owners may choose to promote a "feel good" board or a "tell us what we want to hear" board, hoping that the music won't stop, or that the "good times" will exceed their lifespan. Some may choose to simply pass the buck. I recall in 2009 there were a few people at BLMH who said "Elect Norm and your fees will go up." This attitude was a long term pattern and one of the reasons our reserves were what they were in 2001. When I asked BLMH owners about fees in 2001 some had the opinion that that "Our fees are too high." At the time I recall the fees were about $195 per month, and reserves were less than $400,000. According to my records fees were increased to $204.64 per month in 2002.
If an association allows itself to fall into the "kick the can down the road" trap, what can it do? It's my understanding that some HOAs have dealt with this problem by turning the maintenance of "limited common elements" over to the owners. For example, costs associated with unit patios, decks, garages and driveways. Of course, this is in reality a stealth fee increase.
Delaying maintenance or capital projects may be accompanied by an attempt to keep fees artificially low. After all, if the money isn't being spent then owners will argue "Why is it being collected?" That is a reasonable question to ask. Here at BLMH in 2008 the question was posed as "What do we get for our money?"
In older HOAs the fees are the consequence of decades of decisions. These decisions were made by owners. Owners elect the boards and owners are ultimately responsible. So if you are contemplating purchasing in a HOA it's my suggestion that you look at the long term numbers and meet with the board and ask your questions. This will provide you a much better idea of the temper of the boards and of the owners. Don't allow rules to stop you. While only owners are allowed to attend association meetings, there is no reason a prospective buyer can't request a brief meeting with the HOA board prior to the scheduled meeting.
At BLMH some of the "old timers" attempt to avoid responsibility for the consequences of their actions. The "old timers" are those who have been here for 10 or more years. Some argued against higher fees and in favor of lower fees for decades. They did so in 2001 and in 2008 and did their best to put in place boards to do just that. They include those who said "We have enough money" and some said "Elect Norm and your fees will be higher." In other words, their position is simply to elect anyone who promises lower fees. And for a time at BLMH the owners aligned and did just that. The consequences of inadequate reserves and a lack of planning in any HOA will always be something for future boards to deal with.
To answer the question "Why are my fees what they are" at an HOA requires a historical perspective and for older HOAs it requires about 20 years of data. Why 20? That's the lifespan of roofs, garage floors, patios, decks, streets and so on. Only with 20 or more years of information can one determine the financial reality. It's useful to know that reserve studies span 30 years, as does reserve planning and saving. There is a very good reason for this.
Honesty and Frankness are the Best Policy
I think the best way to answer owner questions is via factual, in-depth newsletter articles. Every owner gets the same information. All owners, be they living onsite or on the other side of the world are given the same information. That's what I've attempted to do here at BLMH. This has not always been greeted by owners. It's my understanding that some owners have said:
- I don't have the time to read the newsletter.
- I don't understand the information. It is too complicated.
- I don't like the information and I refuse to read the newsletter.
- I don't like the author and I only read things written by people I like.
Running an association is not supposed to be a popularity contest. Newsletters are not supposed to be the "good news" paper. Things sometimes go wrong. HOA boards sometimes have difficult decisions to make. In today's economy HOAs do have foreclosures, delinquencies and so on. There are also expensive failures, be it fire, storm damage, trees falling, nearby flooding, water main breaks. liability suits or whatever. These things are all somewhat unexpected. When they occur any HOA in which they occur must deal with them. Nevertheless, providing insights during HOA meetings or via letters or a newsletter can disturb some owners. Some owners deal with this by attempting to elect the "good news" people.
Some catastrophic damage may be covered by insurance, but there are deductibles to contend with. Fire, etc. may result in unusual or unexpected insurance increases.
Unusual winter events can result in higher snow removal costs, ice damage, etc. So what type of winter should the board plan for? The same as last year, a milder one or a more severe one? I sometimes think owners argue a solution to this question based solely on their perspective about fees. An owner who is in favor of lower fees may argue "We are spending too much on snow removal." A board member tells the story of an offsite owner, an "investor" who argued that our snow removal efforts were excessive. He lived offsite and it was his perspective that plowing at 2 inch depth was unnecessary. Of course, he would not have to drive his car or walk in the consequences of what he was promoting.
Some owners simply argue for lower fees with the expectation they won't be living in the HOA in a year or so. For them, reserves are a waste of money. A board member tells the story of the owner who was selling his unit and came to an association meeting and demanded a reimbursement for his portion of the reserves. For others who contemplate moving on, the position seems to be "Why save for a future I will not benefit from?" A lot of people apparently thought this way before the housing bubble popped. At that time a lot of HOA owners expected to cash in and move on. Low fees made selling more attractive. Low, current fees would place a larger future financial burden on those who stayed or those who purchased. But who cared?
It wasn't simply mortgage bankers and real estate brokers who were greedy. A lot of HOA owners joined the frenzy.
An Unknowable Future
All HOA maintenance and repairs must come from owner fees. During the 2013 annual meeting I placed a crystal ball on the podium. That was a tongue-in-cheek effort to say "We can't predict the future." What any board can do is plan and prepare for a possible future. Owners need to ask responsible questions about such plans. Board members should be pressed to provide honest answers to the questions. Doing so may make them better board members.
Of course, some boards are comprised of politicians who have made promises. Some boards realize there have been mistakes but would prefer to sweep the consequences under the rug. Some boards lack the courage to be honest with owners and take the flak. Some boards are incompetent. I suppose some are completely unawares or are comprised of owner hell bent to keep fees "as low as possible" until they can sell their unit and escape.
Some board members strive to avoid confrontation. They tend to agree with owners or simply avoid answering certain questions and will work diligently to avoid provoking angry owners. In extreme cases board members simply want to "look good" and so the owners are told what they want to hear. So if an owner says to a board member "Aren't our fees too high?" that board member can respond with what is wanted to be heard. Of course, in doing so a board member is dishonest and isn't performing their fiduciary duty. That's why it's common knowledge that "There is no room for politics on a HOA board." Nevertheless, such problems do occur and some boards have politicians. HOAs get the boards they elect and deserve.
Banking Disaster, Real Estate Implosion, Foreclosures and Delinquencies
A good example of an "unknowable future" is the banking crisis of 2008 and the subsequent failure of the residential housing market.
Some people argue this was "unknowable" but I disagree. There were more than simply a few very concerned professionals out there, but they were drowned out by the ebullience. For example, by television programs the likes of "House Flippers" and the National Association of Realtors. One of the favorite arguments of some of the owners here at BLMH when possible negative consequences are discussed is "It can't happen" or "It won't happen here." I disagree. We don't live in a fishbowl and we are subject to the financial rules of our economy. That includes lawsuits, delinquencies, foreclosures, financial breakdowns and so on.
However, one thing I can agree on is the consequences of the "Financial Panic of 2008." Some people saw this coming but what could not be predicted were the precise time and consequences. Some of us knew it would be ugly. But how ugly? So even if you or I saw this coming (and I did) no one can predict the future. So no one can state predict precise dates and the specific severity of the crisis when it arrived. In 2007 I found myself in a difficult predicament. I saw the problem, knew it was really close to the "pop" but didn't want to scare the hell out of people. So I continued to advocate caution, planning and preparation for a financial disaster. However, I did not counsel anyone to prepare for "the end of the world as we know it." In my opinion to do so would have been irresponsible. I did follow my own advice.
In 2008 when the bottom dropped out, HOAs found themselves in a terrible situation. But oddly, here at BLMH the owners elected a "feel good" board. I guess that was a misguided attempt to avoid the current reality. Here is the reality experienced by many HOAs for the past six years:
- Interest rates plummeted and so the return of those reserve savings also fell. "Safe" instruments such as CDs and savings accounts rapidly fell to returns of less than 1%. Savers were punished and HOAs found they had to increase fees slightly to offset this loss, or implement "austerity programs."
- Marginal buyers who stretched to purchase in a HOA found themselves underwater. Many had special mortgages which were pegged to the value of their home or unit and would reset to higher interest rates if the value to loan balance reached a trip point. When housing values plummeted that's exactly what happened. A job loss or job curtailment made it impossible for them to meet their financial obligations and that includes paying their HOA fees.
- Some older HOA unit owners had used the value of their units as a piggy bank and took second mortgages or equity loans and spent to the hilt. Never mind that in retirement their Social Security, pension and savings were inadequate to pay back. Rising values would "buoy all boats", wouldn't it? Well, it didn't and these owners found themselves overextended and financially strapped.
- In extreme cases, HOA owners foreclosed or signed a "deed in lieu" and turned their property over to the mortgage holder. Prior to that they stopped paying their fees. This is a "work in progress" and the foreclosures continue to this very day.
- HOA legal fees increased. Some HOAs which seldom used an attorney to deal with delinquencies found themselves paying thousands of dollars annually in legal costs never anticipated.
- The courts, overwhelmed by foreclosures delayed cases. Besides, it was politically unacceptable to toss voters into the streets. So foreclosures dragged on for months and years. Other HOA owners shouldered the burden of financial responsibility to make up for those lost fees.
- Banks didn't help. On foreclosure, some also failed to pay the fees for the units they took over. They were reluctant and unwilling owners. Under law, they weren't required to pay all of the fees.
- Owners who had planned on a sale of their unit in a year or so found themselves unable to do so at the price they expected. "Flippers" who expected to roll out and into another unit also found themselves trapped. In some HOA this made for an ugly owner body who were upset and angry. Boards found themselves trapped between angry profit seeking owners and complacent owners who simply expected a place to live. It got really ugly at some HOAs.
Believe me, responsible HOA boards everywhere have been working diligently for six years to deal with these universal problems. The ramifications continue to this very day.
On assuming a board position at BLMH I ran independent tracking of delinquencies. I have no interest in "who" is delinquent and I do expect each and every one of my co-owners to do what is necessary to meet their financial obligations. Living in a HOA is an opportunity with a cost. We are all equals and so as equals we are all, each and every on of us, to pay our monthly fee. Period! A former president, who had been run off in 2008 returned and I discussed my concerns. We collected archived data and I prepared a new spreadsheet for board use. In 2010 we began presenting that monthly spreadsheet to the board. This supplemented the data provided by management and included colorful charts of historical data from January 2008 to the present. This information facilitated the taking of some extreme measures by the board, but not all board members were happy. Making difficult decisions is never easy. After all, these were our neighbors. However, no one was willing to pay substantially higher fees and every owner in a HOA has a financial obligation to that HOA. When I suggested that a "hat be passed" to help distressed owners, the suggestion was dropped and there was not a single taker. I took this to mean that it was expected that someone else should pay the tab.
Under the Illinois Condominium Act, all owners are to be treated equally, and all are to pay their fees. That was not a popular position and some board members clearly had no intention of enforcing such equality. I upset a few with my written emails about "upholding our fiduciary duties."
This is a HOA which had experienced a severe board earthquake in 2008, so we could have "change." I am of the opinion we got far more change than anyone expected or wanted. Certainly the proponents of "change" expected that our fees would decrease because our "fees are too high." But reality intervened.
Not all of this was bad. The BLMH HOA was able to shift from mulch to stone over the prevailing complaints of some noisy owners. Demands for more colorful plantings were trumped by financial reality. The HOA returned to a "landscaping" path and owner complaints about a lack of flower gardens were overruled by the majority. The BLMH HOA also shifted from a social organization to a business.
Yes, change can be very difficult! But there can be opportunities and most owners do want "fees to be as low as possible" and expect their boards to take the necessary steps to do that.
The physical make-up of an association can have significant impact on fees. For example BLMH is somewhat unusual. This association is also a PUD, or "Private Urban Development." As a consequence owner fees are required for reserves and maintenance of streets, exterior lighting and even the water mains. The fees pay for snow plowing of 84 driveways and the streets. Fees pay for street lighting, street cleaning, patching of asphalt and the curbs, too. This association is large and I have been told is about 40 acres. It includes portions of two lakes, 44 buildings, about 800 trees, 15 acres of turf in extensive grounds, three streams and waterfalls as well as concrete walking paths throughout the association. Fees include water for the grounds and the streams and the maintenance of them.
Some associations have a single large boiler for providing centralized heat and hot water or a wonderful stone facade. Some associations maintain the windows. Replacement of these can be very expensive. I have acquaintances who owned units in these types of HOAs. They each had special assessments to deal with boiler replacement, exterior masonry repairs or window replacement. The cost of these special assessments? $10,000 to $20,000.
Fees include both normal maintenance and reserves for capital projects. At BLMH normal maintenance includes landscaping, carpeting, electrical costs, water, hallway and exterior painting, exterior building repairs, snow removal, streams, management, accounting, insurance, postage, mailings and so on. The BLMH association had a reserve study in 2011 to aid the board and management in acquiring the necessary reserves. The most recent study included a 30 year projection. When is the last time your HOA did a reserve study? Who did it?
At BLMH reserve expenditures include replacement of walks, streets, curbs, roofs, driveways, patios, common area waterfalls, streams, decks, gazebos and water mains. The association is in the midst of a multi-year re-roofing of the 44 buildings in this association. That project includes improved ventilation, insulation, relocated gutters and downspouts. The improvements require drainage modifications to move water away from the buildings which is deposited by relocated or new downspouts. These improvements are intended to extend the life of the new roofs and driveways and to reduce annual maintenance costs.
Certain expenses can be managed in various ways. A significant change at BLMH was a shift away from mulch to stone around buildings. This stone is part of the drainage improvements. It's my understanding this association once spent about $18,000 per year on mulch. Stone is a much better use of association funds, in my opinion. It does not degrade, does not require annual replacement and doesn't float on water and fill sewers or settle alongside buildings. Mulch carried by rainwater to driveways, walks and streets is simply another maintenance expense to deal with.
Annual Fee Increases and Special Assessments
For 2014 the BLMH fees increased approximately 1%. That means I'll be paying $3.46 more each month in 2014. Why? The City of Wheaton has ramped up water rates and a portion of that fee increase will go for that purpose. A ComEd electricity utility increase was approved for 2014. Approval occurred in December, 2013 after the annual association budget planning workshop. Inflation is predicted to be about 1.8% in 2014 and that may influence other costs.
The BLMH association is replacing all roofs, driveways upgrades are about 80% complete, garage floors are being replaced where necessary. All patios and decks were recently improved and the concrete patio replacement project was completed in 2012. The association has a major street replacement scheduled for 2014, etc. Reserves will pay for these things. Every owner in any HOA needs to ask the question "Are reserves adequate and are planned reserve collections sufficient?" They should ask the board and management to prove these numbers. Simply being told "Oh, yes, we have enough money" is not a responsible answer. I can say that from practical experience. If you do not know the detailed answers then you might have a rude financial surprise in the future. However, it is also the responsibility of owners in a HOA to read all of the documents. A failure to read with an expectation that the board will read them to you is not a good use of board time.
It's my understanding the BLMH association has never had a special assessment. For anyone considering HOA living there is a personal question to be answered. Do you prefer the lowest possible monthly fees or special assessments? It's a choice of financial stability or special assessments. Owners must ask themselves "Do I have the financial discipline to save for special assessments?" Most owners apparently hate special assessments. Avoiding special assessments requires long term planning and savings by the HOA. Savings can only be accomplished via fees. So fees may seem higher than expected if they include realistic reserves.
Alternatively, owners can argue for a bare minimum of reserves. To do so can be a decision and a vote for special assessments if capital projects are to be accomplished. Driveways, streets, sidewalks, streams, large decks, landscaping (replacement of trees, etc.), patios, roofs and garage floors are expensive. How much does it cost to maintain or replace these things? The BLMH association collects about $1190 per owner per year for all reserve items. That amount was determined in part by the immediate needs of roofs and driveways. In reality, $1190 does not go that far. But some have argued we don't need to collect this amount, we can get away with less, or by looking at the balance sheets and the bank statements have argued "We have enough money." Really?
If a board collects sufficient fees over very long periods of time, it may achieve the lowest possible fees and avoid special assessments. For example, if roofs can be expected to last for 20 years, then it is necessary to collect the value of 1/20th of the replacement cost of all roofs each year and place that into reserves. Add to this the equivalent value of asphalt, garages, etc. and you then have the best method to avoid higher fees and future financial "surprises." In reality, our association doesn't replace all roofs in the same year. We are currently replacing 6 roofs per year and a complete project will require about 7-1/2 years. In an ideal world the reserve contributions are staggered to match the 20 year anticipated lifespan.
On the other hand, associations can hold fees low and simply deal with financial "surprises" by charging special assessments. Let's assume that a HOA decided to collect half their reserves via fees and rolled the dice and collected half via special assessments. What would that look like? Here at BLMH it could require regular "special assessments" of about $3,000 every 5 years. Of course, if anything went wrong with this planning then the special assessment would be higher.
Our association has taken the position that special assessments are to be avoided. They are the means of last resort. It is impossible to predict the future and so I don't think any HOA can make the statement that "special assessments will never occur in our HOA." However, I do think they can be avoided and BLMH has done so for the last 30 years.
So what would a $3,000 special assessment cost an owner? It would be about $57 a month for a 5 year loan. $6 per month of this is interest at 5.0%.
Some HOAs apparently deal with their finances by doing just that. Of course, the owner must save for that special assessment or can take out a loan. This is why I have heard this approach called "smoke and mirrors." HOA fees are lower but owners get a "back door" demand which increases the actual fees paid by the amount of that special assessment. In my example, that's an additional $57 per month. So which is better, "lower" fees with special assessments or fees with the true costs of reserves and projects built in? Of course, if the HOA budgets and manages their finances then there is no interest to pay the bank for loans. In other words, the monthly cost to owners is less if special assessments and borrowing can be avoided.
Special Assessments - Add to Your Monthly Fees
If owners argue for even lower fees for reserves and the board complies, then it is possible that special assessments would be much larger. I have read about and am aware of HOAs that have in recent years has special assessments of $10,000. The approximate monthly payment for 60 months would be $188.71 at 5% per year interest. Of course, owners could pay any such assessments via their credit card. Today with a 14% annual rate, that would require a $233 monthly payment. At 18% it would require a $254 monthly payment for 5 years. .
A $20,000 special assessment if paid off over 10 years at 5% will cost the owner $212.13 per month.
Of course, at the time of a unit sale the seller would be completely responsible for any outstanding balance.
A HOA Mortgage - Add the Repayment to Your Monthly Fees
Several years ago, some owners were pressing for the BLMH HOA to take on a mortgage to cover anticipated roof work, driveways and so on. Some board members weren't convinced and I was one of them. I prepared a financial plan and presented it to the board president. i also published a similar document on this blog.
The bottom line was straightforward. A mortgage would have to be repaid by the owners. A mortgage would require the monthly payment of principal and interest. That interest would be added to the monthly fees. In other words, a mortgage might be a reasonable solution but it will require higher fees than timely collections and accumulation of reserves.
Other board members also pointed out to owners that a mortgage could take a decade or more to repay. In other words, the owners who were promoting a HOA mortgage were in fact "mortgaging their future." To this day, I think some of the owners don't understand this.
Planning and preparation is the better approach. A mortgage, as is the case with special assessments is best held as a path of last resort. That is my opinion.
The Lowest Possible HOA Fees
Is it possible for fees to be even lower than the recommended minimum? The lowest monthly fees would include no reserves and no savings. Of course, that is not in accordance with Illinois statute. However, there are a lot of poorly run HOAs out there, if I am to believe what I read in the press. BLMH is operating in accordance with a 30 year financial and maintenance plan.
Our fees include reserves for capital projects and a 2011 reserve study is providing guidance to the board, as is professional management. I'd personally like to see an update to that study in 2014, and a closer look at the condition of some portions of the HOA.
Are owners happy with our fees? To be realistic, and I state this as an owner, we would all like to see "fees as low as possible." For a very few owners I suspect that their expectation is zero fees. Of course that's impossible.
Timely Project Completion and Accumulation of Fees
One concern any owner in any association should have is the timely completion of projects. Once a board undertakes a specific path, then that path must be carried to completion. In other words, the board is obligated to obtain sufficient funds and plan for such work on every building. All owners are to be treated equally. There are no exceptions.
This implies that a board should have a financial plan in place prior to beginning a multi-year complex project. Now that would seem to be common sense, but boards can underestimate the complexity or costs of projects and find themselves in a difficult position.
Roof replacements are an example. Once a HOA begins such a project it has made the commitment to finish that project and to have the funds sufficient to do so.
For example, at BLMH our roofing project began with a single roof. The pace ramped up slowly as the board accumulated the fees for necessary reserves to replace 40 large roofs and 4 smaller roofs. Of course, other work and maintenance had to continue. In 2009 3 roofs were completed, then 4 and for several years 6 roofs have been completed annually. The plan is to replace the roofs before major repairs are required and to do so at a pace which will not excessively deplete reserves. The board has set a minimum level for reserves.
At present about 56% of the roofs have been completed and the balance will be completed within three years if the board and the association maintains the current pace. In the process problem roofs have been completed. These are roofs tagged by roofers as being in need for "sooner" replacement and also those identified with leaks or other expensive problems. The board does have the option to repair versus replace, but at a current age approaching 20 years, doing so to a roof is probably a waste of money. It's useful to keep in mind the fact that a large project with 44 roofs can require 8 years to do. In other words, by the time the current project is completed at least one roof will already be 8 years old. Some of our roofs are over 20 years of age. The roofs are due for completion!
When the project began, some owners complained about whose roof was being done. It is no coincidence that some owners also stormed the board and one of the battle cries was "What do we get for our money?"
At the time, the BLMH HOA had experienced nearly 10 years of gradual fee increases. Some owners were unhappy and said so. The board found itself under attack and it was in a difficult position. This is a large HOA and a PUD. Streets, driveways, roofs, water mains, street lighting, decks, patios and streams, etc. all require savings. It seemed the board was playing financial "catch up" and in my opinion it was. Four boards have been taking this on for 6 years.
An improved newsletter and consistency have quieted some of the grumblers. I'm of the opinion that one mis-step by the board and I'm confident the complainers will be back.
The stress of dealing with the necessity to build up reserves has placed the board on the opposite side of the table from some owners. As one board member said "These are my neighbors." True, but that didn't prevent the neighbors from running off some of the board with some very vicious attacks in 2008. When it comes to money, "being neighborly" is an option. I'm of the opinion that the events of 2008 were pivotal in creating significant tension in the BLMH HOA and are one of the reasons the board is consistently understaffed.
Are Some Owners Gamblers?
That's a good question. I have read in HOA and financial publications of owners who obtained second mortgages as they approach retirement age. This implies they expect to have sufficient income in retirement to pay for that mortgage. I have also observed and read of owners who vehemently oppose fee increases. Unfortunately these same owners don't simultaneously argue for severe austerity programs. Everyone expects their street and driveway to be snow plowed, they expect the roofing project will include their building, they expect their building will be painted in accordance with the 6-year cycle, and so on.
Money collected should be spent to maintain the entire complex. That means that each owner is paying a portion of their fees each month for exterior and hall painting. Yet, it might be several years before the building in which they reside gets a new hall carpet, or paint or a roof. Here at BLMH I'm aware of one owner who objected to fees for repairs elsewhere on the property. In other words, some owners apparently have the opinion that any money collected via fees should directly benefit themselves and no on else.
That's not possible or permitted under the Illinois Condominium Act. If this were the case then if there were a fire in a building, then the deductible would be charged only to the owners in that building. Any tree maintenance on a cul-de-sac would be paid by owners on that street. Driveway replacement or roof replacement would be charged directly to the owners who reside in that building. Any work on the lakes or or shores would be charged directly to the owners with a lake view. And so on.
That isn't going to happen here at BLMH or at your HOA if your board and management follow the rules.
I suspect owners who argue to lower fees today because of their short term financial plans or problems are arguing to raise fees in the future, or are attempting to "pass the bills" to others. Of course, who would admit that they have financial problems? Who will be honest and say "I just want my needs taken care of, and I don't give a darn about the rest of the owners?"
HOA Boards are comprised of owners who donate their time and talents "for the betterment of the association." Boards take on the duties to see that the HOA is maintained and financially capable. HOAs can have boards that are gamblers, too. If your HOA does not have a reserve study, if it does not have competent professional management and if it doesn't have a plan, then I would offer the opinion that the board is gambling, and the owners too are "rolling the dice."
The Rise of the Investor
I have read about banks and investment firms which have moved into residential real estate. So too have individuals. This is apparently the consequence of very low interest rates, low or negative returns in bonds, concerns about the stock market, falling commodities prices and so on. Real estate has been a good deal and as I have written here, some significant returns on investment are possible.
Condominiums aren't apparently as attractive to the investor because real estate taxes and HOA fees must be contended with. For the HOA investor these are the possible costs in an association such as ours:
- Real Estate Taxes.
- HOA Monthly Fees.
- Possible HOA Special Assessments.
- Unit Maintenance, including furnace, A/C, plumbing and electrical.
- .Opportunity Costs.
Condominiums also have rules and regulations. Owners of units in condominiums understand that they have no direct control over their monthly fees. An owner can join the board and attempt to influence decisions. However, there is also state statute to deal with. Here it is the Illinois Condominium Act. Larger HOAs also have professional management and professional maintenance. These things all increase the costs for an investor via fees, and take the day to day control of operations out of the hands of the owner.
Individual real estate via homes or apartment buildings is probably the best way to realize maximum returns. After all, the owner decides on all maintenance and does not have to contend with other owners, state statutes or rules and regulations. In fact, the investor makes the rules because he or she has total control. No board, no licensed management firm, no reserve studies, etc.
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In a HOA, the tenant is entirely the responsibility of the owner. For an investor that means possible costs for rules violations. Tenants who are "good tenants" will operate as if they are surrogate owners. However, not all investors understand this and I state this from practical experience. I am aware of some individual investors who give their tenants a small financial incentive each month to deal with such things as applying snow melt, minor interior repairs and so on. However, that appears to be the exception and again, such financial incentives deduct from the bottom line.
I'm personally interested in observing how HOAs deal with the rise of investors as opposed to onsite or nearby owners.
Notes:
- According to the definition I am using I too am an "old timer" as I have been a BLMH owner for about 12 years.
- I purchased several years after a change in management. The BLMH HOA has been under a professional management. With a change in professional management in 1998 and closer financial controls, there was a change in the methods to determine budgets. Not all owners were pleased by this.
- Fees for the initial 5 years of this association fees increased at an average of 19.2% per year. In my opinion this is not unusual. The transition from developer to HOA owners is frequently accompanied by some difficulties in determining actual annual budgets.
- For the period 1983 through 1992 the average increase was 3.2% per year.
- For the period 1993 through 1998 the average increase was 3.5% per year.
- With new, professional management for the period 1999 to 2007 the average fee increase was 8.575% per year. I purchased in 2001 and closed in 2002. For the previous four years the average fee increase per year had been 9.25%. That's why about 33% of the owners I interviewed prior to purchase complained about the "high fees."
- In 2008 with a partial board change the fee increase was 5.5%
- In 2009 the fee increase was 5.1%
- In 2010 with the transition to the new board accomplished, the fee increase was 0%.
- In 2011 to correct for budget shortfall the fee increase was 7%.
- In 2012 and beyond fees have stabilized as the board realized that this see-sawing of fee increases was far too difficult for owners to plan for. Fee increases have averaged about 2.6% per year
- For the 2014 budget the fee increase was 1%.
- All fee increases are approximate. Actual owner fees are rounded per their percentage ownership. Several years ago (2010) and owner complained that the board had lied because his fee was not a precise 7% increase. The previous year the increase had been 0% and with a new board, a few owners apparently expected that fees increases would go to 0% and stay there.
