Real Estate Update Spring 2013

It's that time for a real estate update. Some continue to be discouraged because current prices haven't "snapped back." There are a lot of simple, common sense reasons for this.

There have been signs of life in residential real estate in Northern Illinois. However, while prices in some parts of the country have upticked in recent months, not all communities have experienced this. Yet, there is brisk sales activity in some communities. One nearby community has had 649 sales in the last two years, with only 251 currently on the market. In Wheaton, 1747 homes have been sold in the last two years, with 451 currently on the market. Prices are up about 6.4% over the previous year. and seem to be increasing.

Interest rates are the best they will probably be for some time to come, and have begun to increase. 30 year conventional mortgage rates with 10% down are running 3.5% to 4.3%. It's been reported that new home construction has reached a point where there have been shortages of some materials, prompting manufacturers to open idled assembly lines for such things as plywood. According to the National Association of Home Builders as quoted at Morningstar April 15: "Many builders are expressing frustration over being unable to respond to the rising demand for new homes due to difficulties in obtaining construction credit, overly restrictive mortgage lending rules and construction costs that are increasing at a faster pace than appraised values,"

Inflation is relatively tame and that should keep interest rates low. However, this trend with inflation running 1 percent or more below long term averages will not continue. In fact, all that it will take is some sort of Middle East or North Korean episode and all bets will be off.

All Real Estate is Local
That's an important factor to keep in mind when listening to things such as the Case-Shiller home price indices or the statistics of the National Association of Realtors. Here's an example. Chicago's home market is struggling as it loses population, and yet a friend who is attempting to purchase a home out here, west of that city, has found that there is some serious competition for homes! He was looking for a home in 2005-6 but decided prices were too high, and we both agreed the economy was too fragile.

Since 2005 he's been sitting on the sidelines, saving and renting. After 8 years he decided that this was the time, and last week he put a bid on a home new to the market, but found that one day after listing there were three bids ahead of him, and one was for a price about 20% higher than the asking price.

That was an interesting development, and he stated after looking for a month that a lot of the better properties are moving at a fast pace. It's been reported that banks are beginning to release more foreclosed properties.

So why did he decide to take the plunge now? For one thing, and this is most important, he can afford to buy a home. He was pre-qualified by a bank for a mortgage and began looking only after he had decided how much "home" he was willing to buy. Currently, mortgage rates are increasing, home prices are increasing and rents are increasing. He's decided that it's time to make a modest change and he expects that he will "break even" in 3-5 years as compared to renting. He's of the opinion that residential real estate will only get more expensive from here.

Yet, prices remain off of their 2006 highs and in general are about 20% off of the peaks in Wheaton. Some are apparently waiting for a return of the "good old days" when we paid a lot more for a lot less home!

Factors Governing Home Sales
Prices are low, so what is the problem? In a nut shell, too many cannot afford a home. For another, there are an awful lot of short sighted people out there. For example, they'll trade in a used car for a new one carrying a 96 month loan. How expensive is this? A recent article in the Wall Street Journal mentioned such a buyer who was paying $36,000 for a $23,000 Toyota Camry!

My point is anyone who is willing to spend $13,000 extra to buy a car in this way is not going to have that money available to purchase a home. How much is $13,000?  It's a year of rent for a modest dwelling.  It could nearly purchase a new Honda Fit for $16,000 or it could fund a Roth-IRA for 2-1/2 years. It's also a 13% down payment on a $100,000 dwelling.

While some complain that a home is a terrible investment; home ownership was never supposed to be an "investment." A home is a place to live as an alternate to an apartment. Anyone who prefers to flush their income on more car than they need, or questionable car deals, etc. probably doesn't have the financial skills necessary to budget, save and purchase a home.

Here is a list of financial impediments to buying a home:

• Student Loans
• Revolving Credit debt including credit cards
• Auto loan debt
• Poor credit history or low credit scores.
• Lack of savings
• Poor financial and budgeting skills. 

All of the above reduce the purchasing power of the individual. While FHA will allow a home loan as high as 41% of  income, many financial planners recommend spending no more than 30% of one's take home pay to purchase a home. That 30% includes the mortgage, taxes and insurance. If a condominium, it should include fees and assessments.

A Tale of Two Economies
We continue to hear about high unemployment, and yet we also see the stock market hitting new highs. What's going on here?

I'm of the opinion that we now have two economies in the U.S. There are people with cash and retirement accounts who are employed and relatively debt free. Then there are the rest.

Contrary to some of the statistics, most are working, many do not carry excessive credit card debt, and so on. When we read that average credit card debt per borrower is approaching $5,500 that means that some have $0 credit card debt while others have $11,000.  The actual statistics are worse. The average household credit card debt is about $15,000. in other words, some households have $0 credit card debt, while an equal number have $30,000!

Average interest rates on credit cards are about 14.9%. That household with $30,000 credit card debt is paying $4,470 per year in interest! Add a 96 month car loan, and it's reasonable to assume that a home will not be a possibility for 8 or more years. Of course, in 8 years when that car is paid off, the individual in this example will probably buy a new car. Perhaps sooner. And so the cycle of debt continues.

Here's a graph that illustrates the problem. It shows household debt payments as a percent of disposable income. It peaked at a little over 14% in 2007 and as of October 1, 2012 had decreased to about 10.4%. I understand it has increased since October. It's again useful to realize that these are averages. Some households have 0% debt, while some have 21% payments. For some households, this is more than 41% of their income!

An Absence of New Buyers
The major problem is the absence of new buyers. For the reasons stated, many cannot buy a home, and a few could, but have decided not to. That is a significant change in the home market, which saw annual percentage increases since 1945.  Back then about 45% owned a home. By 1990 it was about 60% and today it's about 70%. How did that happen? The government in an ill planned move, decided that "we should all be homeowners." That decision was good for the banks who make the loans, good for the construction companies and workers, good for the realtor estate brokers, and good for all kinds of manufacturers who provided the goods and services that are necessary for a new home.

It was unfortunate, but to entice more and more buyers into homes, the government made it ever easier. 0% down loans, reduced requirements to get a FHA loan, and so on. This had the desired effect as more could buy a home. It also opened the flood gates to all kinds of questionable and unsustainable practices, including "liar loans."

So where do new buyers come from? From the young. Interestingly, in the age group 20-24 about 35% own their homes free and clear. At the other end of the scale, about 25% of retirees own their home. Currently about 70% of us do live in a home or condo and have a mortgage.

Another disturbing trend of the 2000's? A lot of people used their homes as a "piggy bank" and took out large mortgages. Now, at 65 when they should be reducing debt, they find that they continue to pay a mortgage from their social security income. Well, it was fun while it lasted, and they can take solace from that fact that a lot of banks prospered from these loans!

The largest group of possible new owners are younger people. However, it seems there is a concentration of younger people who have excessive debt including student loans. Others in that age group have been struggling to get a job at a wage that matches their skills. Younger buyers are usually a peak market for home purchases. Today it's been reported that older people who have amassed cash through years of savings are purchasing second or third homes. These are considered true investments and alternatives to that 1% CD, bonds paying 2% and the foibles of the stock market.

Sometimes, people use the term investor as a dirty word. I prefer a more simplistic view. There are savers in our society and there are spenders. Those who save accumulate wealth and then have the problem of determining where to put those savings. Some will fund a Roth-IRA for retirement, some will be parked in a bank as a 6 month emergency fund, and the rest? Most savers have learned through trial and error to live within their means. No fancy car, no McMansion, no iPhone and other toys. Savers will accumulate 10% of their annual wages. Super savers will accumulate more. Over 40 years, that's $2 million or more. That is why the Obama administration is now promoting limiting the retirement savings of "super savers." Better it be spent on junk, or anything that the government can tax.

It's interesting, but older people are buying homes as investments which they will rent to the younger people who shun them! The current situation is somewhat reminiscent of portions of DuPage County in the early 1980s and New York City in the 1970s. A lot of people bought real estate as an investment at that time, and have done quite well from the rents collected and the appreciation of the properties.

Today, we again have two distinct groups. Those who have saved and are looking for a place to invest it, and those who would normally be buyers, but cannot or will not because of high debt, disinterest, or poor financial skills.

Can I Afford a Home or a Condominium?
Here are some sample figures for a rock bottom home in Wheaton with a price of $100,000 and nothing down. This is a best case example:

• Annual mortgage at 4.0% = $4,512.
• Taxes: $3,153.
• Mortgage Insurance (PMI): $500.
• Home Insurance: $500.
• Total = $8,665 per year.

Using the above and assuming the cost of a home represents 30% of one's take home pay, that means that anyone who takes home more than $29,000 a year should be able to afford such a home. Of course, finding something suitable for $100,000 may not be easy.

Condominium prices have been lower than home prices and there are condos in the Wheaton area for $100,000. Here's an example for a condominium:

• Annual mortgage at 4.0% = $4,512.
• Taxes: $3,153.
• Mortgage Insurance (PMI): $500.
• Home Insurance: $500.
• Condo Fees at $250 per month = $3,000.
• Total = $11,665 per year.

Using the above and assuming the cost of a home represents 30% of one's take home pay, that means that anyone who takes home more than $38,900 a year should be able to afford such a condo.

Here's a current graph of the interest rates for a 30-year conventional mortgage from January 1, 2000 to March 1, 2013.

So What's the Problem?

The problem?  One thing that might be holding some back is reality. You can't get a McMansion for $100,000. Another is student debt, which is rising. Student Loans exceeded credit card debt and approached $1 Trillion in 2012! This figure ignores the fact that many college graduates not only get a sheepskin for the wall, but walk away from that 4-year university with significant credit card debt.

Here's a current graph of consumer credit:

Recent school graduates or new families comprised of recent graduates have traditionally been a source of home buyers.  However, when these new families are strapped with college loans, credit card and new car debt, they are sometimes automatically disqualified from obtaining a home loan. 

Here's a partial list of the impediments to purchasing a home or condo:

• The glow is off of residential real estate.
• Many possible first time buyers would prefer to rent
• Many first time buyers have too much debt to qualify for even the simplest home FHA loan.
• Some would rather buy a new Toyota Camry for $36,000.
• Lack financial skills. 
• Short term thinking. 

Am I Being Too Harsh?

Not at all. Simple arithmetic indicates that one can buy a small abode for $100,000 and if the costs are compared to even basic rent at $1,100 a month, the cost to buy versus rent is better after 2 years.  Yes, you did read that correctly. One can buy something for $100,000 today, and the break even as compared to rent is 2 years! Even a condo with $300 monthly fees will break even within 4 years!

Of course, after that break even point, the owner finds that they are accumulating some equity and are financially ahead, and that is comparing a 3% annual rent increase and a 2% annual increase in home value. 

Is a 3% annual rent increase realistic? Here's a chart from the St. Louis Federal Reserve. 3% annual increases may be a bit too low!

What's the Big Problem?

I suggest that one of the impediments to purchasing a home is financial skill and literacy. This begins at an early age, 16 or younger. By the time the average graduate, who is supposed to be our "brightest" has exited college, they carry with them an average $30,000 student loan debt. In other words, some have $0 debt and some have $60,000 in debt. Add to that credit cards and the auto loan. Some have dubious degrees and will take decades to earn enough to live and pay for those school loans. Some did not understand that college is not an alternative to working. It's a part of a long term education to prepare one for 40 years of working and saving. 

So Who is Buying Today?

To repeat, one of the sectors fueling the real estate market is investors who are dissatisfied with the 1% they get in CDs at the local bank, and the perceived risks in the stock market. 

Real estate is cheap today, and it's very easy to get a 35% return on investment in rental real estate. I'll say that again. A 35% annual return. So would you rather put your money in a bank at 1%? Apparently, many people have decided otherwise.

"Investors" with good credit and who can put down a sizable down payment have recently gotten 15 year mortgages for 2.2%! 

Alternative Perspective

The bottom line about buying a home is this. Can we afford it?

 Even Suze Orman has gone on the record and apologized for steering us into owning a home. Back in 2011 she said "The American Financial Dream is Dead." Orman has since promoted renting. But is it really that bleak? Here's a video from 2011. She states the problem very well.

Oh, by the way, the government in order to pay for all of those failed mortgages via FHA, has recently increased the requirement for Private Mortgage Insurance. For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be canceled when the Loan to Value ratio reaches 78 percent, provided the mortgagor has paid the annual premium for at least 5 years. In other words, a FHA borrower will be required to purchase PMI until almost 80% of the loan has been paid off!

The Bottom Line

"The impact of low mortgage rates is profound. Before the Fed began buying mortgage-backed securities in late 2008, rates for 30-year fixed mortgages stood at around 6.1%, and a borrower who could qualify for a $1,000 monthly payment could get a $165,000 mortgage. Today, that same borrower, at a 3.5% rate, can borrow as much as $222,000. In other words, the Fed's low-rate campaign has increased purchasing power by a third." From The Wall Street Journal April 7, 2013

According to that same article in the Journal "The housing sector is finally healing. But the sector may be in for more volatility until there is more demand from—and credit for—people who want to buy homes that they plan to live in."

Yes, people can buy more home at current low rates. However, these rates also allow buyers to get a home at a lower annual cost. Using the above example and the figures from the WSJ, one can buy that $165,000 home for a monthly mortgage payment of about $750. That's a reduction of $250 a month to pay taxes or PMI insurance. Yet, there is a call from some for more government intervention to make homes even more "affordable." We've been there and done that, as Suze Orman says, and we know how it turned out, don't we?

HOA Challenges 2013

Nearly one in three owner occupied residences in Chicago is multi-family. In the U.S. as a whole, the number is about one in five, according to recent statistics. Many experts are convinced that condominiums and their associations will continue to expand, and to improve.

However, there are a lot of challenges for HOAs in 2013, and our association is no exception.

Our board has faced many challenges in recent years. A terrible economy, an aging infrastructure, the need to accumulate reserves (via higher fees), some unhappy owners, battling agendas, issues with a neighboring college, a disastrous fire at a nearby association that ensnared us, board issues, delinquencies, foreclosures,  and so on.

Nationally, the price of residential real estate is 26% off its 2006 peak, according to a report issued April 3. Yet, Zillow predicts that real estate will increase in price by 22% as of 2017. The fact is, overall households have been "deleveraging" for 5 years and debt, as a percentage of household income, is in the best situation in 30 years! However, unemployment overall remains higher than normal and student debt has risen.

There is no doubt that the board at BLMH is taking positive actions to improve the association. You might ask "What have we done and are we making progress?" There are specific answers to that question, but first, it's necessary to set the stage.

It's a Jungle Out There? Perhaps Not!
If I look at the list of things "to do" it sometimes seems overwhelming. This is partially a consequence of owner pressure and board compliance about 20 years ago. At that time people were apparently unhappy about "high fees" and by 1998 the board found itself in a difficult position. Reserves were low, infrastructure was aging and with the perspective provided by a new management team it became necessary to increase fees to build reserves. For most of the next 10 years following 1998 there were annual fee increases.

So, how does one "keep fees as low as possible" while building reserves? One method is to do only essential maintenance, to keep the Operating and Maintenance (O&M) budget as low as possible. In this way, reserve contributions can be increased while O&M items are decreased.

However, by using this approach some things don't get done, or are done with a band-aid approach. This is a "kick the can down the road approach." I think this association did what it had to, and attempted to balance the needs for maintenance and reserves and to avoid special assessments and unreasonable annual fee increases. To accomplish this, restoration project for unit patios was suspended. Ditto for some much needed stream work. The roofing project began very slowly, with one roof one year and after several years, two roofs in one year. Then it was planned to do three roofs. In other words, extend the life of existing roofs as far as possible while building reserves. With 44 roofs in the association, we certainly didn't have an additional  12 years. Landscaping was maintained, but a lot of mulch was spread around to give a crisp, neat appearance.

Owners noticed the growing account balances and after a few years some began questioning the board in a belligerent manner. "What do we get for our money" was the rallying cry, as was some debate about "fairness." The board held its course, until a new group came to power in 2008.

Management has consistently coached the board that the property must be maintained, even in the face of the terrible economic situation in the U.S. in 2008. Real estate may have been "down" but it wasn't out, was the argument, and once we fall behind in these things, catching up is difficult or impossible.  Some board members understood this, and some didn't.  BLMH had a series of discussions about "austerity measures" in 2009 and 2010. We discovered that there were limits to what could be done unless there were major changes in the association. There were serious board and management discussions about what it is that makes BLMH the association it is. Some things were considered unpalatable. Shutting down streams, for example. About 50% of our units are either on a stream, or have an excellent view of one. We might as well chop down the trees, rather than maintain them!

A reserve study raised more questions than it answered. A second, internal study was completed by me with management support. Finally, to get the definitive answers and armed with what we had learned with those two earlier studies, the board commissioned a third study. It was difficult to spend that money, but we needed an unbiased professional opinion with not a hint of any conflicts of interest. It was a difficult decision because we needed that money for other things.

While this was going on, we surveyed the condition of 84 garage floors, surveyed all of the patios and so on. We also accelerated the completion of roofs to 6 per year and accelerated the replacement of driveways. We also began sealcoating new and "good" driveways. Drainage improvements began because the new roofs include additional gutters and relocated downspouts to get water off of the new driveways. We have replaced those garage floors that were surveyed as "poor condition" and we've completed the concrete patio work; all unit concrete patios have been upgraded. We have also begun replacement of the bridge, walks and patio/seating area at Waterfall #2.  Normal maintenance continued, as did the painting and repair cycles. At one time the association began replacing brick windowsills with limestone. The spalling brick was becoming a maintenance problem and there was a legitimate desire to avoid water damage to units. This was suspended for several years, but it is on the agenda for 2013 and we expect to continue this project. Etc., etc.

All the while, I've been seriously engaged in a review of "what's missing" and "what must be done" while doing my utmost to shift the conversations here to "This is a business."

I feel that it has been a race against the clock. I have felt, since 2006, a real  need for urgency in this association.

A Reality Check
This has not been greeted by all owners. I think the best summary of the situation is a recent report by the Employee Benefit Research Institute (EBRI). "EBRI’s 2013 Retirement Confidence Survey: Perceived Savings Needs Outpace Reality for Many." In that study, 51% of workers felt "very confident" or "somewhat confident" that they would have enough money for a comfortable retirement while 49% were "not at all confident" or "not too confident."

In other words, about half of us workers seem to be doing sufficiently well to feel confidence in our ability to save for retirement, while the other half is not. That's probably the way it is in most HOAs. This difference can create tensions between owners. Add retirees, and we now have three distinct groups of owners. Why stop there? Let's add offsite owners to the mix and voila' we have four groups with differing perspectives.

Yes, there will be challenges in 2013!

I have no precise idea of how owners in our HOA are doing. Yes, we have delinquencies and we have experienced foreclosures. However, it is also true that in the U.S. 32% of us own our place of residence and fully 85% of us are not "underwater" (as of November 2012). That means about 15% are underwater and a portion of that is distressed. We probably have some here at BLMH.

I keep these statistics in mind when I listen to owners.

If you want to criticize my lack of knowledge about the financial standing of owners here, let me point out that this is personal information. Some of our owners feel strongly that this is their business and none of the board's and that is true. What matters is simply "Do they pay their fees and keep the rules?" To provide some idea to the reader of how some owners view their personal information, the new board of 2008 promptly remove the "age" information from the census form. So the board doesn't know the age distribution of the owners on site.

One way I get "out of my head" is to walk the grounds and look at the financial statements. Most of our owners don't complain and keep the rules. They are simply going about their day to day business, as I am. That includes paying their fees on time and turning in their census forms.

Walking the grounds, I see the new roofs, driveways and drainage improvements. I see the progress in a new patio area at Waterfall #2. I see the new pond landscaping after we removed the willows at Gloucester, and new patios. Then there are the new emergency access Knox boxes for keys. As I recently stated in our newsletter "There are more maintenance initiatives underway than I can possibly state in one newsletter."

Yet, if I were to empower the positions of the few, it would be very different. Yes, there are some things that fail and we need to address them responsibly, and this board will. Some owners do what they can to push themselves to the front of the line.

It might be a jungle out there, but this is also a beautiful, great place to live. As an owner wrote "may I also say, I absolutely love it here, and encourage my friends to move here also." Another wrote "Thank you.....especially for all you and the Board do to make Briarcliffe Lakes a great place to live."

Most of our owners understand the issues and remember why they bought here. Some of our owners forgot why they purchased, or had unrealistic expectations for what "ownership" would entail and what they could expect from their association and of the obligations they have. Some think it's the equivalent of buying an apartment where someone else maintains the buildings and the grounds and pays for that maintenance, too!

One of the duties of the board is to remind owners of why they bought here.

Step One - Remind Everyone of Why They Purchased Here and What BLMH is
A condominium is a place to live. It is an alternative to a single residence and to living in an apartment. It can provide a deeper pool of resources for common maintenance issues. Everyone who purchased at BLMH did so of their own free will. Yes, their expectations may have changed in the past five years. But this association has gotten better and we have the evidence of this.

Some might not like the "weeping mortar," tudor style exterior or the meandering streams. However, they have been here for 35 years and were here when each and every owner purchased a unit. Replacing these things, while a possibility, is not realistic with the current fee structure. Amen!

The first step with a disgruntled or unhappy owner is to remind them of what this association is and what it is not. We've done that as responsibly as we can. However, this requires constant reinforcement. How to do that? At BLMH it's a newsletter that is just that and nothing more. It includes financial information, details of various maintenance and project initiatives, rules emphasis, information by management, and so on. It reveals some of the issues we all face and it provides reserve updates, finances and the goals of the association in a realistic and responsible manner. Of course, if every owner attended every association meeting they would know this. But most do not. Each member of the board is requested to author an article. It's not easy and the newsletter certainly isn't a popularity contest. For example, the current article by the treasurer is about "bad debt."

For a short time, the newsletter became the "good news" newsletter. Sort of a rosy tinted perspective which was long on curlicues and white space, and short on information. This was an attempt, I guess, at making people "feel good." A perfectly adequate approach for a social club, but not acceptable for a not-for-profit business with 336 shareholders and a $1 million annual budget.

But I persisted and the news is accomplished in a 4-page document which is issued about every other month. It's been called "Manor Briefs" but is currently simply called the newsletter.

Graphics consists of a masthead photo taken in the association, and perhaps additional photos to clarify the contents of an article. Where necessary, "pie" or other type of chart may be included to assist owners to understand the problems of this business in which they are shareholders. The newsletter neither paints a rosy picture or a dismal one. One of the tasks for the board is to provide factual information.  Our association is 35 years old and it is aging. We have a financial plan, reserves, professionals to guide the board and do the heavy work. We're neither a social club, or a "Club Med" or a "Retirement Community." We're a self-sufficient PUD and we do most of our maintenance with little financial assistance from anyone. We're probably the best kept real estate secret in Wheaton, with private streets and extensive grounds.

Five Years After the Great Recession 
Before continuing, it's useful to note the current reality. At present, we're all a bit weary. Weary of politicians in Illinois who squander our taxes and make false promises. Weary of hearing bad or disturbing news from "talking heads" who offer no solutions beyond "tune in at 5 pm." Weary of "change" which it seems was no better than that which preceded it.

That's the psychological morass that we find ourselves to be in. Not a great place for one's mind to be! Today, the economy is slowly, tortuously improving. For a culture that is steeped in "instant gratification" and a "just go do it" mentality, dealing with the consequences of the recent financial melt down has been agonizing for some. Most 30 somethings have never experienced an economy like this, and some of us expected real estate to increase in value, at a good clip "forever."

Something that everyone, it seems, said was not possible did occur. Residential real estate collapsed in 2007. This was something that was on an upward trajectory and seemed unstoppable. With that collapse, a lot of people were trapped. Trapped in their poor decisions, their homes, their HOAs and trapped in that mortgage.

In part, it's psychology. Some of those who feel trapped decided that it was someone else's mistake. They insist they had done everything right. They expected the value of their residence to increase 5 to 10 percent a year. They expected to use their equity as a piggy bank. They expected to sell and retire somewhere else. They expected to flip in 3 years and make a nice bundle and move into something better. Unfortunately, the real estate bubble "popped" and the economy turned against their goals and dreams.

During the heights of the real estate bubble, some buyers didn't do their homework. They purchased a unit without checking the Bylaws and Declarations. They didn't read the Rules & Regulations. They didn't consider the age of their furnace and air conditioning. They may not have checked the finances in that HOA. Why bother? It was a "feeding frenzy" and there was a lot of short sighted thinking.

The consequences of the real estate bubble are still reverberating and have certainly contributed to the challenges here at BLMH.

Those challenges include the perceptions of owners:

• Owners who want to sell and can't at a price that they feel is "reasonable" i.e. back to the 2006 highs. 
• Owners who feel they made a mistake and are trapped in the association.
• Owners who are simply unhappy.
• Owners who are simply uninvolved, oblivious, or apathetic.
• Owners who expect the board to do the "dirty" work for them.

Living with Two Realities

One of the things about the last five years is how polarized it seems to have become. This might be in part due to this economy, in which some people seem barely touched financially and yet others have faced severe financial setbacks and a few, ruin. 

We have some owners who seemingly are doing fine and may be oblivious to the nature of the problems around us. Others I suspect are financially struggling.

That makes for an interesting community. And so it is in the U.S. as a whole.

One of the questions I've had since 2007 is how is an association to deal with this? Here at BLMH we found out when some owners began talking loudly about "fairness." I can only surmise the source of that conversation, but it seems to have been grounded in the economy and the "unfairness" of it all. However, it morphed into some nasty stuff.

I concluded that some may have decided that fees were "unfair" if one was having difficulty paying them.

The crash of the real estate bubble was certainly unfortunate. But nothing that this association did contributed to it. Our fees had been increasing for about 9 years as the board struggled to improve our reserves and prepare for some really major projects. Those projects are underway and about 50% complete. It took about 14 years to prepare for this, in an association in which some expected to sell before the bill came due.

Step Two - Develop a Long Term Plan
When an association is confronted with problems, a potential financial shortfall, a few very vocal and unhappy owners, and a contentious, divided board, what is it that must occur?

The foremost thing is to establish certainty. Now, when we hear the use of the word "certainty" we might think of "predictability." I'm using it from the view of "Certainty is perfect knowledge that has total security from error." In an HOA we are attempting to avoid errors in judgement and miscalculation. We certainly don't know the future. The topic "establishing certainty" will be more deeply explored in a future post.

We all hate surprises, so here at BLMH, budgeting is a continuous, year long process that culminates with a "budget workshop" in October. Then the cycle begins again. There is no end to the budgeting process.

To avoid error, at BLMH the board decided to fund a reserve study. That was a courageous move. Some on the board were convinced that "we have enough money" and "our fees are too high." In other words, the fees were higher than was necessary. Others were of the opinion that the fees were necessary and used some arithmetic to support that position (for example, number of roofs multiplied by the cost per roof divided by years to complete and compared to reserve contributions).

It was acknowledged that "the reserve study may reveal things that the board and owners would not be happy about."

Why did we fund that reserve study? I suspect is was because the "we have enough money" faction really believed that to be true. It was expected a reserve study would "prove" this position to be correct. I was present as a bystander for part of the debate during an association meeting. As I recall, a manager cautioned the board "This could open Pandora's Box." I was concerned, but I am convinced that time is the enemy of any financial plan, and delay can prove financially fatal. So when that board decided it was better to proceed, I said to myself "I'll keep my fingers crossed." I'd been running my own numbers on this association and I knew there was a possibility of hidden flaws.

The conclusion? This association needed to continue on it's course to build up reserves to do the identified projects. In fact, we had "adequate" reserves as per a second professionally prepared study, but we certainly did not have "too much money," nor were our fees "too high" considering the amounts required to continue the various projects.

So we did establish certainty. It wasn't the "good news, we can reduce fees" proclamation as expected.

However, the board had also identified two key financial issues:

• Owners were overwhelmingly opposed to special assessments, and
• Gradual increases, even 1% or 2% annually, are loathed by some but may be unavoidable.

Step Three - Improved Communications
The board of 2008 took some fresh steps to improve communications. However, that communications didn't address the concerns of owners. A get together with free donuts, the formation of a very small "neighbors club" and a more colorful newsletter weren't all that helpful to assuage the concerns about how this association was to deal with the fallout of the "Great Recession."

In fact, one of the problems in our association is its sheer size. 336 owners, most on site with 6 or 7 board members. It's easy for boisterous, belligerent or noisy owners to run over the board. It's sheer numbers. Even 20 unhappy owners provides a 3:1 advantage and yet represents less than 6% of the ownership.

That has been a real problem from time to time at BLMH.

I suppose, some associations may have the opposite extreme where 94% are aligned and agree to "keep fees low" and kick the can down the road. I've often wondered how some associations can survive in modern America. Yes, we have the Illinois Condominium Act (ICA), the Bylaws, Declarations and Rules & Regulations. But what happens if an entire association decides to toss out the book?

Returning to our boisterous few, the question here is how to counter the 6%?  The board decided under continuous pressure, to alter the content of the newsletter. Real financial concerns needed to be addressed. The question "What do we get for our money?" needed to be answered, and the requirements of the ICA to avoid creating special groups of owners needed to be upheld. Altering the newsletter was the best means to do this.

It began with more in-depth articles about Architecture & Maintenance; after all that's where most of the visibly spent money goes. Then expanded financial information. Yes, each owner gets a budget and association finances each year, but a pie chart is somewhat more useful and graphically indicates "where exactly does the money go."  I'm convinced that a few owners really believed that something had to be wrong with our finances; how else to explain why it costs what it does to run this association?

The board decided to begin a website. All newsletters are posted there. This allows others outside of the association to view our workings and to get a handle on what is occurring  It also allows new or potential owners easy access to the older newsletters, as well as the Declarations, Bylaws, Rules and Regulations and the "Quick start" documentation, etc.

An explanation of what this association really is also ensued. It is a Private Urban Development; a PUD. We own our streets. Many owners didn't understand that. I know, because when a water main broke, some of the owners standing by stated "It's not a big deal; the city will take care of it!" I heard this and said "Whoa!"

Yes, it really does take a substantial amount of money to maintain about 40 acres, including 15 acres of turf, the lakes and their shorelines, the streams, waterfalls, paths, 44 buildings, streets, street lighting, and so on. We do the snow plowing, too!

Shifting the newsletter wasn't easy and it remains difficult to this day. It takes a real commitment to communication on the part of the board to make this happen, to take the time and to express the knowledge responsibly and to provide both the good news and the not so good to our owners.  However, I view it as an absolute necessity.

 Step Four - Staying the Course
"Staying the course" is an expression sometimes used to mean "to pursue a goal regardless of any obstacles or criticism."  This goes beyond any one board.

For example, our association has a reserve study. "Staying the course" means it has to be used! It also has to be updated annually so that it reflects current reality and was not simply a "snapshot in time." A board that has computer literate skills including spreadsheets can do this each year. However, this is another task to be added to that never ending "task agenda."

Step Five - Establishing Priorities
Our board is comprised of volunteers. We have a lot to do in our personal lives, and being of service to the 330 other owners is not our main task in life.

It's essential to achieve and maintain a balance.

As a board member, one's time is limited. That means, each of us has to prioritize how we spend that time. Owners are a diverse group. There is a possibility of unlimited criticism from owners. Here at BLMH, six board members have 330 critics in the stands. It is not possible to keep them happy. It's best to to remind them upfront and repeatedly of this.

Here are the priorities as I see them:

• Run the business. 
• Manage the managers.
• Maintain a long view perspective.
• Closely monitor the finances, including delinquencies. 
• Prepare monthly budget updates and monitor for deviations.
• Prepare various, detailed monthly reports so the entire board is informed. 
• Avoid entanglements with owners, or groups of owners.
• Uphold the Rules & Regulations. 
• Operate the association in accordance with the ICA, Declarations & Covenants, and the Rules & Regulations.
• Avoid diversions. 
• When all else fails, remember why we purchased here, and why we are on the board. 

Update Prior to the Forthcoming Association Meeting

Reserve Study is Due
We are all "breathlessly" awaiting the Reserve Study which is, I believe, due or past due at this point. This was to be completed, reviewed and released to unit owners prior to the next budget planning meeting. The board has chosen not to agree with the study prepared with our professional managers, and chose to find and fund an outside firm. As stated by our CD, the firm she evaluated and promoted was "very willing to work with us". That means, I presume, willing to edit the study before the final copy is released to unit owners. We'll never see the copies preceding the editing by the board.


This does, I suppose, provide political cover should the board find it necessary to have a fee increase this year. As you will recall, the board voted for a 0% increase this past year, which means, we didn't fund to match inflation. The implication is that our expenses are decreasing. However, my numbers indicate we are spending more in day-to-day expenses.


I did my own study several years ago and revise it annually. I have discussed aspects with involved and concerned unit owners. I have used it to make statements to the board. These are ignored or disputed. I have not released all aspects of my findings here because these duties and responsibilities fall on the board. That's why they were elected. I also have concerns about releasing certain information "to the world at large". I see no advantage to the association by releasing possibly sensitive information to the public. Would you like your "home budget" published on the internet? I think not. How would this possibly support or hinder unit sales?


I have repeatedly stated my concerns and misgivings to this and previous boards. Most recently, I sent this email to our board president:

Hi [Madam President]:

I read the 2008 audit which per the newsletter was posted at BLMH.org per board decision.

Is this wise? I realize this info should be available to unit owners and other interested parties. However, some of the information might be detrimental. Receivables, which is according to the accountant, are fees due from unit owners, is an example of information that might not be good to distribute all over the globe.   

Unit Sales
I sent this email to our board president and communications director:
[President] and Select Board Members:

During the May meeting, [our communications director] made the statement that “someone had suggested” that the association; i.e. the board, prepare a sales or marketing brochure to aid unit owners who are selling their property. [our CD] said that “sounds like a good idea”. The board concurred.

I’m curious. What’s happened? Were there any assignments made? Has there been any progress, and if so, specifically what? Is anyone working on this? If not, why not?

How about a progress report to the unit owners during the forthcoming association meeting?

For an article dated April 21 on this subject, see:

http://tinyurl.com/28gfclg


I have not attended the most recent association meetings, but those that have tell me that there has been no further discussion of this by the board. Of course, any and all discussion is supposed to be made public. 

Association Meeting Agenda has been Revised
I protested the revised agenda order at a recent association meeting. This was not the first meeting attended by unit owners in which this was protested. The issue was scheduling the "homeowners forum" prior to the completion of all sections of the meeting and specifically prior to the "New Business" discussion by the board. Scheduling board business after the homeowners forum effectively prevents comment by unit owners. 


Earlier in 2010 after similar unit owner complaints, the Communications Director was directed by the President to schedule the "Homeowners Forum" after all business with the exception being the closed door "Executive Session". However, in May the order was again revised. Our President wasn't attending. I stood up during the meeting and protested to the CD about this unauthorized change. Of course, the CD, who ran the meeting in the President's absence, could have simply changed the order of business, then and there. But she didn't and preferred to argue with me. 


I wrote a note to our President:
I have protested to [the communications director] the manipulation of the schedule and agenda for the association meetings. I did so recently during the month you were absent; I have the entire interchange on video.

The “homeowners forum” as the majority of the board prefers to call it, has been moved ahead of “new business”, thereby cutting off unit owner comment or query during the meetings.

[Our communications director], the “power behind the throne” as she prefers to call herself, seems to act oblivious and doesn’t understand the problem.

I am growing impatient with all of this stupidity.

Where are you in this matter?

I received this email response from our board president:
Nobody is trying to "manipulate" the agenda. I have zero interest in doing so, and I don't believe any other board member has any interest in doing so, either. Wouldn't it be super if senseless animosity could be put aside, and people chose to start working together like the fellow owners we are? What a great step forward that would be. All I can do is try to model that approach and hope that others will see its value and want to join in.

At the July meeting, [another unit owner] asked that the homeowner's forum come before any voting. For the August agenda, you will see this order:

Old business
New business
Homeowner's forum
Motions and voting  

I trust this addresses your concerns.


This was my email this morning to the board president:
Now that was easy, wasn’t it? However, that identical “change” was directed by you, earlier this year, when unit owners including myself brought the agenda order up during an earlier association meeting. So forgive my doubts.

It’s amazing what happens when or if:

1. The board listens.
2. The board responds.
3. The board acts in accordance with agreements.
4. The board does what it said it will do.

One of the aspects of being on the board is “leadership by example”. I have concluded that this concept is considered trite.

There is nothing “senseless” about stupidity or failing to do what was agreed. That is the basis of my disagreements. I have told everyone who has a capacity to listen that I have drawn a “line in the sand” in 2010 and I resolved not to allow stupidity to rule.  What you do and how you act as board president is, within certain limits, your business and your choice. 

Projects and Landscaping

Various projects have been languishing. 

Roofing

The roofing project for 2010 has been moving slowly forward. Our new Landscaping Director has been arguing to revise the specifications. As stated during the association meetings, he wants the re-roofing to be brought up to his opinions on "new construction" standards, and offered to re-write the specifications. Even the Treasurer was caught by that one and argued the position that "this is a simple and straighforwar re-roofng project!" I assume that there has been more arguing going on behind the scenes. I am very concerned. First, there is absolutely no grounds for such a position. Second, to do so will add to the cost of the project. Third, this will delay the project. It is now August. I understand the bids were reviewed and a roofer selected. There were project impediments last year and as a result the board action was delayed. The roofing schedule for 2009 was jeopardized by various board members. Here we go again?

Driveways

The driveway project for 2009 were delayed. This is part due to board action and then, at the last minute, a delay of a week or two by the city for code review. Of course, the board "officially" stated that the entire delay  was due to the city. The arguments on the board and the unwillingness of the communications director to support the project, even going so far as to cast a NO vote, that had no bearing on the outcome?

So, where do we stand with the driveways in 2010? We are still waiting. The driveways projects for 2009 are in the same state of partial completion they were last year. A labor strike lasting several weeks is the culprit this year. So, why didn't the project begin in June? [Ask] the board. 

Landscaping

Overall the landscaping is gorgeous, as usual. The landscaping is now in late summer flora.

The landscaping included a mis-mulching this year. The wrong area was mulched. There has also been quite a bit of unit owner discussion about lack of progress in some areas. This has reached the point where unit owners are planting their own grass seed and installing stone outside their patios in the common areas to eliminate muddy areas. 

Having turnover in the position of Landscaping Director doesn't help. Neither does the appointment of an LD by the board who seems more interested in the Architectural Directors work than his own. Non-landscaping interests include reducing the wattage of bulbs to save electricity, re-writing roofing specifications, promoting porous asphalt driveways, etc. I'm sure I don't know the half of it. 

The swamp behind Harrow Court is worse this year; we've had a wet summer. I've made a video and I'll be posting it. This area was discussed by the former Architectural Director in 2008. It was put on the "back burner" by the board. Turnover in positions doesn't help and there seems to be no one on the board who is able to promote consistency. Most of the current board members never or seldom attended meetings prior to their election or appointment. So what should we, the unit owners expect?

The mulch is now being washed into driveways and in some ways impedes the flow of water. I've made a few videos and I'll be posting those, as time permits. I consider mulch to be inferior to ground cover and I also consider mulching when sculpting of the soil beneath does not promote drainage, to be a complete waste of money. This association spends many thousands of dollars on mulch each and every year. The overall board seems not to be interested in this and the Landscaping Director is pre-occupied with architectural projects.   I'm unsure of what progress or plans are in the works for the "gardens" he has been promoting. As I stated earlier, this concept seems to have morphed into a concept of "personal gardens" by some unit owners. 



Comments, Corrections, Omissions, References
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1. This is scheduled for automated posting.
2. I'll revise this to include a chart of unit sales in recent years. 
3. Minor typo corrections made August 15; thanks to an observant reader!