Creating an Initiative

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

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

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

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

This post is a less formal presentation.

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Comments, Corrections, Omissions, References

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

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

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

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

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

Austerity Program - April 14 Email to the R&R Director

Sorry for the delay in responding; there is so much to do, and so little time.

I do need a response from board members to some emails; it may simply be a "yes" or a "no." For example, is an austerity program something this board is to pursue? Ditto for a "sales and marketing program."

Yes, I understand [our treasurer] will present a letter [during the April board meeting]. It will be the first of several to owners. The letter serves several purposes, including a "heads up" to owners who are in arrears.

I apologize if I seem harsh, at times. I am willing to be accountable for my actions, and the consequences, thereof. If you ever want to discuss my actions or have issues, feel free to call me at any time. Yes, I am busy, but I will either tell you a time at which I can talk at length, or handle your call immediately.

I feel a sense of urgency. We are three (actually four) years into a very serious economic decline. It is not over, yet. Some would like to pretend that it is. I am not one of those. I am concerned that as this economic malaise continues, it will further stress owners. Anyone who is living off of savings will eventually run out.

I am completely aware that there are retirees on SS who have had no COLA benefit for two years. Many other working people have not have a salary or hourly raise in that time. Many others are working at reduced hours. As a business owner, I am paid with what is left after bills and other salaries. There have been a significant number of years in which I earned less than my administrative assistant. That is not a complaint; it's a statement of fact.

Believe it or not, I am operating from the perspective that all board members are committed partners. However, as human beings, we don't always operate in accordance with those commitments. It is easy to revert to a position that "I" or my needs, are to come first. I am operating from the position that I am a fiduciary; in association matters, my commitment as a fiduciary comes first. I do have difficulty honoring that commitment, and simultaneously honoring the individual owner. I always ask myself "what is the appropriate action, consistent with the needs of the association."

I do have a vision for this association, which is only a possibility.

I coined an expression some years ago to sum up that reality: "God loves us, but the universe does not care." So things don't always go well, and good people sometimes experience difficulty.

By an "austerity program" I mean a formal approach to reducing fees. This may require a curtailment of specific services. In other words, owners may have to give up something, some of those perks they get, to achieve a fee stabilization (reduced increase in 2011) or a fee reduction. Some associations have accomplished this by turning maintenance over to owners. We have done so with "grass seed", on a trial basis. I'm sure you noted [an] owner's complaint in the information packet. They are correct; it's not their responsibility; we can ask owners to "take it on" and they can refuse.

Other associations simply turn over the maintenance of "Limited Common Elements" to owners. In my [Architecture & Maintenance] report, I address this approach; it's really a stealth fee increase.

I am, within reason, willing to consider any approach, as long as the board is fully informed of the consequences, and agrees, which is to say, "makes informed consent." I am unwilling to simply "wave the magic wand" and hope it all turns out. I am unwilling to take actions that will impose avoidable burdens on future boards or owners. Our fees, today, are what they are because boards in the period 1985-1999 made financial [decisions]. That costs me about [amount deleted] each month, and has restricted sales in this association.

Comments, Corrections, Omissions, References

Note 1.  This post will be one of a series on recent issues facing this association and will expand on topics contained in the newsletter.  

Economic Update March 31, 2011

This is excerpted from an email dated April 2 that I sent to our board. I provided this as a service to our association, and to our board. I thought it might be useful to others. This is the type of background information I use when making decisions.

As I stated in the email:

"I prepare a quarterly economic update and forecast for my business, and specific clients. It’s unclear to me what information is available or used by this board. I separate the term “information” from most of the “noise” that we get on the evening news, which is what many use as their primary source.

I have decided to provide this summary, based on the information I use. This includes some trending based on current facts and known information. This information is based on BLS, Census Bureau, Federal Reserve, Wharton Business School at U of Penn., and other reputable and generally impeccable sources. The information is current and relevant. Note that this is information that I routinely use for planning in my business and personal life, and now as a member of the board. This is not to be copied and circulated, although you may quote it; it takes me time and money to prepare this.

From the information available, some tentative conclusions are possible. “The future” is unknown. But it would be foolish not to plan and prepare for likely outcomes. As an example, using my approach, I detected early signs of the recession in 2006, and made adjustments that allowed me to avoid serious financial or related pain. I say that so that you understand that I do use what I am providing, and it has been of significant value to me over the past 30 years.

March 31, 2011.

The U.S. economy is improving, but with fits and starts.

Inflation is increasing, and may now reach 3.0% by year end. The consumer price index has been increasing at a 3.9% annual rate over the past 6 months (this is a very high rate, and has reached 5%!). Inflation will increase the cost of many goods and services used by our association, and by owners. The price of petroleum based fuel and food have increased substantially in the first quarter of the year. Natural Gas prices are stable. Is inflation in food and fuel important? It accounts for about 23% of the average person’s spending.

Indicators are that this inflationary trend will continue. The Producer Price Index, which track the cost of materials to producers and which are eventually translated as consumer prices, show an increase of 35 to 40% over the past 6 months.

Unemployment has fallen from about 9.7% in November to a current 8.8%. The real numbers aren’t quite so good. If we take into account those who lost their jobs over the past two years, and compare number of employed then to now, the real unemployment rate is still above 10%. Note that unemployment percentages are unreliable indicators; as displaced workers decide that jobs are again available, some of the “discouraged unemployed” will again re-enter the market and seek a job. They will then be added to the rolls of the unemployed. In such a situation, the reported percent unemployed will increase. It’s important when tracking unemployment numbers to view the changes in quantity, not simply the percentages. According to the U.S. government, if you have not looked for a job in the last four weeks you are not considered unemployed. That’s called the civilian “participation rate” or CIVPART. Civilian employment at BLS is CE160V. (Note that the U.S. economy must create at least 125,000 jobs per month to keep up with population growth. Don’t forget to add immigration, too!)

The unemployment drop reported by the government is sudden, and may put pressure on wages. Real wages are flat or negative for the last 5 months, based on census bureau data which indicates that median household wage has not increased. In five of the past six months real wages have not kept pace with inflation. Wage earner annual spending increases are now increasing at a rate about 2.3% more than their earnings, as a consequence.

(Actually, according to the U.S. census bureau, real median wages in the U.S. have been flat for over a decade; that’s one of the reasons credit card debt also steadily increased in the past decade. Many people were maintaining their life style by borrowing; we’re all familiar with the concept of using the equity in one’s dwelling as an ATM machine. This practice was common until 2008.)

Businesses are hiring, but slowly and cautiously. Real output in the U.S. is up about 6.8% even with the current high unemployment; this means that businesses are able to produce more goods or services with fewer workers. Many businesses feel no pressure to hire. Hiring of temporary workers has increased. This translates into corporate profit margins above 12%. The National Federation of Independent Business which provides small business statistics, indicates that small business have once again begun to hire. Unemployment or underemployment (those working fewer hours than they would like) remains unusually high.

Real estate in the Wheaton area is now at 2002/3 prices. This is not consistent (all real estate is local) and is being affected by foreclosures. The real estate market remains stagnant as many banks are sitting on foreclosed properties. There is a serious backlog in the courts and foreclosures are reportedly now taking 6 months to a year longer than usual. Buyers are waiting on the sidelines and some are now attempting to “time the market,” and purchase at the “bottom,” according to some experts.

Interest rates remain low, but home mortgage rates are inching up. 30 year fixed rate mortgage is about 4.84%. One year CDs are at 1.06% and 5 year are at 2.29%. Money market accounts are generally below 0.75%, but there are non-commercial FDIC accounts available at greater than 1.0%. The government policy continues to punish savers, in an attempt to coerce them into placing their savings into riskier things.

Rents have been steady for the past 8 years. However, rents are now expected to begin increasing and some reliable sources report they may be up 15% nationally by year end. In the Wheaton area, there are about 600 rentals available, including apartments, condos, townhomes and houses.

Household debt is generally decreasing. This is due in part to foreclosures. According to the Federal Reserve, consumer credit increased at an annual rate of 2-1/2 percent in January 2011. Non-revolving credit increased at an annual rate of 7 percent, while revolving credit decreased at an annual rate of 6-1/2 percent.

Caution continues for about $400 billion in mortgages, which are scheduled for possible recast or reset between now and 2014. A significant or sudden inflationary spike could force this to occur. If inflation were to simultaneously erode the finances of the debtors involved, then many of these mortgages would fail.

The bottom line:

Optimists see problems continuing for the remainder of the decade. They are of the position that there will be no hyperinflation, debt will gradually unwind, the government will address unsustainable deficits and housing will be stabilized. This will all occur by 2020! It is not all good news. To address the high deficits, the government will reduce benefits (entitlements) and increase taxes. This means less disposable income for retirees and wage earners, alike. It also means there will be unpleasant surprises ahead for boomers and retirees, those being in the ages 55 and above.

Problems with states and municipalities are difficult to quantify. Some states such as ours (Illinois) have debt that is well known and publicized. For example, public employee pensions are underfunded about 60% (for every $100 promised to retirees, there is only $40 saved) and the state continues to spend more than it takes in. This adds additional pressure in the form of unknown tax increases for Illinois’ residents. Taxes will increase; what is not known is by how much.

The issues for the Association at this time and based on current information:

1. Continued deterioration in the financial health of some residents. This translates into reduced capacity to absorb any fee increases.

2. Continued lower sale prices for units, than owners expect.

3. Possibility that every unit mortgaged since 2004 is underwater. This is dependent upon the type of financing used. (Note 2).

4. Increased costs of basics including roofing materials, driveways, concrete, etc.

5. Modest local tax increases.

6. Inflation increases will provide an increase to interest paid on reserves. However, this may not be sufficient to offset material price increases.

7. Unknown future adjustments by government to entitlement programs makes predicting the financial health of retirees, or near retirees, difficult. It is probable that between means testing and tax increases, the consequences will be real reductions in retirement income for many. Those with ample savings or secondary sources of retirement income will be able to absorb these government adjustments. Experts anticipate some changes to occur in as little as three years. The 0% COLA increase for social security beneficiaries is one method the government has at it’s disposal to reduce entitlement spending, and it is using it.

One possible conclusion:

1. The current economy and outlook for the anticipated (near future - 3 years) economy, and probable entitlement program adjustments makes board decisions difficult. Postponing fee increases with the anticipation that the income of owners will increase in the near future is hazardous. There is no evidence that owners will be able to absorb any increases better “someday in the future” than they can, today. That approach was tried, either by accident or by intent, in the 1990s and based on current fees, it failed. So here we are.

Additional information, for your consideration:

Should the board put on the “rose tinted” glasses and assume that things will indeed, get better, much better? Here’s something to consider. Our economy is in a fragile condition, and it wouldn’t take all that much to put it back into recession, according to the experts. We’re dependent upon other countries, for oil to generally remain below $100 (it’s currently $108), the world economy, and the ability of our government to smoothly and quickly solve problems that have been accumulating for 30 years. Is it possible that no events will intervene in this economic recovery? Or is it equally possible that there may be serious bumps on the road ahead?

Last week “The Economist” contained an article that said, among other things, “This was supposed to be a stress-free year for the global economy…….The year without crisis is not to be." Analyst Morgan Housal commented “Has there ever been a year without crisis? Have we ever made it 365 days without something really awful happening? I don't think we have. Ever. In the history of human history. Something big, terrifying, and [stock]market-moving happens every year without fail.” He then provided this list as evidence; it’s not all-inclusive and you will note some ommissions, such as the Haiti earthquake (that easily forgotten blip “only” killed between 90,000 and 220,000 and left about 1.8 million homeless, according to conservative, which is to say, understated sources.) If we don’t know what some on the list are, that might be an indicator of our current financial or other awareness, I guess.

2011 (so far): Japan earthquake, Middle East uprising.

2010: European debt crisis; BP [gulf coast] oil spill; flash crash.

2009: Global economy nears collapse.

2008: Oil spikes; Wall Street bailouts; Madoff scandal.

2007: Iraq war surge; beginning of financial crisis.

2006: North Korea tests nuclear weapon; Mumbai train bombings; Israel-Lebanon conflict.

2005: Hurricane Katrina; London terrorist attacks.

2004: Tsunami hits South Asia; Madrid train bombings.

2003: Iraq war; SARS panic.

2002: Post 9/11 fear; recession; WorldCom bankrupt; Bali bombings.

2001: 9/11 terrorist attacks; Afghanistan war; Enron bankrupt; Anthrax attacks.

2000: Dot-com bubble pops; presidential election snafu; USS Cole bombed.

1999: Y2K panic; NATO bombing of Yugoslavia.

1998: Russia defaults on debt; LTCM hedge fund meltdown; Clinton impeachment; Iraq bombing.

1997: Asian financial crisis.

1996: U.S. government shuts down; Olympic park bombing.

1995: U.S. government shuts down; Oklahoma City bombing; Kobe earthquake; Barings Bank collapse.

1994: Rwandan genocide; Mexican peso crisis; Northridge quake strikes Los Angeles; Orange County defaults.

1993: World Trade Center bombing.

1992: Los Angeles riots; Hurricane Andrew.

1991: Real estate downturn; Soviet Union breaks up.

1990: Persian Gulf war; oil spike; recession."

Comments, Corrections, Omissions, References

Note 1.  "Morgan Housal" can be read at the Motley Fool website:
http://tinyurl.com/morgan-housal

Note 2.  April 28 update. According to CoreLogic as quoted in Morningstar "23.1% of all homes with mortgages are underwater"

Using Panoramio to Publicize BLMH

Google Earth and it's related site Panoramio provide an excellent opportunity to publicize our association.  I sent an email to the board with this information on April 20.

As a trial, "I recently submitted five photos of BLMH to Google Earth. Two have been selected for display on “google earth” and may be viewed by anyone who types in an address of BLMH at maps.google.com and zooms in.

Two of the BLMH photos were also nominated for the next Google photo contest under the category “scenery.”

This I think is excellent advertizing for BLMH. Of course, that’s my opinion. Anyone can do this, and if done well, it can aid sales efforts. If done poorly, it can also be detrimental. This could also be a committee task under “sales and marketing.”

Photos can be posted directly from a smart phone. To get the best possible impact, I’m using a digital camera, cropping and editing the size and adding my ID to the photos “NORM60189”"

Here's a quick link to get to BLMH at Panoramio:

http://tinyurl.com/BLMH-Panoramio

Any location can be found, and there are photos from all over the world. To get to a specific city, such as "Wheaton, IL" here is the procedure:

1. Go to:  http://www.panoramio.com/
2. Type “Wheaton, IL” in the “Search Place” Box.
3. Then click the “Search” button.
4. You’ll find several photos I posted of BLMH, as well as many posted by others.

 Enjoy!

Why I Ask All of Those "Dumb" Questions

"In school they give you a question and ask you to find an answer. In the real world the answers are everywhere -- the Internet, calculators, history books, reference manuals. The trick is asking the right questions."
--Adapted from speech by Conrad Wolfram

When contemplating a difficult decision, I frequently ask myself several questions. These I have found are useful when attempting to select the "best" solution:

1. What am I truly committed to; that is, what outcome am I attempting to achieve?
2. If this is a human factors decision, then who am I empowering and who am I dis-empowering?
3. How can I say that by picking a specific solution, that I can achieve the desired result?
4. What am I overlooking?
5. What is the downside risk if I select that specific solution? That is to say, what is the "worst case" possibility that might occur. What is the likely outcome of that worst case possibility?  
6. If this is something I am doing in my capacity as a member of the board of BLMH, and a fiduciary, there is one more question to ask: In doing this, and in making this specific decision, am I serving the association? Or is it possible I am instead, serving a small group of owners, the members of the board, or myself?
7. In making this decision and selecting the solution, is it possible that I am creating "winners" and "losers?" If so, is that appropriate? Can I alter the solution and create only "winners?"
8. Is there anything that can support and validate my answers to the preceding questions, or am I simply operating out of my beliefs, judgments, and opinions?

Comments, Corrections, Omissions, References

Note 1.  This post was prompted by recent association events, including Thursday's association meeting.  

Fees Revisited, Spring Cleaning and Marketing, etc.

The board has taken a change in direction, and our president has reconsidered the issue of marketing our association. Our president brought this up at the last association meeting. As a consequence, our CD is now working on a sales brochure. To assist her in that endeavor, I sent her a link to a nearby association in an email entitled "What the Competition is Doing."

It's my view that this is not so much about "sales" as it is about marketing our association in a very competitive environment. Our condos are priced in the lowest 25% of all real estate in Wheaton. There's a lot of competition at the low end.

Management and I recently inspected the physical condition of each of the garages as part of an ongoing effort to quantify the finances of the association. While doing so we discovered that about 1/3 of the garages were in violation of current rules, with "stuff" stored in them. It's an expense for owner's to pay to have this hauled; currently a garbage sticker is $3.19 (going up to $3.33 on July 1) and a special pickup is $22 per cubic yard. There are dimensional and weight restrictions for normal trash pickup.

This prompted me to suggest to the board that we (the board) consider a "Spring Cleaning" event at BLMH, and also consider providing a dumpster to assist owners and tenants in their effort to clean the garages. I had discussed this with management last year, and wrote a piece in this blog. According to management, other association(s) in the area do this. So far, the LD and Treasurer have responded positively about the dumpster. Our CD is planning a newsletter notice or article, but avoided the topic of the dumpster. The president and R&R director did not respond.

The subject of fees is again surfacing. One of our retirees stopped me to ask if I am currently employed and I replied "yes." He then stated that he isn't, and doesn't have the luxury of an income beyond Social Security and a Pension. I always wonder why it is that some retirees think that "working" is such a benefit. If it was, wouldn't we all be doing that?

It might be desirable to get a  job at Ace Hardware, McDonald's or any of a number of other local businesses that are hiring part time. There are limits, of course.  I had an aunt who worked at a cellular telephone store part time until she was 85. She finally did permanently retire, but lamented not going to work! I had another female relative who worked for a bank well into retirement. Another relative is currently working as a painter at 83. Another retired couple, in their early 80's, currently maintain three residential properties, consisting of two apartment buildings and a two flat, with adjoining grounds. They tell me it's a lot of work; they do most of the maintenance and all of the cleaning and grounds work themselves! So, it seems that there are exceptions to any rule. With relatives like these, it will difficult to take an early retirement, let's say at 66. I'm sure they'll chide me for quitting early.

Returning to the issue of fees, I received an email a while ago from an owner who asked about the fees at BLMH. He asked some questions and his email was well written. He included a selected list of townhomes and condominiums in the western suburbs, with average monthly fees of $169 and a maximum of $197. There was a question posed about getting our fees "in line" with these other associations. I sent a reply to him and to our president, and later copied the remained of the board with some additional comments on the issue.

Here’s my opinion on fees and comparing BLMH to other HOA’s, based on that email. This is drawn from my email reply and the notes to the board:

Our association does have higher costs than some of the competitors.

When comparing properties there are some differences to be aware of. First, if they aren’t a PUD, then those associations have no responsibilities for street repairs, water mains, street lighting or snow removal beyond driveways. I have also been made aware of some associations which pass on certain costs and responsibilities to the owners; for example, the maintaining of patios, dryer vents, etc. Second, many of the HOA’s which some of our owners like to compare to BLMH, have no lakes or streams and limited grounds and landscaping. So monies we are paying each month in our fees for these items are not required at many other condominiums, because they don’t have these items to maintain.

I am also aware of condos in the area which have recently had special assessments, some of which were thousands of dollars. We have not.

Financially, I think owners can better handle fees without special assessments. For example, a special assessment for certain basic reserve items, such as for a roof, would require a surcharge fee of about $190 per month, per owner for 3 years at 5% interest. That could then be followed by a special assessment for driveways, etc. If an association were to use this approach, it would result in a lower base monthly fee.

However, the total of fees for operations and maintenance, plus fees for other reserves plus special assessments would result in a high monthly overall fee. Of course, if an owner could sell before that assessment came due, perhaps he/she could escape and pass the burden to a new owner. I sometimes think that could be the agenda of some owners. However once any special fee is levied, it would not be possible to sell one's unit until it was paid.

I suppose it would be possible for an association such as ours to 1) Remove some expensive items such as roofs from the monthly fee for reserves; and 2) Levy a special assessment for roofs. If we were to use this approach, then monthly fees, using what is actually a "slight of hand" would appear to decrease. Each owner statement would have a fee plus assessment. For owners, that would have a very serious consequence. All special assessments would have to be paid before a sale was possible.

Personally, I would prefer lower fees, no matter what the going rate might be. I’m acting as a fiduciary and so in some ways, my personal opinion or feelings does not matter. Nor can I operate for personal gain in these matters.

That is not to say that there is no room for improvement. There are restrictions. The Illinois Condominium Act requires that the board act as fiduciaries and maintain the property while doing so. We have no legal option of simply stopping the maintenance of the property. We can however, adjust how moneys are spent while maintaining BLMH, and we are striving to do more, in my opinion. The ICA aside, I've been cautioned by professionals and the CAI about the risks halting maintenance to provide a temporary and artificial reduction in fees.

I purchased here 10 years ago. At the time, I reviewed the finances of the association and was concerned by the reserves. The reserves have significantly improved since then, as the association built them up for roofing and driveway projects. My spouse and I purchased here because we liked the location (for example, COD very close and a park across the street, great South Wheaton location, etc.) as well as the extensive grounds and landscaping, and the general design of the buildings, which offered a reasonable compromise between home living and condo living. I had been a home owner previously and I was apprehensive about some of the aspects of “community” living in a HOA. (My apprehension has been confirmed by recent events at BLMH). However, we have stayed here for the same reasons that we purchased. I am aware of the differences between associations in the area. We looked at some of them but chose BLMH, and I have several acquaintances who live in condos or townhomes in the area, so over the past 10 years, we have traded stories.

To be candid, financial issues, including budgeting are at the top of my list here at BLMH, and so is marketing of our property. I am very concerned by the current combination of fee increases and the apparent deteriorating finances of some owners. I have other board duties and responsibilities that supersede or displace as much financial involvement as I would prefer. The discussions and information provided to owners last fall was the “tip of the iceberg” and the treasurer and I have been doing additional work. This includes improved monitoring of delinquencies and late fees, and ongoing discussions about expenditures, cash flow and funding. Our president is maintaining a separate spread sheet of expenditures. Management and I are currently in the process of reviewing the status of garages, and have prepared lists of buildings which are potential candidates for roofing in 2011. Currently, those building not yet re-roofed, have an average shingle age of 18 years.

The information gained from all of these efforts will be used to adjust the data I prepared for the board as part of my review of the reserves, and the reserve study. I intend, with the support and work of management and others on the board, to provide additional information on the state of reserves and funding of current and future projects. As our owners are aware, a significant amount of the fees collected are going to reserves. In the near future, the roofing and driveway projects will be completed.

I cannot state if fees can then be reduced, or annual increases reduced, as the association completes those projects. Last year's board authorized and selected a vendor to provide a reserve study. That study with the input of management, provides guidance to the current board and to future boards, until another study at additional cost replaces it.

Inflation is a reality, and the cost of basic services will and do increase over time. It will be necessary to begin rebuilding reserves again, for the next round of repairs. Nor can I predict the role of any material cost increases. I am monitoring the costs and would like to see such fee reduction. That may be in the hands of future boards. I can only deal with the present and plan and prepare for the future.

The board approved a nominal 1% fee increase for handling all Operations and Maintenance cost increases for 2011. What we know about true inflationary pressures, indicated that was a very aggressive minimization (core inflation as published by the Fed reduces or ignores the rising cost of fuel and food, which ultimately affects the costs of goods and services as well as the various projects here at BLMH). The board has taken other steps to either hold costs or reduce them, for the purpose of staying within budget and reducing fee increases. There has been discussions of “service cuts” and alterations to reduce landscaping fees. There will be more discussion. For example, the board has discussed and tentatively approved a change from a 5-year painting schedule to a 6-year schedule. That will ultimately reduce our annual exterior painting costs by 3.33% and management and I are also reviewing the painting specification and type of paint that is used, to see if we can achieve some savings with no loss in quality.

However, any failure to properly maintain the property will make it difficult to sell units here, I have been told by professionals, and that includes discussions during a workshop at the CAI in January. I realize the term “maintain properly” is somewhat ambiguous and subject to personal interpretation. Large potholes on Lakecliffe would seem to be pushing it. We can delay some types of repairs, but water in units, roofing or truss failure, drainage problems, a sinking building, street issues, broken water mains, a collapsing underground pump cistern, etc. would all seem to be in the category of requiring some immediacy. Would not everyone agree? We do have the reserve funds to properly address these problems.

On the other hand, I suppose an owner could take the position that if it “isn’t my roof” that is leaking, or my street with the potholes, then it isn’t all that serious. The Illinois Condominium Act also has stipulations for boards about property maintenance.

Discussions about reducing maintenance hours, or landscaping costs, must be accompanied by "how." What service is to be reduced, who is to coordinate the suggestions of board members and owners, read contracts and ultimately arbitrate the suggestions, revisions, and determine specific cost savings?

Comments, Corrections, Omissions, References

Note 1.  I've posted this because it will be several months before an article on this is in the newsletter, assuming one is approved. I am also preparing an article which breaks out some of our unusual fees, etc. so as to inform our owners. 

Should You Buy at BLMH?

It's sometimes useful to do the numbers. From a strictly financial perspective, which is to say, looking at the costs to rent versus the costs to buy, which is the more prudent decision?

How much would it cost to rent a 2 bedroom 1 bath, or better in 60189? Let's assume we were looking for something a bit nice. What would that cost?

Rentals in 60189 vary, but we could expect to pay in a range of $1,125 a month for 995 square foot and upwards. Currently there are rentals of $1,395 per month near the high end of the monthly rents.

So to make a comparison of rent versus buy, I'll use $1,200 a month as rent.

What would be our "out of pocket" costs if we were to purchase a condo at BLMH? I'll use the 2011 monthly fees and 2010 real estate taxes that I pay for my unit, which is a "B" unit as an example. However, it's important to realize that my condo is about 1,300 square feet, 3 bedrooms and 2 baths. So my fees could be higher than what you might experience.

Assumptions: 
Monthly rent $1,200.
Purchase at BLMH for $140,000 with 5% down and 4.89% 30 year fixed rate mortgage.
Include BLMH monthly fees and real estate taxes in comparison.
Other assumptions: Owner keeps the condo for 10 years, rent or property values increase by 3% a year over that 10 year period.

What's the result?
The cost to own is $15 per month more than renting.
However, at the end of 10 years, the owner would have $33,834 recoverable equity, after paying a broker a 5% selling commission.

Not bad! Think of it this way. If you purchase at current prices, and stay here for ten years, it's possible you will have saved the equivalent of $267 per month by owning, as opposed to renting. And that's after paying real estate taxes and monthly fees!

On the other hand, continue to rent, and pay your landlord. It's your choice!

Comments, Corrections, Omissions, References

Note 1.  There are units for sale at BLMH for less than $140,000. At that price, it's a bargain, and the numbers confirm it.
Note 2. According to Zillow, the unit above would rent for $1,425. I don't know if I could rent my unit for that, but it's an indicator of what I might expect to pay to live at BLMH.
Note 3.  According to Zillow (April 1, 2011) the mid point for Wheaton home prices are $259,900. That is, half of the houses in Wheaton are priced above, and half are priced below.

A Call for Marketing Assistance

During the most recent association meeting, our president made a call for the preparation of a "sales and marketing" brochure for this association.

This will be an owner and board prepared item, and it needs to be done quickly if we are to have it available for owners this spring and before summer.

If you are an owner or tenant, and you have specific skills or experience in marketing and even as a former realtor, I'm sure our association can use your input.

I'm glad the president made this change in direction. I would have preferred that this be done last year, when the government announced a home buyer credit. According to Zillow's estimate, prices in our association began rising in March of 2010 before again declining in November.

If you want to participate, contact our Communications Director. If you have any issues or comments or legitimate suggestions, contact me. I consider this to be one aspect of a coordinated sales and marketing campaign for our association. I've been working on a plan for this for several years, and I'll be sending an email to the board at large. I have other duties and responsibilities, so it will rest upon our president and our CD to get this done.

Here are a few ideas for owners:

1. Update your information at Zillow. Add photos of the grounds, or other aspects of the property or your unit. 
2. Consider participating in a "spring cleanup" campaign.
3. Send our CD your insights as a recent buyer. Why did you purchase here? What attracted you? I've spoken with a few of our new owners, or neighbors who stated they purchased in the recent past. I found their opinions and insights to be refreshing and inspiring. 
4. Should the association sponsor one or more "open houses" this year? 
5. Give your board you ideas and feedback. It's going to take some effort to get this done. 

As a board member, I can support the production of a brochure. I can't support the use of association fees, but can support the use of "sweat" in producing this. Once done, the brochure could be made available to interested owners for the cost of printing alone. Should we send some to realtors in the area???

Let us know, and let's not lose momentum!