The object in the title was a ship, a transportation vehicle that ran afoul of some serious difficulties. When we use the name "Titanic" as I am using it in this post, we usually think of that voyage which was to be an extraordinary, pleasurable trip. But it encountered grave difficulties and has become the stuff of legend and also the object of several films, both romantic and documentary.
Using the term "Titanic" to describe one's condominium association is a metaphor that brings up an image worth thinking about. Is your association on a collision course with disaster?
Most of us will say "Of course not." Others may say "We're doomed!" Yes, there are a lot of "horror stories" out there since 2008. Not all are representative of reality. It's useful to remember that in 2012, about 85% of all the "homes" in the U.S. were not underwater. That includes townhomes and condominiums. If you think most of us are "underwater" then you can blame the politicians and the news media for misleading you with statistics that were not representative of the entire home market. The overwhelming majority are not underwater, and weren't in 2008, either! How can that be? A lot of people own their homes outright (32% in November 2012). A lot of people have paid off a substantial portion of their mortgages. A lot of people purchased homes with 20% or more down. Many apparently bought a home for that old fashioned reason "to have somewhere to live" and as an alternative to renting; they were not overextended in real estate.
Financial conditions have improved. Apparently, many of us have been paying down our mortgages for the last 5 years. However, individuals and associations face a lot of challenges in 2013 and beyond.
If you compare a home or condominium to a transportation vehicle and consider it to be a place to spend a significant part of our lives, then I suggest you also consider that travelling on a commercial airliner with professional crew is safer than flying on a small, private plane. In other words, there are advantages to condominium living with professional managers, a board to monitor and direct maintenance and finances, and a community to share the financial burden and the financial risks.
The naysayers will point to the Titanic, and to the headlines and say "But commercial crashes do occur on airplanes and on trains." Yes they do. These are the exceptions to the rule. It is a fact that in 2003 there were 22 people who died in commercial airline accidents in America. It is also true that in that same year 44,757 died in motor vehicle accidents, excluding motorcycles. (Note 1). In an average year, 82 die in commercial airline accidents. The number of automobile fatalities is pretty constant at about 40,000 per year. My point? Commercial travel is safer, Titanic or not. So operating our life out of specific events might not be the wisest way to go. Today, some people say that owning real estate such as a home or condominium is a big mistake. Really?
Residence or condominium, we also sometimes think of our "home" as somewhere to rest our hat during our journey of life and escape from the outside world with a nice warm hearth in the winter and other comforts. It is somewhere in which the problems of the larger world, the financial issues of our country and countrymen and women may seem far, far away. In other words, if we are attempting to find a means to achieve solace and comfort, including financial security, then there may be value in owning an abode. However, a private residence might not be the wonderful place that some have promoted it to be. Nor is it the automatic disaster that others now say it is. The fact is, we all have to live somewhere and a condominium can offer real financial advantages over renting. That includes an advantage called "strength in numbers."
However, real estate never was a sure thing, and with that signature you could be buying a ticket on the Titanic. That's what those who are deeply "underwater" in their mortgages may think. This applies to both single residences and town homes or condominiums. So if you are a home owner, you also might want to read this post and see if the concerns it raises should also be applied to you.
Rugged Individualists?
Ah yes, this is supposedly a nation of free thinkers, of rugged individualists with a "can do" mentality.
That's a wonderful, romanticized version of America. What does that mean? Does the ability to sing like a canary guarantee a slot on "American's Got Talent" and a financially successful life? Well, that's not quite what I was thinking about. I was raised by my parents to be self sufficient. My kindergarten teacher once told us "You are Americans" and she went on to point out that the word "American" ends in four letters "I CAN." In other words, it was in our national identity! The pioneers came to this country and saw a magnificent bounty. That manifested itself as near limitless opportunity. They lived that opportunity. We've all read the stories.
Where are we today? Has the opportunity evaporated? I think we forget about the reality of some of those romantic tales. The reality is life in this United States has been difficult from time to time, and there have never been guarantees. It was difficult before we were a nation. The Jamestown Colony perished. The Donner Party perished. People lived difficult lives, died on the prairie of starvation, in childbirth, in Indian wars, or in the influenza epidemic of 1918. If we compare the "Great Depression" to the "Great Recession" current times look like a cake walk. Furthermore, there have been not one, but four recessions since 1980!
Why do I say these things here? Because I think it's important to understand that we are probably living a life grounded in fiction. Contrary to some beliefs, we do need community. We need infrastructure. We need deep pockets. We need so much we take for granted, and yet many of us pretend we can do it on our own!
"A man's home is his castle" is the old expression. That may be, but it may also be a "money pit." Our personal reality probably lies somewhere between those extremes, but from time to time it may seem that we have moved closer to one or the other. If things go bad, would you rather be alone, or have professionals to support you and neighbors to share in the burden? Would you prefer to be a loner, or have the support of a larger group including professionals in your immediate community?
Unreasonable Expectations
Everyone who purchased a condominium did so with some expectations of what community living would be like. They also came with expectations of costs. Every association is unique, and so too are the expectations and built-in costs.
Here at BLMH, we have 15 acres of turf, hundreds of trees, two lakes, three ponds with meandering streams and waterfalls, and a mile or so of walking paths. Yet, we're not an arboretum, or a park, or a retirement community. Other associations may have a pool or pools, a sand volleyball court, cabana and a clubhouse. Yet, they aren't a "Club Med."
Owners may not understand this. Offsite owners may have little interest in maintaining some of these amenities, as their personal agenda might be simply extracting as much cash as possible from their personal business, which is renting their unit.
Condominium associations are communities. Ours is actually larger than some villages. Yet, we aren't a social club. Primarily, condominium associations are businesses in which each owner is a shareholder. Ours is a not-for-profit corporation. The primary duty of the board of directors is maintaining the property and operating the association as fiduciaries while upholding the declarations, the bylaws and the Rules & Regulations. That puts the board in the crosshairs of owners from time to time. It is not a popularity contest, and funds are spent to maintain the entire property. Not simply to maintain or improve the view of a group of owners, or on personal whims. Further, in a large association such as ours, it's impossible to do everything "at once." We paint the exteriors and halls on a 6-year cycle, for example. Large capital projects are also done in phases. We have 84 driveways which we are replacing. We're replacing 44 large roofs. Stream repairs which include large patio areas are also being done on a rotation basis. Yet, some owners will say "Why are you doing that patio over there, with my money!"
Some owners do not understand the purpose of the association in which they belong and some will promote a personal agenda and a political position. For example, we are not primarily a retirement community. Yes, they persist and in so doing, they are probably doing a disservice, and contributing to the tensions that will always be present in a diverse group. They certainly make the job of the volunteer board more difficult.
It is a fact that most associations have "adequate" finances. That's true here at BLMH. We don't have excess funds for personal initiatives and any "new" initiatives will require reallocation of funds, reducing spending in other areas, or increasing fees or levying a special assessment. It's untrue to say "We have enough money" to do whatever, unless it's already in the budget, in the maintenance and reserve studies, and also in the current fee structure.
Yet, owners from time to time will pretend they aren't aware of this, or make a fuss to get their way, or undermine the board. Owners will sometimes fall behind in their fees, and may feel that "There is enough money in the association" and so, being late or a month or two behind should be acceptable and tolerated.
If an association doesn't properly manage these expectations, it should expect difficulties.
The Current Reality?
Here are a few statistics to think about. I chose these because they are general in nature and are commonly quoted statistics and headlines. I suggest that the reader avoid drawing any specific conclusion from these and I'll explain why later in this post.
"Fifty-seven percent of U.S. workers surveyed reported less than $25,000 in total household savings and investments excluding their homes, according to a report to be released Tuesday by the Employee Benefit Research Institute." This from a March 19th article in the Wall Street Journal.
"There have been approximately 3.9 million completed foreclosures in the U.S. since the economic crash squarely began in September 2008." This from CoreLogic’s National Foreclosure Report for October 2012.
Let's look at one more statistic.
The total number of foodstamp recipients as of November, 2012 was 47.7 million. At that time the total number of U.S. households on foodstamps hit an all time record of 23,017,768! (Here's an aside statistic; the cost to the taxpayer to keep these 23 million households fed was $281.21 per month per household.)
What's My Point?
My point in the previous statistics is this. First, there are some real problems in society and the U.S. economy. These problems permeate all aspects and every segment of our society. However, generalities don't do justice to individual condominiums or personal plans. Yes, there is a lot of populist fiction out there and politicians who exploit it. We do get conflicting information. Which is it, are we a nation of underwater homeowners living in foreclosure with foodstamps, or are we the stuff of the pioneers?
I suggest that in each of us, there is both possibilities, and that we're a bit of both. That is also true for each household and each condominium association. For example, the statistic on savings provides a dismal picture. It implies that 57% of those workers approaching retirement have a bare minimum of savings, and that's untrue. A recent Employee Benefit Research Institute survey was the source of that statistic. That survey also stated that 51% of us are either "very confident" or "somewhat confident" that we will have enough money in retirement.
How can that be? Well, there are a lot of workers out there and most are in the age group 18 to 70. If we are younger we usually have fewer savings because of school debt, the costs of raising a family and we might be putting up to 41% of our income into a home. However, as the children age and the home is paid off, many of us divert that cash to retirement funds and savings. Yes, specifics vary all over the map. And so too for condominiums and homes.
Yet, if we read the headlines which focus on misfortune we may conclude that most of us are underwater and in foreclosure, that we subsist on food stamps and have no retirement savings. That is certainly true for some of us and for those who are that situation, we may have gotten there by accident, misfortune or bad luck.
This is not a personal finance post and so it will focus on condominiums and other forms of residential property ownership. Yes, as with individuals, an association may find it doesn't have the funds available to maintain the property and deal with necessary repairs and other normal costs. I suggest that poor planning and an inability to act in accordance with plans also contributed to the "hard times" some are experiencing.
Your Association is Somewhere between "bulletproof" and the "Titanic"
Just as it is with the individual households in this economy, condominium associations lie somewhere between well run and a disaster.
On the Titanic, we had a ship which was piloted in possibly treacherous seas. (Are there any seas that aren't possibly treacherous?) There were a number of mistakes made:
- It was considered to be "unsinkable." In other words, the plan couldn't fail.
- It had design flaws. In other word, there were incompletions. One was a rudder too small for a ship that size, and the absence of "bow thrusters."
- It didn't have a contingency plan. After all, who needs one in an "unsinkable ship"!
- It was running at a speed at night which meant it could not avoid an iceberg if one were visually spotted directly ahead. Oops, is that a symptom of poor judgement?
- It didn't have sufficient life saving contingencies, such as lifeboats.
- Passengers weren't briefed on life saving and other issues, and told "In the event this ship sinks, you may have to swim for it." In other words, inadequate communications.
- Does your association have a 30 year, long term plan? One that can identify "icebergs" ahead?
- Does your association have supplemental 1-year, 5-year and 10-year plans?
- Are these plans updated every year, so that current conditions are taken into account?
- Does your association have professionals who take an objective look at the plan and its conclusions?
- Does it also use reserve professionals to provide an independent, unbiased review?
- Does your association use an accountant and are your finances independently audited?
- Does you board include a treasurer who scrutinizes every bill and signs every check?
- Does it view the plan as "unsinkable" or does it consider it to be only a possibility and "adequate?" In other words, is your board cautious or arrogant?
- Is your association outspending its finances? Are you pretending "icebergs" don't exist?
- Do you have a contingency plan to deal with any flaws in the plan?
- Does your association honestly communicate the issues to the owners?
- Have you, as an owner, attended numerous association meetings so you are aware and understand the issues facing your association?
- Have you studied in detail the documents that govern your association?
This is a term which is taken from the title of the book "The Black Swan: The Impact of the Highly Improbable" by Nassim Nicholas Taleb. That book has become quite popular because it delves into the occurrence of improbable and unlikely events, both positive and negative, which result in massive consequences.
It has been used as a crutch to explain everything from the recession of 2007, the stock market panic that followed in 2008, and even the rash of home foreclosures since then. In fact, it has even been used as an excuse for these failures. What rubbish!. I am of the opinion that if the book had existed back in 1912, it would have been used by some to explain the sinking of the Titanic.
Here's a fact. While hitting an iceberg is improbable, running at high speed in a ship which can't turn quickly in the dead of night in seas with icebergs and no radar is a risky venture. It would have been darn near impossible to hit that iceberg if the speed of the ship had been a correlate to its turning radius and the visible distance, with a margin of safety.
The real question to ask about Black Swans is this "What is a Black Swan?" It is an event that is highly improbable. Most such events are avoidable. When people take the perspective that "it was unavoidable" or "it could never happen" and then, after it does, describe that so called impossible event "A Black Swan" I suggest that they be questioned in depth. Most of the time we will discover that they didn't plan and mistakes were made. The larger question is "What steps need to be taken to avoid this."
Everyone, from homeowners to condominium owners, should be able to have a responsible conversation about this. I suggest many can't and many won't, preferring to quote some politician or other and saying "It can't happen because "so and so" said it can't."
A Personal Perspective
Most of us know what we have to do. We can read the papers and the internet and the various financial data provided by many accountable sources. But we may not take the necessary actions.
You want proof? Then answer these simple financial questions, and these are every day, household budget type questions
- Do you have a realistic household budget?
- Do you have a 5-month "emergency fund?"
- Do you have a savings plan?
- Do you have a retirement plan?
- Do you fully fund a Roth-IRA each year?
- If you have children and expect them to go to college, do you have a funded "529?"
- And, the biggest question of all is this. If you have such plans do you live your life in accordance with them?
- I'll take it up a notch and ask "Are you debt free?"
If we have difficulty with a household budget, don't plan to accumulate the savings for a new furnace or roof, then we'd better have someone around to do the "heavy lifting" for us. I know, we will argue and complain, but in the end I assert it's better to be in a responsible community than to be a single, do-it-alone individual in current day America when it comes to housing. Unless, of course, we really are one of those "rugged individualists." However, I'm talking about accomplishments, not our personal thoughts or ideas on the subject.
Many people think "I can go it alone, I'm capable and I'll make it work." There is a reality that indicates that a lot of us can't and many of us won't do the planning or the work or whatever it is that is necessary to succeed. That's one of the reasons that many businesses fail in the first year, and nearly 65% within the first four years. Thinking "I can do it" is no substitute for actually doing the things it takes to accomplish one's goals.
In the next post on this topic, which I'll call "Somewhere Between Bulletproof and a Disaster" I'll compare some lifestyle possibilities, and I'll also give everyone something to think about.
Final Thoughts
One of my philosophies about living is "Generalities are wonderful pipe-dreams, but specifics are reality." As applied to one's abode, there is a point of view that owning one's home gives one ultimate dominion and control. That's arguable. If you live in Wheaton, IL as I do, there are specific codes and ordinances to be upheld and adhered to. I can't let my abode fall into the state of being a dump. If I do, I can expect the local inspector to knock on my door.
That's the problem facing individual homeowners. Yes, we can make certain decisions, but then we discover that we are responsible to a "higher power" and we are solely responsible for making all of those financial decisions and performing the necessary maintenance. Those financial decisions include designing a life that allows saving to deal with the consequences of home ownership.
Oops! That means that when the driveway develops a hole, the roof leaks, or the exterior needs repairs or landscaping, that "Sally Homemaker" gets to pay the bills and/or do the work. Of course, "Joe Homemaker" has been planning and saving for this for the last 5, 10 or more years, hasn't he?
The fact is, we can live our lives to a certain extent as we wish. However, if we want to be a "home owner" there are specific obligations, and not a lot of help in satisfying those obligations, beyond our family unit. Perhaps "Mom and Dad" can help out, but more than likely they have their own issues.
In 2008 a lot of people discovered they were serfs. That was the year it became apparent that they lived in that home, paid the taxes, mandatory insurance and did the necessary maintenance. But in fact, as they had no "equity" they were in fact, serfs. With that realization and "no skin in the game" a lot of people decided to walk away and toss the keys at their lender. Today, there are ads on various radio stations and the gist is "Honey, we're okay financially, but that decisions we made to buy this home is really killing us. We're underwater and it will take years to pay off enough of this debt to get to where we expected to be. We made a mistake and we need a way to get rid of this financial responsibility." The solution in the ad? "Call XYZABC-Lawers and we'll get you out of that mortgage, so you can live a happy, carefree life!"
As so many have realized, with ownership comes financial and other responsibilities. That being the case, would you rather go it alone, or with other owners to share the risk, and with professional management? Do you want to avoid being on a financial Titanic?
Continued in Part II "Somewhere Between Bulletproof and the Titanic"
Note 1. Statistics from Time Magazine article on risk dated December 4, 2006.
(C) 2013
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