In a recent post I responded to a reader's question about why HOA fees are what they are. I've based my opinion on what I have learned here at BLMH, the experiences of my friends and relatives at their HOA's and reports in the popular press. I don't consider BLMH to be a typical HOA. It has 336 owners, 44 buildings on about 40 acres and is a PUD. Of course, I don't know if there is a "typical" HOA.
When owners or potential owners look at the fees of a HOA I have found that most ask "Why are the fees as high as they are?" That was the perspective of some owners in 2001 and it remains so today. I have suggested that it is also useful to ask "Why are the fees as low as they are?" The unasked question is why do we automatically think of fees as being "high?"
An Internal Bias
When we look at the fees of an HOA, many of us are predisposed to think "Wow, those fees are high." After living in an HOA for over 10 years, I have decided that it is of no matter what the number is. It seems that some view HOA fees as a "tax" and as we all know, taxes are collected and poorly spent, aren't they? So the very thought that it's a tax creates an internal bias. But why would we compare the HOA in which we live to the government in Washington, or in Springfield, IL?
I've concluded that it's about the use of money. In a HOA we are required to turn over a fee each month to an "association." That fee includes the costs of operations & maintenance. It also includes an amount for savings for reserves. But we don't think of it as a just fee. Now I ask, why would we think this way?
It might be societal.
An Example - And Yet a 1% Annual Fee Increase!
So how are associations managed and does this justify the poor opinion of some owners? In 2013 the BLMH association experienced a severe problem with a water main. This was anticipated by the board but it was not predicted to occur. So how to collect fees for such an event?
In 2013 not one but several breaks occurred in a small area in which several previous breaks had occurred. I was appalled by the costs of the repairs and pressured management and the repair company to come up with a better solution and one which would be pre-emptive. Emergencies cost far more than "planned" maintenance during normal 8-5 business hours on Monday through Friday.
As breaks occur on weekends or nights and sometimes over holidays the costs can be formidable. In 2013 a water main break was very destructive. A recently replaced driveway was destroyed, an entranceway was torn up, a foundation was damaged, and not one but several repairs were made, each at a cost of thousands of dollars. The City of Wheaton threatened to bill the association for the water lost. Cleanup, landscaping and driveway and entrance repairs costs additional thousands of dollars over the cost of repair of the main.
After consultation with experts and discussion with management the board agreed to replace a large section of the main. From my perspective, waiting for the next "unforeseen event" and only then doing ongoing repairs in that area was the equivalent of the "death of a thousand knives." We have the numbers to prove it. Some were published in the association newsletters. All were discussed during normal association meetings and any owner with the interest to come, listen and take notes knows as much about the costs as anyone on the board does.
We did not have money earmarked specifically for this in our budget. We had amassed and continue to collect a small portion of the monthly fees for a "contingency" fund, which is something I began arguing for in 2009. Even our manager and the board was skeptical at the time. That fund was created and has been used to date exclusively for water main repairs.
Was There a Special Assessment for "Water Main" Repair?
No, there wasn't. Nor was there a large fee increase this year, unless we take the perspective that a 1% fee increase is a "large" increase. Nor was a loan taken to deal with this. How was that possible?
The contingency fund helped. Having sufficient reserves helped. But that money was spent and it will be replenished. The board will continue to walk the tight rope.
The board has discussed fees during association meetings. A 1% fee increase was agreed for 2014. This was considered by one board member to be "too high" an increase and "too low" by another. I agreed with the 1%, but with reservations. One concern I have is the reserves. Are they sufficient? I'm of the opinion that we will know only after after the full costs of the replacement of half of Lakecliffe Blvd. a professional assessment of the remainder of the streets and then an update to the reserve study.
Yet, I understand some owners think "Our fees are high." To date we've had twice the normal snowfall and we've had four times the snowfall of last winter. In this HOA our fees pay for snow removal and the application of "salt" on the streets and driveways. Obviously, our snow removal costs will exceed the budget for the winter of 2013/2014.
Do We Have Enough Money?
That's a difficult question for any association to answer. The BLMH HOA is 39 years old. The buildings, streets and so on are "middle age." Some types of failures are impossible to predict. Yet we do know that the streets, roofs, driveways, garages, building, street lighting and water mains and sewers have a finite life. An HOA should be saving for this, shouldn't it?
Yet, some of our owners have argued "We have enough money." Even former boards took that position and glibly passed 0% fee increases.
I think the real question for any association should be "Do we have sufficient reserves and are our fees levels sufficient to support our Operations & Maintenance budgets?"
If the owners of a HOA can't answer that question with substantiation, then I suspect they are gambling. If a board can't answer that question with a few caveats, then I think the board is also gambling.
What Do I Mean By "Caveats?"
Any budget is based upon assumptions. For example, our 1% fee increase assumed a "normal" winter which includes about 26 inches of snow and that means a certain number of "pushes" by our snow removal contractor and the application of a specific amount of "salt" to the streets.
So if I were asked "Is our budget adequate" I would say "Yes, with provisions." My provisions include the weather, the conditions of our streets, the assumption that no more than six roofs will be replaced each year as part of the "roofing project," there will be no disasters such as fire, and so on. I would also say that any assumption about fees is that owners will pay them. However, since 2008 most HOAs have experienced delinquencies, foreclosures and higher legal fees. In other words, collections aren't what was expected and legal fees are required to collect from some owners. Our association uses a specially prepared delinquency spreadsheet with charts to track delinquencies. I created it with the assistance of our current Treasurer. It historically tracks delinquencies, number of owners delinquent, amounts and so on. It spans the period from 2008 to the present.
Sadly, a lot of people seem to prefer the quick answer about budgets. They want the simple "Yes" or "No" about budgets and assurances. I've concluded that they want someone else to carry the burden. This too may be societal.
The Real Question
I suggest that if we really don't know why the fees are what they are, then perhaps our opinions are not grounded in reality. Remember, your board pays the same fees you do. I suppose there are some associations where the board gets "special" favors. In a professionally managed, transparently run association that should be impossible.
I do have a lot of uses for those fees I pay each month to my HOA and it would be wonderful if someone else paid for the lawn care, the driveways, roofs and street repairs. It would also be wonderful if the exterior maintenance and painting, snow plowing and so on was free. Ditto for the arborist and picking up the trash and doggie bags in the community trash receptacles.
But I as a unit owner don't want to do these things and so I have to pay someone else to do them. That's the way it works. As they say, "there is no free ride." Nor do I have the benefit of building a fence and having a private yard. BLMH isn't designed that way nor is it a townhome complex.
The real question to ask is this: Is my HOA board acting as fiduciaries and in the best interests of the association?
When asking that question, it is useful to remember that we each have our personal biases and opinions that color everything we do. It's also useful to remember that Home or Condo ownership is not for everyone. That was and continues to be a fiction promoted by certain politicians and those who financially benefit from the real estate and home building industries.
So why do we think the way we do? It could be part of the psyche of living in a society in which many of us take these positions:
Notes:
Here are some recent statistics (2014) about how well Americans save for the future. I provide this to substantiate my opinion. The figures are based upon statistics for those who begin working at 25 and reach the age of 65. These are according to U.S. Census Bureau figures, Bankrate.com and Saperston Companies:
When we look at the fees of an HOA, many of us are predisposed to think "Wow, those fees are high." After living in an HOA for over 10 years, I have decided that it is of no matter what the number is. It seems that some view HOA fees as a "tax" and as we all know, taxes are collected and poorly spent, aren't they? So the very thought that it's a tax creates an internal bias. But why would we compare the HOA in which we live to the government in Washington, or in Springfield, IL?
I've concluded that it's about the use of money. In a HOA we are required to turn over a fee each month to an "association." That fee includes the costs of operations & maintenance. It also includes an amount for savings for reserves. But we don't think of it as a just fee. Now I ask, why would we think this way?
It might be societal.
An Example - And Yet a 1% Annual Fee Increase!
So how are associations managed and does this justify the poor opinion of some owners? In 2013 the BLMH association experienced a severe problem with a water main. This was anticipated by the board but it was not predicted to occur. So how to collect fees for such an event?
In 2013 not one but several breaks occurred in a small area in which several previous breaks had occurred. I was appalled by the costs of the repairs and pressured management and the repair company to come up with a better solution and one which would be pre-emptive. Emergencies cost far more than "planned" maintenance during normal 8-5 business hours on Monday through Friday.
As breaks occur on weekends or nights and sometimes over holidays the costs can be formidable. In 2013 a water main break was very destructive. A recently replaced driveway was destroyed, an entranceway was torn up, a foundation was damaged, and not one but several repairs were made, each at a cost of thousands of dollars. The City of Wheaton threatened to bill the association for the water lost. Cleanup, landscaping and driveway and entrance repairs costs additional thousands of dollars over the cost of repair of the main.
After consultation with experts and discussion with management the board agreed to replace a large section of the main. From my perspective, waiting for the next "unforeseen event" and only then doing ongoing repairs in that area was the equivalent of the "death of a thousand knives." We have the numbers to prove it. Some were published in the association newsletters. All were discussed during normal association meetings and any owner with the interest to come, listen and take notes knows as much about the costs as anyone on the board does.
We did not have money earmarked specifically for this in our budget. We had amassed and continue to collect a small portion of the monthly fees for a "contingency" fund, which is something I began arguing for in 2009. Even our manager and the board was skeptical at the time. That fund was created and has been used to date exclusively for water main repairs.
Was There a Special Assessment for "Water Main" Repair?
No, there wasn't. Nor was there a large fee increase this year, unless we take the perspective that a 1% fee increase is a "large" increase. Nor was a loan taken to deal with this. How was that possible?
The contingency fund helped. Having sufficient reserves helped. But that money was spent and it will be replenished. The board will continue to walk the tight rope.
The board has discussed fees during association meetings. A 1% fee increase was agreed for 2014. This was considered by one board member to be "too high" an increase and "too low" by another. I agreed with the 1%, but with reservations. One concern I have is the reserves. Are they sufficient? I'm of the opinion that we will know only after after the full costs of the replacement of half of Lakecliffe Blvd. a professional assessment of the remainder of the streets and then an update to the reserve study.
Yet, I understand some owners think "Our fees are high." To date we've had twice the normal snowfall and we've had four times the snowfall of last winter. In this HOA our fees pay for snow removal and the application of "salt" on the streets and driveways. Obviously, our snow removal costs will exceed the budget for the winter of 2013/2014.
Do We Have Enough Money?
That's a difficult question for any association to answer. The BLMH HOA is 39 years old. The buildings, streets and so on are "middle age." Some types of failures are impossible to predict. Yet we do know that the streets, roofs, driveways, garages, building, street lighting and water mains and sewers have a finite life. An HOA should be saving for this, shouldn't it?
Yet, some of our owners have argued "We have enough money." Even former boards took that position and glibly passed 0% fee increases.
I think the real question for any association should be "Do we have sufficient reserves and are our fees levels sufficient to support our Operations & Maintenance budgets?"
If the owners of a HOA can't answer that question with substantiation, then I suspect they are gambling. If a board can't answer that question with a few caveats, then I think the board is also gambling.
What Do I Mean By "Caveats?"
Any budget is based upon assumptions. For example, our 1% fee increase assumed a "normal" winter which includes about 26 inches of snow and that means a certain number of "pushes" by our snow removal contractor and the application of a specific amount of "salt" to the streets.
So if I were asked "Is our budget adequate" I would say "Yes, with provisions." My provisions include the weather, the conditions of our streets, the assumption that no more than six roofs will be replaced each year as part of the "roofing project," there will be no disasters such as fire, and so on. I would also say that any assumption about fees is that owners will pay them. However, since 2008 most HOAs have experienced delinquencies, foreclosures and higher legal fees. In other words, collections aren't what was expected and legal fees are required to collect from some owners. Our association uses a specially prepared delinquency spreadsheet with charts to track delinquencies. I created it with the assistance of our current Treasurer. It historically tracks delinquencies, number of owners delinquent, amounts and so on. It spans the period from 2008 to the present.
Sadly, a lot of people seem to prefer the quick answer about budgets. They want the simple "Yes" or "No" about budgets and assurances. I've concluded that they want someone else to carry the burden. This too may be societal.
The Real Question
I suggest that if we really don't know why the fees are what they are, then perhaps our opinions are not grounded in reality. Remember, your board pays the same fees you do. I suppose there are some associations where the board gets "special" favors. In a professionally managed, transparently run association that should be impossible.
I do have a lot of uses for those fees I pay each month to my HOA and it would be wonderful if someone else paid for the lawn care, the driveways, roofs and street repairs. It would also be wonderful if the exterior maintenance and painting, snow plowing and so on was free. Ditto for the arborist and picking up the trash and doggie bags in the community trash receptacles.
But I as a unit owner don't want to do these things and so I have to pay someone else to do them. That's the way it works. As they say, "there is no free ride." Nor do I have the benefit of building a fence and having a private yard. BLMH isn't designed that way nor is it a townhome complex.
The real question to ask is this: Is my HOA board acting as fiduciaries and in the best interests of the association?
When asking that question, it is useful to remember that we each have our personal biases and opinions that color everything we do. It's also useful to remember that Home or Condo ownership is not for everyone. That was and continues to be a fiction promoted by certain politicians and those who financially benefit from the real estate and home building industries.
So why do we think the way we do? It could be part of the psyche of living in a society in which many of us take these positions:
- We don't like to be told what to do.
- We think we each know what's best for ourselves.
- We don't trust those in authority.
- We think we can do just about anything better than the next person, and that includes the board of the HOA.
- We think we're smarter than everyone else.
- It's my opinion that matters most; after all, I'm the center of the universe.
- We each have a better, personal use for those fees.
- What works for me is what matters.
- We may feel we are entitled.
- We may not want to be accountable for our personal situation.
- Most of us are such poor savers that we won't have enough savings for our retirement. So why should I be willing or coerced to contribute to a HOA when I could use this money for my own retirement? See the Notes at the end of this post.
Notes:
Here are some recent statistics (2014) about how well Americans save for the future. I provide this to substantiate my opinion. The figures are based upon statistics for those who begin working at 25 and reach the age of 65. These are according to U.S. Census Bureau figures, Bankrate.com and Saperston Companies:
- How many will have sufficient retirement savings at 65? Answer: 4%. 96 out of 100 won't have enough savings.
- How many will be working at 65? Answer: 1%.
- How many at 65 will be dependent upon Social Security, charity, relatives or friends for their financial well-being? Answer: 63%
- How many 25 year olds won't live to reach the age of 65? Answer: 29% will die before reaching 65.
How many retirees over 65 rely entirely upon Social Security for their retirement income? Answer: 35%. In other words, only about two out of three retirees has sufficient savings to augment their Social Security income. The rest live from SS check to check.
Here's something to think about. Knowing the plight of many retirees, is it financially prudent or is it harmful to allow retirees to take control of an association? Are they capable of operating as fiduciaries? Or would they be inclined to operate on their own behalf? This question is general in nature. It is very difficult for anyone to put aside their personal beliefs, wants and needs and operate altruistically for others. Investors have their perspective and it might be simply to maximize their bottom line. Others may simply want to keep fees as low as possible because of personal financial hardship. Our association doesn't require a financial statement from a board member. It's assumed we're all capable and we will operate and make decisions for the good of the association. Dream on, I say! This is America we are talking about. Look toward Washington DC and Springfield IL for your inspiration and you will know what I mean. Operate for the good of others? Oh, how quaint some may say.
Any board member who is financially disabled should recuse themselves from financial matters in an association. That's the "honor system" and I assure you it does not always work. This is not a matter of age or personal wealth; it's a matter of financial impartiality and integrity. How many of us would vote for a necessary fee increase that we personally could not afford?
Of course, if an association achieves sufficient numbers of financially strapped owners, what do you think will happen to that association? Here at BLMH, we have a few owners who will readily state "What's good for me is also good for the association."
One of the questions an association might want to ask is "How do we deal with a rising number of aging owners?" This is not a frivolent exercise. At BLMH we have some owners who have been here 30 years or more. Some have said "I'm going to live here until the day I die." That's well and good, but what happens when they do pass on and leave their unit behind? Who then assumes the payment of fees? My experience is the property is donated or the bank takes possession or the family takes it over and sells it as soon as possible or turns it into a rental. If there have been no plans for the unit then it goes to the bank and the remaining owners in the association have to pick up the slack for the lost fees until a sale is completed. This will be the subject of a future post.
Any board member who is financially disabled should recuse themselves from financial matters in an association. That's the "honor system" and I assure you it does not always work. This is not a matter of age or personal wealth; it's a matter of financial impartiality and integrity. How many of us would vote for a necessary fee increase that we personally could not afford?
Of course, if an association achieves sufficient numbers of financially strapped owners, what do you think will happen to that association? Here at BLMH, we have a few owners who will readily state "What's good for me is also good for the association."
One of the questions an association might want to ask is "How do we deal with a rising number of aging owners?" This is not a frivolent exercise. At BLMH we have some owners who have been here 30 years or more. Some have said "I'm going to live here until the day I die." That's well and good, but what happens when they do pass on and leave their unit behind? Who then assumes the payment of fees? My experience is the property is donated or the bank takes possession or the family takes it over and sells it as soon as possible or turns it into a rental. If there have been no plans for the unit then it goes to the bank and the remaining owners in the association have to pick up the slack for the lost fees until a sale is completed. This will be the subject of a future post.
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