The Price of Pain

“There's no such thing as a free lunch.”

- Milton Friedman

It's spring, some days, and that means many associations are about to undertake major projects such as repairing/replacing decks, re-roofing, re-paving. That means some associations are undergoing the pain of having special assessments.

I attended one such meeting last week. There had been little maintenance done for years, a questionable management company (now replaced), and substantial rot that needs repair. So, sadly but diligently, the board of directors had multiple contractors visit the property to determine the extent of the problem and the best way to tend to the rot, e.g. from inside the units out or outside the units in.

Having had loans in the past, this association thought it best not to have another one with the high rates now in existence. It reviewed its Reserves and thought it best not to near empty it to avoid a special assessment, for a variety of reasons, e.g., low reserves make it hard for owners to sell; they had other maintenance issues to tend to; they wanted to keep a cushion for cost overruns (a promise in the dealing with wood rot); soft costs such as expert reports on the extent of the needed project; and the knowledge that emergencies always arise when you have the least amount of money on hand. So they wanted a financial cushion. So they passed a special assessment in the high four figures for every unit, a substantial amount for units not valued as highly as those on the seacoast.

For their efforts, the members of the board of directors, fellow owners who had essentially assessed themselves, were lambasted by a small but vocal group of owners who, repeatedly, expressed the opinion that the Reserves should be emptied. Their point was since there wasn't any emergency, the board should take the risk because special assessments hurt; an emergency was just an “if” worth risking; and therefore the reserves should be drained.

I get it. I really do. A recent article I read noted that 25% of people in the United States now live in community associations with at least 3 million of them paying $500.00 per month or more, fully 9% of all condominiums. And it's going up because long-deferred maintenance is coming due. (By the way, New York checks in as the most expensive with a media HOA fee of $739.00 per month followed by Washington D. C and Hawaii. On the other end of the payments, and I think this says all you need to know about the state of the associations, Wyoming and Oklahoma each have a monthly, median fee of $48.00 per month, and because that's not low enough Arkansas checked in at an average of $47.00 per each month.

What to do? Well, the worst thing about special assessments is, of course, the money owed. The second worst thing is the due date, usually now or within a month or two. One way to avoid these types of things, is to get a proper reserve study done. Depending upon your association it might run $5,000.00 or more, and much less for smaller associations.

Two companies I have found over 25 yers of condominium practice that are really good are Reserve Advisors and Criterium Engineers. They visit the property and will create a thirty year plan of what is likely to go when, what it will likely cost; and how much you have to raise each year, giving suggested condo fee increases along they way to reach the goal of having sufficient money for expected, long-term capital repairs without assessing owners.

Realtors have repeatedly made the statement to me over the years that a properly done reserve study, will add anywhere between $10,000 and $20,000.00 to the value of each Unit in an association, for the simple reason that owners don't want to walk into a one or more special assessment after they purchase. Buyers will walk away from association without a proper reserve and pay more, much more, for one that has a proper reserve study.

Get one done, and roughly follow it each year. Your fees will certainly go up, but slower and in much smaller quantities than a large special assessment. So, I guess you have to ask yourself which is going to hurt more, a regular, steady, slow increase (inflation is never at 0%, so it's always a warning sign of sorts of underfunding the reserves when a board of directors claims fees have not gone up but the services have remained the same and are perhaps been even better) or a large, sometimes very large, surprise special assessment.

This group of very nice people sadly just learned a hard lesson.

Let's hope your association can avoid that.