Welcome to Community Wise. Brought to you by Wise Property Solutions.
Nathan Flora: Joe, each week I get calls from homeowners saying their HOA fees are too high, what are they paying for, and why can’t they be lower like their neighbors down the road?
Joe Wise: The biggest mistake that homeowners make is assuming that that HOA fee can easily be translated from neighborhood to neighborhood. And so evaluating it based purely on a dollar sign is in fact a horribly misguided notion and way to assess it for a number of reasons.
The first is HOA fees are essentially the annual budget of an association divided out by the number of people who own property in that community. And so one HOA might buy water and sewer as a common expense whereas another may not. And so if you don’t have the information about what all is included in those fees you can end up with a misguided impression as to what the real value of those fees are. And so that’s the first question.
The second question, and I see this all the time, in real estate listings it will say $50 a month or $100 a month HOA fees and then it will proceed to list all of the things the HOA fee covers – insurance and landscaping and maintenance. And if that $100 is not enough to cover those costs in the future when they come up, guess who’s paying? It’s the property owners. The homeowners are going to pay it in the form of increased assessments or special assessments. And so keeping an eye on it that way too is important to understand.
Nathan: So one of the first steps a homeowner might take is asking to see the budget for the association to get a truer understanding of what their HOA fee is paying?
Joe: Absolutely. And look at that budget and ask yourself does it seem plausible that $2,000 a year is an adequate budget for maintenance on an 80-unit community.
Nathan: Yeah, another trick is to divide that annual budget by the number of homeowners.
Joe: Absolutely. It’s reasonable to look at a homeowners association or a condominium particularly and just ask yourself does that seem like a reasonable number if I had a single family home. Now there may be some variables in there that you need to consider but if the association is budgeting what amounts to $30 to $50 a year for maintenance on your property I think we can all look at that and say there is something not being sufficiently prepared for.
Nathan: Now another thing that homeowners will say is that higher HOA assessments make it harder to sell the property. How would you respond to that inquiry?
Joe: The homeowner association fees need to be set realistically based on the service expectations and future capital costs an association faces. Of course as with anything you can price yourself out of the market. But thinking that by keeping fees artificially low you are somehow doing yourself and your fellow owners any service is woefully misguided. Let me say this – buyers will look around a community and if they see evidence of deferred maintenance they’re going to discount the price they’re willing to pay you. And so the question isn’t really high fees or low fees. The question is not whether we pay or don’t pay; the question is not whether we pay. The question is how and when we pay.
You can pay now with a planned reserve and appropriate funding of those future costs. You can pay later in the form of a special assessment or real estate values that are suppressed because buyers are basically discounting your property because they can look around and see retention walls that are decaying. They can see roofs that are long overdue for replacement. They can see pavement that’s a mess. And they begin to take discounts. They may not necessarily realize exactly how those costs are flowing through but properties become worth less as they begin to degrade.
Nathan: Sometimes homeowners will also call and they will see the reserve balance and, you know, it’s $15,000, or $20,000, or $30,000 and certainly that is significant – that’s a significant amount of money – but it is to a person or one individual. But talk a little bit about what reserve balances might look like for a community and how that should be considered by the homeowner.
Joe: That’s right. I think it’s helpful to always back your way into those numbers by saying what does that translate to as a per unit price? You know if you’re a 200-home community with a $20,000 reserve balance that means that you have $100 in the bank in your rainy day fund. And that seems like enough to get you through a tough spot then good. But if it doesn’t, if you think you’re going to come up short, rest assured that the same is going to be true for a homeowners association. If you’re going to have $50,000 or $100,000 or $200,000 or $500,000 worth of roof replacements in the next three years and you don’t have $25,000 in the bank, you’re not ready. And there are ways to get ready but don’t buy into the delusion of these low HOA fees and think you’re some how getting a deal. It’s not a question of if you pay; it’s a question of how and when.
Nathan: And what are some of the items that an association is responsible for that an individual homeowner may not recognize or realize that is a future cost that the HOA needs to be planning for?
Joe: Those will be as unique as the governing documents of each community. Some governing documents tend to be very detailed as to what is and is not a common element or a common expense, while others are little bit more vague and so it’s left to some degree of interpretation. But within a condominium community, for example, it’s very common to see future capital costs centered on things like roofing, guttering, siding, painting, paving, even over time landscape replacements and overhauls as things become mature and go to a point that they need to be re-worked or rehabbed. And all of those are things that over time will kind of sneak up on you.
We have worked with a lot of communities that have 20 or 30 years history and one of the big challenges that they face is that for decades the assessment has been based on nothing more than current operating expenses. What does it cost to get the grass mowed? What does it cost to keep the insurance in force? And those are two very important things to do, but they don’t take into account the progressively diminishing life of those big capital expenses. And those big capital expenses are big. You’re talking six and potentially seven-figure numbers depending on the size of your community and scope of its common elements.
Nathan: So, homeowners to best engage their association on these types of planned future expenses and what their budgeted HOA fees or assessments are going to, need to take a look at the budget. They need to consider long-term capital expenses and the reserves that are there to fund those and they also need to consider whether the deferred maintenance affects their property now or later when they try to sell.
This episode of Community Wise was hosted by Nathan Flora and Joe Wise and is a production of Wise Property Solutions. For more helpful information, visit us on the web at wisepropertysolutions.com or you can view our blog and sign up for our e-newsletter.