Excellent post.  Great pictures of Bode, by the way, also. 

The HOA story rings too true.  My HOA, Village Park HOA, has exactly the kind of dysfunction you are discussing: every time the Board tries to raise fees or raise funds for a special assessment for an improvement or an upgrade gets pilloried.  We had a recall election last year.  On the other hand, the Board DID go a bit overboard in trying to pass an assessment for a $2 million rebuild for the Clubhouse, when all it really needed was a little repair work.  Still, our replacement fund is underfunded, and the new board isn’t likely to increase fees to set up an adequate sinking fund.

On the bright side, since our HOA controls only the common areas, it doesn’t create the disaster that HOA fees become in the example you present, which alternatively could have been designated the “North Korea Tower Condo Association.”  As has been pointed out here before, it is possible that some of the condos with stiff HOA fees are actually worth nothing (i.e., the HOA fee itself is a larger amount that one would pay for the property value). 

Of course, it may be worth asking:  is this a failure of capitalism, or a “tragedy of the commons?”  One’s opinion of the free market might tend an individual toward one or another alternative explanation.

OT GDP grew in 3rd Q.

Sure, with govt spending.

Can you spell “double dip”?

Get ready for another drop in everything, including housing.

It seems to me the problem with HOAs would be largely solved if they were forced to fund their reserves. When paying bills becomes optional, there will always be a debate over payment. When payment is required, the association would do whatever it needed to in order to remain properly funded.

At times like these, there would still be problems with HOA funding due to delinquencies, but at least they all would be starting from a place of full funding. When they are already behind, the problem becomes hopeless.

This is a big negative to buying a condo.  You still have to pay what amounts to rent, but instead of to a landlord you pay to an HOA-plus you have a mortgage, taxes, and insurance on top of that.  The HOA fee in the featured property is $437.  Now, you can’t rent a place in Irvine (or most places) for that much, but that amounts to a mortgage payment of about eighty grand (30 year fixed with no money down).  So, the purchase price isn’t really $608k; more like $688k (or more, since you still have to pay HOA fees after you pay off the mortgage-plus they probably will go up in 30 years while your mortgage payment won’t).  You can add in Mello Roos in a similiar fashion, which might be as much or more.

That is, looking at the big picture financially, an older house (or a lucky new infill one in an established neighborhood) with no HOA or Mello Roos is cheaper than the same house or condo with large ones.  Of course, you have to add in maintenance costs that you have to pay out of pocket that the HOA would otherwise pay for-assuming they actually perform said maintenance in a timely manner.

Wouldn’t HOA be able to do NOD and NOT with delinquencies? What’s the point of paying HOA if they cannot have that kinda threat?

BTW, the problem with HOA lies mostly with HOA laws (CA in particular). I’m currently living in Taiwan and we don’t have that stringent of laws binding HOA from proper funding. Hell, you would see protests and complaints if board members voted to increase HOA fees here (unlike Irvine where it is expected to rise at least every year or so).

I think I know where the “Los Condos Diablo” complex is.  We looked at these P.O.S. condos back in 2008 when we thought we wanted an investment property.  I had a friend who lived there when they were fairly new, more than 20 years ago.  We couldn’t believe the state of disrepair they were in.  The decks looked dangerous and were full of either rot or termites.  I don’t think the units had EVER been painted.  One of the units we toured had several beds in the living room and the other bedrooms were locked.  The other unit we looked at had been stripped of everything - baseboards, appliances, even the medicine cabinets in the bathrooms!  I remember it had major cracks in the patio slab and the patio was separating from the structure.  I think even our realtor was shocked!

I haven’t had the chance to look at the finances of any of the local high-rise condos, but the construction quality of towers is far different from the stuff that was slapped together in the boom years when new stuff was thrown up willy-nilly, and building inspectors were rumored to operate on commission.

At the same time, it would be really interesting to see the aging report. The bigger the assessment and the longer before the foreclosure, the bigger financial hit every one of these foreclosures is.

Los Condos Diablo is a composite, but there are plenty of toxic associations out there, and the collapse of the great housing bubble will mean that there are many more, where units may become unsalable at any price.

Great post.  I would absolutely use an HOA analysis service.

IR,
What a novel idea to fully funding the HOA reserves and other obligations.  Another novel idea would be to fully funding the retirment/pension plans.  The idea of kicking the can down the road is everywhere and lead to nowhere, but some inriching themself and most holding the bag.

Toxic debt gives rise to toxic HOA.  With more FC’s and long-term govt sponsored free-renters, HOA’s are going to be in a world of hurt.  I rent in a higher end condo, but have seen a lot of FC.  Lucky for the HOA, the banks have been moving fast to FC in my complex and that limits the HOA’s loss.

The OC fairgrounds drama that is linked was good reading.  It amazes me how under almost every rock hides a family of roaches.

IR,
When the time is right for us to buy, I would be VERY interested in using an HOA analysis service. Ideally I would like to be able to visit a website that is updated monthly or quarterly, pay a 30, 60 or 90 day subscription fee and get all my info online. If each Association had a 5 star rating system and a summary of recent projects completed (streets re-surfaced, pool work, termite treatment, etc) I would feel better prepared to make a purchase. It would be nice if the subscription fee came with the opportunity to email or speak on the phone with an HOA expert. The market has never needed this type of service more than right now.

I guess I should have addressed OC Progressive

I like the idea of HOA analysis but I think I primarily like it because it can be so hard to get a realtor to get those documents for you.  I mean I would think most of us could do a rudimentary analysis ourselves if we got all of the documentation.  I’m certainly capable of walking through a property and seeing what is new, less new, or flat out needs replacing ASAP. 

Plus it would actually not be too expensive per-rquest if it really took off, becuase multiple people would potentially request the same assesment (especially in a larger association) within a certain period of time and I am guessing this analysis doesn’t need to be Re-Done more htan every 6 months or so.  He could sell two levels of product, one that is “a recent HOA analysis, within the last xx months” and one that is a “custom analysis dated today”.  The first requestor would end up with a cheaper custom one.

On the OTHER hand I don’t think its quite as necessary as an actual valuation.  I mean it seems like a good HOA is happy to hand out their numbers - he certainly was in the above post.  An HOA in trouble might tell you their in trouble by being very difficult to obtain paperwork from.  That could be a warning sign off the bat.  Not as good as a real analysis but there’s something there that a non-expert can judge for themselves (in addition to being able to judge the condition of the property).  An appraisal isn’t usually something that a non expert can do since there are very specific rules around what counts for what .... and people are bad at being objective about places they want to buy.

I work with many people in the insurance industry, and here’s what they’ve told me about HOAs.

It’s important that when you become a member of an HOA, you purchase an additional coverage called “loss assessment” on your house/condo insurance and your earthquake insurance.  A homeowner loss assessment is very rare, typically only happening when the master HOA has loss exposure (deductibles or exclusions), or the limits are maxed out by a major event, like the Northridge EQ, or a huge fire.  Other examples would be a child drowning at the community pool, or possibly even a president of the HOA being sued for an event that is not covered by the master policy.  Most people do not discover they don’t have this coverage until it’s too late.  Basically what happens is when you become a member of an HOA, you assume common financial responsibility for events that can occur on the grounds, and/or related to the community ... in other words, they can bill you, and make you pay.
So everyone needs to add “loss assessment” coverage to their insurance if they’re members of an HOA.

high rises can be hugely expensive for maintenance.  just like a roof (which they also have), they have super expensive mechanicals.  replacing a stack of 20 floor elevators can cost hundreds of thousands, if not a few millions, of dollars.

Every day I read this I am still amazed that someone actually paid $400K, $500K, $600K, $700K, and even $800K…for the @$#@^*!ing CONDO!!!!  Not a house….but a #%@@!*^%ing CONDO!!!!

Lee is dead solid perfect on this.

But this insurance doesn’t cover anything which will most likely happen. Somehow insurance companies are better at collecting money than they are at paying it out.

Associations are only allowed to increase assessments by 20% a year, unless there is some type of emergency. Unfortunately, deferred maintenance can create an emergency, where you’re suddenly liable for a $5,000 special assessment to make up for deferred maintenance. The lawyers say so.

An HOA can initiate foreclosure proceedings, but usually only after a certain threshold has been met. In CA, I *think* it’s around $1500. Assuming HOA fees are $300, the HOA can start in 5 months.

Problem is…if you’re missing HOA payment, you’re probably underwater on your mortgage and behind on your taxes. There’s probably not enough to cover your 1st TD, much less any 2nd TD and delinquent HOA fees.

HOA’s can and will go after borrowers with collections and civil lawsuits…and will usually win, but having a judgment and collecting it are two different things. Plus, if a borrower is insolvent/files bankruptcy, then it’s a no go.

People walking away from properties or go through foreclosure are usually advised to pay HOA if they are able to since the FC wipes out/clears out any issues with loans, but an HOA still come after you.

There was a NYT article on shoddy $1.5M+ condo towers built in the boom years in NYC and now the HOA’s are stuck trying to get repairs done.

Excellent post!  I live in a so. county condo complex that sounds frighteningly like Los Condos Diablos.  I could tell you so many horror stories.  OCProgressive, what is the specific state law that mandates the reserve study be done annually and mailed with the budget?  Our board hasn’t done a reserve study since 2007, and we are woefully underfunded with a ton of deferred maintenance.

Thanks.

I agree, the Fairgrounds drama is good reading from OCP.

I find it somewhat ironic that public owned property (the OC Fairgrounds), can be fueled by politics and cronyism.

This bullshit happens all over the country, on both sides of the political spectrum.  I keep asking myself, when are people gonna gather with pitch forks & torches in hand, yelling “NO MORE FU*KERS”.  This crap is beyond ideology, and impacts everyone of us.

LOL!

If you don’t like the tone of the article about the sale of the OC Fairgrounds, an asset owned by the poeple of the state of California, then please, please explain how this makes any sense.

Calling out names and citing the numerous laws that have been violated is “unsubstantiated”?

Yes it’s invective, and proudly so!

While it’s possible to get annual budgets, with the reserve disclosures, it’s almost impossible to get current aging reports, and that’s where the rubber hits the road.

If you look at the reserve disclosure, and find out how many units are in foreclosure, you can definitely avoid the toxic condos.

lifted from the web

The requirements are set forth in the Davis – Stirling Common Interest Development Act, Civil Code Section 1365 and its sub parts.  The Code also sets forth certain performance requirements for board members, and requires a site inspection every three years.

California has established reserve study performance and disclosure requirements, but has not established any minimum funding requirements.  The law does require disclosure of the funding plan, and also whether or no any special assessments are planned as any part of the 30-year funding plan.

California law is codified as the Davis-Stirling Common Interest Development Act.  Sections 1365 and 1365.2.5 set the disclosure requirements and specific format of certain disclosures.  Section 1365.5 establishes performance standards.  These standards require a visual site inspection every three years.  Since the disclosure standards require new information to be distributed to members as part of the annual budget, it is virtually impossible for the association to comply with the disclosure requirements unless the association performs an update without site inspections in the two “off” years.

I too would love an HOA detail analysis service.  But why can’t we start something rudimentary right here, right now?  I’m sure there are many readers on IHB who live (or rent) from a place with an HOA in Irvine.  And have access to their HOA’s reserve studies.  And also have access to a scanner.
 
So IrvineRenter, why not have a place on this website where people can upload their HOAs reserve studies document?  I can imagine it now…. GardenEstatesCondo_HOA_ReserveStudy 2009.PDF   Your viewers can download, analyze and comment if the HOA’s financial are straight and funded.
While this won’t be as a good as a detailed analysis, its a great start to see various HOA level of stability across various Irvine properties.  And, it’ll be easier to access than getting it from your local real estate agent.

I was prez of our HOA for about 5 years, and know how tricky it is to run it with fiduciary integrity.  The difficulty comes not so much from members not paying their fees or going into bankruptcy, but from 2 main sources:

1) insanely increasing insurance costs;
2) local (non-member) REALTORS coming to Board meetings and telling us that our HOA fees were too high - said realtors also leafleted the whole complex trying to create member disgruntlement.  Fortunately members realized that the fees covered important maintenance costs that they would otherwise have had to pay out of pocket or through assessments.

Currently it’s very difficult to get new people to serve on this voluntary board - people who buy at the top of the market don’t want to govern their investments, apparently.

Our HOA deals with this simply by disclosing current year budgets in the off years, that include the amounts being spent from the reserve fund on specific maintenance mandated by the reserve study.  If your association is actually complying with its reserve study (which is in the self-interest of all owners except flippers), this isn’t a problem.

A prospective buyer should be able to compare the reserve study chart of projected reserve expenditures per year to the budget for that year, to get an idea of whether the HOA fees are sustainable.

IR,

A rule of thumb for annual home maintenance costs is that they should be about 1% of purchase price.  Many people who buy condos (to live in) don’t think about maintenance; maybe they’ve been renters for years and it’s just not on their radar.  But people who’ve owned SFHs know that maintenance is necessary.  Sometimes they’re happy to live in co-ops or condos and let the association take care of it.

So although HOA fees are indeed a cost that reduces the price of a property, some portion of them should be counted against what the owner would otherwise spend on roofs, paint, sidewalks, pool membership or maintenance, etc.  This might complicate your algorithms a bit.

Great idea!!

OC Progressive:

Your article says that 6 of the 8 directors are conspiring to purchase the OC Fairgrounds, but that the estimated value of this asset is bloated.

So, if California can sell the grounds at an inflated price, wouldn’t that be a good thing?  Perhaps we buy it back when they “foreclose”!

I know there is a rip-off there somewhere, but the article seems contradictory on this point.

With your own house, you have control.

In theory, common assets and reserves would bring lower costs for maintenance, insurance and common areas,

In practice, not so much.

Sorry I’m late to this blog…

Another way to look at reserves is this.  You buy a SFR with a 30 year roof.  The cost of roof replacement is $30,0000.  Are you going to open a savings account for you home and put aside $1,000/yr for 30 years towards your roof.  NOT.  So HOAs that underfund have to special access, that’s life.

The problem is with small HOAs.  A few people get on the board with thier own pet projects and with no-one to stop them, they spend your reseves which are supposed to be for your roof on say, remodeling the entry gate or some other vanity project even though they are supposed to have an architectural committe and a vote before they make this chage, they do it anyway because they can.

So after being thru this several times, you know what, the only way to keep the board from spending money on these vanity projects, don’t keep any reserves and when they need to fix the roof, have a special assessment!

There are a number of things going on here, and they are all bad, and yes, they are mutually contradictory. None if it makes any sense, but we can see that the sale will encumber the fairgrounds and squeeze every vendor while every public service is eliminated.

What’s obvious is that it’s bad public policy and a bad deal for the people of California, both locally and statewide.

The best position is to Derail the Sale and start over again, instead of having a deal done in the middle of the night as part of a flawed and dishonest budget deal.

And this is a great point.

When you buy into an HOA, you may be buying hundred or thousands of dollars worth of savings against future maintenance costs.

My point is that you should look at that one paragraph that shows what you are buying.

Where I live, it’s an asset. In many HOA’s it’s both and asset and a liability. In a minority of condo associations, it’s an indicator that you shouldn’t buy because your property may be unsellable in the future.

Vanity projects are a small, small, although annoying part of the problem.

And I have to confess that I only became involved in my HOA because of a well-meaning board that wanted to tear down a clubhouse and replace it with something that looked like a big Taco Bell. After the recall,we renovated it appropriately.

Under the law, the association can’t do a special assessment unless it’s a special situation.

And the roof at 30 years is only a small part of the maintenance assessment. That’s what the reserve study is all about.

I thought an umbrella liability policy covers this…

I would like to add another variable to home prices: population.

Immigration and growth can do a lot when there is excess capacity.  Even 15% extra homes will be gone in 5 years in a high growth area.

In a shrinking area, once the rate of shrinkage exceeds depreciation, demolition, and conversion to alternate uses, prices just keep going down.

Add me to the list of people that would love to have an expert review an HOA before buying.

We try to adjust the percentage for maintenance and replacement for properties based on circumstances like that. It is subjective, but even a guess is better than no data at all.

Condos with high HOA often have lower maintenance expenses. Investors actually like that because they have less they might have to replace if the tenant trashes the place.

I would certainly use an HOA service. If I happened to be looking at a condo, it might go something like this:

OC Progressive: “So, the condo HOA at this complex…”

grabasnorkel: “Hold it right there. I ain’t participating in a condo HOA, period.”

(Though I couldn’t necessarily rule out a neighborhood association for SFRs.)

I have little desire to pretend like I “own” something where shared walls, roofs, etc. are involved. There just isn’t any need to pretend like “owning” it means anything at all. I’m quite content to just rent it.

Yes! Foreclosure properties are really hot in the market right now. The amounts of offers submitted to these REO listing agents are starting to get ridiculous! Banks are having no problems moving their distressed properties because investors and smart small-time investors realize that their opportunities to invest in properties for dirt cheap (pun intended), will come come to an end real soon! So just a quick advise to everyone that are “thinking” about investing…don’t think about it anymore. Just invest, wisely of course. Be sure to consult with your Realtor and seek financial advise before investing.

I agree. Why funding the actually-computed reserve amount is not required is a mystery.

OC Progressive,

Thanks for great info in the post.  Your business idea makes sense (advising/reporting on HOA’s for potential buyers), hope it works out.

I read a couple columns/articles of yours online regarding the fairgrounds.  I think you are the kind of local, detail oriented reporter that we need more of.  Most local journalism waits for an accident to occur or waits for a press release to roll out of the fax machine.  Very little current local journalism involves finding stories.  I’m probably preaching to the choir here, but thanks again for all your writing.

+1 on this one.

Do agents have access to aging reports?