Ownership Cost: Homeowners Associations

I asked our resident HOA expert to write a few words about HOA issues for today’s post. The author has served on the board of his large HOA for 16 years,
worked for one of the largest HOA management companies, and was also on
the Fountain Valley City Council for six years. Lately he’s been
working to expose the scandal behind the sale of the Orange County
Fairgrounds with this link.
He’ll be responding to comments.

360 East YALE Loop 15 Irvine, CA 92614 kitchen

Irvine Home Address … 360 East YALE Loop 15 Irvine, CA 92614
Resale Home Price …… $608,000

Do you remember the good old days before the ghost town?
We danced and sang as the music played in any boomtown
This town (town) is coming like a ghost town

Why must the youth fight against themselves?
Government leaving the youth on the shelf
This place (town) is coming like a ghost town
No job to be found in this country
Can’t go on no more
The people getting angry

Ghost Town — The Specials

High HOA fees can make a ghost town out of a good neighborhood. This cost is unique among our cost estimates because there is a high degree of uncertainty about the future of HOA fees — and worse yet, the possibility of assessments — that are not in a point-in-time analysis like the IHB Property Valuation Report.

Today is part 4 in the ongoing series on Ownership Cost:

Ownership Cost: Income, Payments and House Prices

Ownership Cost: Interest Rates and Downpayment Requirements

Ownership Cost: Property Taxes and Mello Roos

Ownership Cost: Homeowners Associations

Ownership Cost: Taxes and Opportunity Costs

Four Major Variables that Determine Market Price

Over the last three days we looked at the four main variables that determine home price:

  1. borrower income,
  2. allowable debt-to-income ratios,
  3. interest rates, and
  4. downpayment requirements.

Today we are looking at homeowners associations because this expense (1) reduces your payment to the lender, (2) reduces the
amount you can borrow and bid, and thereby (3) reduces the value of real
estate. People can persuasively argue that HOAs add more value than they cost, and I believe this is true, but that value is reflected in market comps. When you examine the details of cashflow, HOAs are a cost, nothing more.

The following is the words of our guest author OC Progressive.

Avoiding the toxic condo association

As the housing crisis continues, some condo associations can
be dominos lined up to fall.

This is not to say that you should avoid any
property with
a Homeowners Association, and in large swathes of Orange County,
it’s very hard to have a property that doesn’t have an HOA. As a best
example, let’s
look at my large scale HOA in Fountain Valley. This is a master
recreation association which
maintains 20 acres of parks, three pools, and some buildings in a forty
old neighborhood with 1,048 homes. The association runs a swim team,
kids’ events at holidays, and doesn’t get involved in telling people
what color
to paint their homes. The city maintains the streets, street
lighting, sweeps the streets, writes parking tickets, and has code
enforcement officers to keep properties maintained.

Properties don’t turn over very quickly here, but we’re
still seeing the results of the borrowing binge. Our assessments over 90 days
past due have tripled in the last year, and the money we will write off as
uncollectible could be in the $10,000 range next year, versus less than $1,000
last year. It doesn’t make the directors happy, but our budget is over $750,000
a year, our capital reserves are fully funded at close to $500,000 and we have
operating funds in the bank of over 100,000.

So a ten-fold increase in uncollectible assessments is a
blip on our balance sheet. A couple more years like this and we might have to
raise assessments another dollar or two a quarter.

Los Condos Diablo

Let’s take the reverse of this scenario, with a condo
association somewhere in South
County we’ll call Los Condos
Diablo. It’s a 200 unit association where everything is a common asset – not just
the land, but the sidewalks, streets, street lights, the roofs and walls of
every building, the trash enclosures, stairways, patios and decks.

Builders threw the place up quickly and there have been
serious ongoing maintenance problems which have been handled with band-aid type
repairs. The board of directors has been very reluctant to raise assessments,
so the reserves are funded at around 20% . Emergency safety repairs, collapsing
stairways, remediating mold problems from roof leaks, and other expensive problems
keep preventing them from catching up on maintenance. Exterior second story
decks that should have had a new surface coating, new paint and gutters now needs to
be torn down and completely rebuilt.

So instead of being like my HOA, where we are current on all
of our maintenance and have $600 in the bank for each homeowner, Los Condos Diablo
has net deferred maintenance liabilities of $5,000 a unit, and is struggling to
pay their bills every month. Because so many structural elements have been
compromised, to bring this set of buildings to good condition would take over a
million in reconstruction, money they don’t have and can’t save or borrow.

And here’s the kicker for that condo association. They were
upside down on their maintenance before people started defaulting on their
loans, and people are defaulting like crazy. These were entry level condos, and
when prices started rising, lots of folks cashed out and moved up. Over half
the units turned over close to the peak, and probably two thirds of them are

When someone loses a job or just gives up, they stop paying
their HOA fees. The HOA starts adding penalties, filing liens, sending notices,
and running up legal costs. Ultimately, some day, the bank forecloses and the
property changes hands. At that point all of the past due assessments get
written off. The bank is only responsible for paying from the date they assume title. Worst of
all, a management firm or collection firm might now be owed late fees and legal
fees that were assessed.

With assessments of $250 per month past due for 18 months, plus another $500 in fees the
condo association is out $5,000 that they need to collect somehow from the rest
of the owners. If ten percent of the 200 units go belly up, the remaining 180
owners each now has another $555.00 apiece in debt that they share with the
remaining owners.

Now let’s add another kicker. The Directors of the Condo
Association, volunteers who have stepped up out of civic duty, see all of this
coming and can see it getting worse and worse. Their neighbors rise up in anger
when they try to raise assessments, cursing and threatening recall. Instead of continuing to take abuse from their
neighbors, they resign or sell out and move on, leaving the community without a
board of directors. The management company tries to hold a new election, and
nobody volunteers. They send a letter to all the owners, resigning their

So the State Department of Real Estate ….. Oh wait, there
isn’t any agency with responsibility to pick up the slack for a failed condo
association. What happens next is anybody’s guess, but it will most likely
involve lawyers and the Superior Court, adding another layer of debt to each

So if you think you’re getting a bargain in a low-end bank
owned condo, you might in fact also be buying a big liability that you will
have to pay for somewhere down the line.

Never, ever make an offer on a condo without getting a copy
of the last year’s budget, and seeing the state mandated disclosure from the
reserve study.
If you can’t get it, walk away. WALK AWAY, and if an agent tells
you it’s not important, he’s either a fool or a scoundrel.

Reserve Studies

A reserve study is a document that is updated every year as
required by state law. It’s fairly complex, yet also pretty simple.

We know
that woodwork on buildings needs to be painted every four years and stucco
every eight years. We know the pool needs re-plastering every twelve years. We
know that the life on the flat roof is around fifteen years, and that the
playground equipment should be replaced after every fifteen years. So an
analyst assigns a cost and a life to each major component of an association.
Then they figure out how much the association should be saving for each
component, and plug it all into a big spreadsheet. That shows how much should
be available every year for major maintenance and replacement items, and how
much the association should be setting aside so that money is available. The
idea is that the level of assessments remains very stable as long as the
association doesn’t have to pay for several major components all at once from their
monthly assessments.

There’s a big catch. The state requires that you do a study,
disclose the results, and have a plan if there’s a deficiency, but the
association doesn’t actually have to appropriate the money
, and most fall

So a smart buyer has to look at the summary of the reserve
study has to be mailed with the budget, and the calculation that is required by
state law.

Here’s what it looks like for a fully-funded reserve from my
own association.

Based on the method of calculation in paragraph (4) of subdivision (b) of Section 1365.2.5,
the estimated amount required in the
reserve fund at the end of the current year is 452,933
based in whole or in
part on the last reserve study or update prepared by Advance Reserve Solutions,
Inc. as of January 1,2008. The projected
reserve fund cash balance at the end of the current fiscal year is $433,225
resulting in reserves being 96% funded at this date, The current deficiency in
the reserve fund represents $18.81 per ownership unit.

This is a source of pride. For every one of the 1048 units, there is $413.38
in funds dedicated to replace everything. That money is set aside in separate
accounts that can’t be used for operating expenses, and there’s an annual
contribution to maintain the counts at close to the ideal level.

Let’s say you have another association, where the
association hasn’t funded their reserves. That line might show reserves funded
at 50% and a deficiency in the reserve fund of $1153.41 per unit. Is that bad?
Not necessarily. But you better budget for your HOA assessments to increase by
20% per year, which is the maximum allowed by state law without a vote of the

Although it’s improbable, even an association with reserves
funded at 10% might be financially solid if they have just completed re-roofing
every building and replacing every piece of deteriorating wood work.

Where does the red flag go up, where you should just steer
clear of a condo?

As a rule of thumb, less is more, but bigger is better. The
fewer parts of the individual units that are maintained by the association, the
less likely you are to face significant issues from underfunded reserves and
deferred maintenance. And also, the larger the association, the more likely you
are to have professional management, and the more units you have to divide
fixed annual costs like the corporation filing fees, d&o insurance policy,
cost of the reserve study, et cetera.

Before you start looking, find a real estate agent to represent you who
understands what you’re talking about, and knows that you’re going to need a
copy of the last budget before you make an offer. Just as there are HOA’s where
you’re actually getting a valuable share in cash assets as part of your
purchase, there are professionals out there who will help you gather the
information you need to make a good decision.

Then use some common sense and use your eyes.

Look at the numbers in the budget and the reserve study. How long would it take the association to
catch up on under-funded reserves? How
much is the deficit in relation to the value of the unit and the current
monthly payment? Underfunded reserves are frequently associated with
dysfunctional condo politics, deferred maintenance and serious rates of
delinquencies. Politics? Yes, some associations have repeated recall elections,
with warring factions wasting money on attorneys while their finances fail, or
they have idiots elected to their boards who are more interested in the
neighbor’s dogs than preserving and protecting assets.

So if the numbers don’t look good, they may in fact be far, far worse.

Also, look for signs of deferred maintenance – rust on
wrought iron fences, peeling paint and dry rot, missing roof tiles, cracks in
asphalt are the most obvious, but with a sharp eye you can look at the edges where
the decks meet stucco, where the eaves meet the roof and see if these most
vulnerable areas look as if they’re tightly sealed and well-maintained.

Whatever you do, steer clear of Los Condos Diablos, the nightmare association
where everything is going wrong. At its worst, it’s broke, internally at war,
and unable to find a way out of the hole that its owners have been excavating
for years. Every dollar you put into a part of a failing condo association is at

[end of quote]

HOA Analysis Service

The author of today’s post has been in contact with me via email for quite some time. He is contemplating offering HOA analysis as a service, and I told him it is a great idea. IMO, getting an HOA analysis is just as important as getting a home inspection.

Both HOA analysis and home inspection are insurance against unknown expenses you may face in the future if you acquire property. A cracked foundation can cost you tens of thousands of dollars — an underfunded HOA can cost you even more. Both are equally important.

Unfortunately, to my knowledge, nobody is providing HOA analysis as a service. The documents are hard to get (HOAs are not keen to display their dirty laundry), and the initial review is time consuming, but such a service would cost no more than a home inspection, and perhaps even less.

In a post-Great Housing Bubble era, we will see a financial wasteland on HOA balance sheets. Many have always been underfunded, but even strong HOAs will suffer when the payments stop coming. Most readers of the Irvine Housing Blog will buy in a community with an HOA. Without this service, it will be a crapshoot whether or not you find a stable and well-funded HOA.

If any readers care to comment on whether or not you consider this service to be valuable, perhaps we can convince the author to offer this service to everyone. I think it would be great.


360 East YALE Loop 15 Irvine, CA 92614 kitchen

Irvine Home Address … 360 East YALE Loop 15 Irvine, CA 92614

Resale Home Price … $608,000

Income Requirement ……. $113,182
Downpayment Needed … $121,600

Home Purchase Price … $526,500
Home Purchase Date …. 6/24/2009

Net Gain (Loss) ………. $45,020
Percent Change ………. 15.5%
Annual Appreciation … 15.5%

Monthly Mortgage Payment … $2,641
Monthly Cash Outlays ………… $3,450
Monthly Cost of Ownership … $2,600

Redfin Property Details for 360 East YALE Loop 15 Irvine, CA 92614

Beds 3
Baths 1 full 2 part baths
Size 2,187 sq ft
($278 / sq ft)
Lot Size n/a
Year Built 1986
Days on Market 4
Listing Updated 10/20/2009
MLS Number S593399
Property Type Condominium, Residential
Community Woodbridge
Tract Ge

According to the listing agent, this listing is a bank owned (foreclosed) property.

Two story end unit with 3 bedrooms and 2.5 baths. Large Living Room with vaulted ceilings and fireplace. Formal Dining Room and breakfast nook plus Family Room with another fireplace! Master suite has separate tub and shower. Upstairs laundry. Mirrored wardrobe doors in all bedrooms. Large sideyard with lots of hardscape and a fireplace.

This property was a peak purchase with an Option ARM. The owners held out a bit longer than most because they had some of their own money in the deal.

The property was purchased on 10/18/2006 for $710,000. The owners used a $568,000 Option ARM with a 1% teaser rate, a $71,000 second mortgage, and a $71,000 downpayment. The gave up in late 2008…

Foreclosure Record
Recording Date: 05/28/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2009000272123

Foreclosure Record
Recording Date: 02/26/2009
Document Type: Notice of Default
Document #: 2009000091143

The auction price is 26% below the original purchase price. The lender is trying to recoup a bit more with this asking price. Given the state of our market, they will probably get it.

47 thoughts on “Ownership Cost: Homeowners Associations

  1. Freetrader

    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.

    1. IrvineRenter

      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.

      1. Chris

        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).

        1. CA

          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.

      2. alan

        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!

        1. OC Progressive

          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.

    2. Geotpf

      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.

      1. OC Progressive

        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.

    3. OC Progressive

      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.

      1. freedomCM

        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.

      2. CA

        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.

  2. Chris

    OT GDP grew in 3rd Q.

    Sure, with govt spending.

    Can you spell “double dip”?

    Get ready for another drop in everything, including housing.

  3. SoOCOwner

    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!

    1. OC Progressive

      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.

    1. irsx02

      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.

    2. AbroadThankGod

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

  4. Newbie2008

    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.

  5. Lucky Victim

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

    1. Lee in Irvine

      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.

  6. Serenity Now

    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.

      1. OC Progressive

        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.

  7. Talyssa

    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.

  8. Lee in Irvine

    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.

    1. OC Progressive

      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.

      1. norcal

        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.

  9. MikeyD

    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!!!!

  10. whatever

    Good article. Too bad the OC Fair article is so bad.

    I was upset about the OC Fairgrounds sale and was hoping for an interesting article. Instead I get name calling, invective and unsubstantiated accusations.

    1. OC Progressive


      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!

  11. NightmareHOA

    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.


    1. OC Progressive

      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.

  12. norcal

    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.

  13. norcal


    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.

    1. OC Progressive

      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.

    2. IrvineRenter

      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.

  14. Major Schadenfreude

    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.

    1. OC Progressive

      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.

  15. MalibuRenter

    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.

  16. grabasnorkel

    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.

  17. CityRidge

    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.

  18. bill shoe

    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.

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