from Local Attorney, Michael H. Wasserman

Thursday, January 23, 2014

Reuters: 70% of HOAs Are Underfunded

by Michael H. Wasserman, Attorney at Law

A startling number of condominium and homeowners associations do not keep reserve funds on hand. Reuters reports that 70%. of all American associations. are underfunded, a 12.5 percent increase compared to 10 years ago. That number seems to be rising.

Certainly, there are plenty great reasons why home buyers might consider condominium projects or houses that are part of a planned community or homeowners association.  Common expenses are spread among the community members, which can blunt the costs of maintenance and can also make available more & nicer amenities for all to enjoy. How popular are association communities? Four of five buyers of new homes, including condos buy into an association. 63 million Americans live in community. By contrast, only 2.1 million did so in 1970. 

Those pesky future costs for maintenance and repairs are the issue here. The last years of financial turmoil following the mortgage market melt down strained many associations, who’s home owners were unable to make their monthly assessment payments. Many associations were forced to defer maintenance and repairs for lack of available funds. Even under the best of time, it takes strong discipline and community support to budget savings for future costs.  We know this to be true in all aspects of life, including funding our own retirement accounts (or public employee pensions) This is particularly difficult in smaller associations where unit owners - who do not even know that they want to live in a home beyond the short or mid term - would rather keep monthly payments low than worry about / fund future repairs that might not be necessary until long after they move out. That sort of thing. 

Problem is, once those maintenance/repair issues come up, associations and owners face different choices: borrow money as a community or levy special assessments to pay the bills. 

Condominium due diligence investigation is a critical component of any real estate lawyer's job. Are there known maintenance or repair issues that will need to be addressed? Is there a plan in place to pay for those costs? Does the association have an adequate reserve? Is the association management pro-active or reactive in the way it deals with such matters? Is the buyer willing (and able) to take the risk of an underfunded association? 

Such as they are, the only real checks and balances come at the point of a purchase and sale. Mortgage loan underwriters will only approve loans where a given association's reserves are deemed adequate relative  to annual assessments. 

Sharp buyers and their lawyers also have the right to - and really must - review association financial records before closing on a contract. All others proceed at their own peril.