By Deborah Goonan, Independent American Communities
The other day I posted a blog entitled Fox Hollow (Memphis) and Tymber Skan condos – affordable housing failures, and shared it across several social media platforms. In one particular discussion forum, I have been challenged on my analysis of the insurmountable challenges faced by many affordable condominium communities.
Today I share with readers the typical Affordable Housing – Condominium industry talking points, and my responses.
If you can think of any more valid challenges to industry rhetoric, feel free to post a public comment below this article.
Industry Talking Points
First, you can read the talking points, made by a veteran attorney who represents real estate developers of common interest, association-governed communities. His areas of expertise include drafting governing documents (such Covenants, Conditions & Restrictions), writing sales contracts for new construction, negotiating on behalf of developers when construction defect warranty claims are brought by owners and HOAs, etc.
You get the idea.
This is a professional with a vested interest in presenting association governed communities, including affordable housing built as condominiums for sale, in the best possible light.
Here are the bullet points, paraphrased, that we hear over and over again, with regard to condominiums as “affordable housing” – a path to home ownership:
- Most low and moderate income condominium associations are successful, failures are uncommon.
- Condominiums allow for more people to become homeowners, so they can build family wealth.
- Basic construction does not mean poor quality construction.
- Mass-produced housing, such as affordable condominiums and tract homes in planned communities, builders take advantage of economies of scale (buying materials in bulk) to keep costs lower than they would be in a custom built home which is not in an association.
- When a community is well-managed, owners can enjoy recreational amenities, and a low-maintenance lifestyle.
- A small percentage of condominiums exceed FHA lender limits on percentage of units rented to tenants
- Most condo owners, including absentee landlords and investor-owners, regularly pay their assessments and maintain their units.
- “Condominiums are an excellent opportunity for first-time homebuyers and low and moderate income Americans.”
Affordable Condo Reality Check
But the evidence is mounting against HOA industry claims that condominiums are excellent opportunities, as well as the claims of economies of scale providing an advantage for anyone other than the original home builder/developer.
Just this week, industry trade group Community Associations Institute (CAI) released its Construction Defect Study. According to the study, 57% of defects occur in condos vs. single family construction. Nearly half of the time, those defects are not discovered until after the builder warranty has expired. Among those defects discovered within warranty, About one-third of the time, the association does not recover sufficient funds to make necessary repairs, resulting in special assessments or inability to make those repairs. Property values and affordability are adversely affected as a result.
The study does not say what percentage of condominiums have defects, but it is clear from national reports in cities across the US that construction defects in condominiums are so common that it has become difficult for builders to obtain affordable liability insurance. (Colorado is a prime example.)
Then there is the problem of insufficient reserves – a 2013 study found that 72% of associations have underfunded reserve accounts.
And California Department of Real Estate even issued a consumer warning to that effect.
Common sense tells us that low and moderate income Americans are more likely to face financial hardship and that family wealth is more at risk when it comes to underfunding of reserves. Without sufficient reserves, an association must either resort to special assessments or indefinitely defer maintenance of common areas.
The Washington Post recently reported on the growing problem:
As for lending for condominium purchasers, look no further than FHA’s most recent Mortgagee Letter 2016-15,
HUD remains concerned (rightfully so) about low owner-occupancy rates at condominium associations, and therefore most condo associations do not qualify for FHA financing. So of course, only a few associations in FHA lenders’ portfolios exceed lender maximums on rental units and/or delinquent condo assessment accounts.
Notably, in the past decade, thousands of condo associations have been terminated and converted to rental properties or demolished for redevelopment.
Here’s a recent report from Chicago:
And a previous article that presents several more examples from different states:
These reports are becoming more common, and they are hardly an indicator of success of the condominium model, particularly housing that is designed for sale to low and moderate income households.