By Deborah Goonan, Independent American Communities
I admit it. I am a bit of a research study wonk. So when I see a new study involving association governed communities, I read it carefully and with great interest.
I look at the methodology. I consult other research studies, as well as literally thousands of anecdotal reports archived on various media platforms.
Then I analyze all of that information and boil it down to the most important points to make it easy for the average reader to understand.
Today’s topic: the rise of monthly assessments (also called fees or dues) in association-governed communities. Let’s begin by looking at the following article published by Trulia.
Attack of the Killer HOA Fees
By Mark Uh | Mar 15, 2017 12:01AM (Trulia Blog/Affordability)
Homeowners association fees have been on the rise throughout the country. In 2005, the average monthly HOA fee among all households in the country stood at $250. By 2015, the average fee was $331, a pace that’s not only outpaced the nation’s housing prices, but exceeded the inflation rate by 5.9%.
For the uninitiated, homeowners association fees are required monthly fees that help cover the cost of maintaining a community’s common spaces such as a gym, pool or activity room, landscaping or even utilities and cable TV. They are usually, but not necessarily, attached to homes that are a unit in a multi-family building, such as a HOA or townhouse, but can included single family homes in a community too.
The financial crisis and great recession of 2008-2009 did little to halt the inexorable march of HOA fees (blue) despite the drop in home prices (orange). They continued to rise. Trulia sought to identify what kind of properties are likely to have high HOA, or homeowners association fees, what markets had the highest fees and what caused HOA fees to rise so steadily.
– See more at:
https://www.trulia.com/blog/trends/hoa-fees/#sthash.QSgYRcLq.dpuf
Paraphrasing, the basic conclusions of this Census data based research, summarized in the article linked above:
- Association fees have increased at a faster rate than home prices
- Older buildings, and larger buildings with a greater number of units have higher fees
- The more bedrooms in a unit, the higher the fees
- Fees as a share of housing costs varies considerably by metropolitan area
Research limitations:
Although the article and the methodology section refer to homeowners associations (HOAs) in the generic sense, a closer look reveals that this study primarily tracks condominium associations. Based upon the actual questionnaire in the window below, the reader can see that the American Community Survey is not capturing residents of true homeowners associations (HOAs) consisting of detached homes and townhouses in planned communities or mixed use communities. The ACS also does not capture the reality that a significant number of residents are subject to nested associations in larger common interest developments. By nested associations, I am referring to the fact that a homeowner may be paying a condominium assessment as well as HOA or POA (Property Owners Association) assessments to a Master Association.
See Question 15 on page 6:
Most survey takers cannot distinguish between the three different types of associations: homeowners associations, condominium associations, and cooperative associations. And in most parts of the U.S., people assume that a condominium is an apartment-style multifamily building. Therefore, a resident of a detached home, townhouse, or manufactured home subject to HOA fees would be likely to answer NO to question 15: “Is this house, apartment, or mobile home part of a condominium?” This is especially true if the resident lives in a detached single family home that is, in fact, part of a homeowners associations but not part of a condominium association.
Assuming the survey is not capturing fee information from owners in HOA planned communities, then the ACS is not counting millions of dollars spent on things such as private road maintenance and repair in gated communities; maintenance of privately-owned and maintained lakes, canals, and dams; and operation and maintenance of security entrances in these communities.
Furthermore, you will note from the questionnaire that tenants are not reporting condo or HOA assessments unless they actually pay them. Usually the condo unit owner pays these fees, not the tenant. And since 37% of home buyers do not reside in the property, and the ACS surveys residents, not owners, a considerable amount of data on fee amounts is not being captured.
Importantly, special assessments are not considered in the survey, either, just regular monthly assessments.
Due to all of these limitations, it is my opinion that fee increases in association-governed communities are likely understated in the Trulia study.
Nevertheless, the statistics document what housing advocates have known for years: the cost of home ownership in association-governed communities is rising at an alarming rate, with no end in sight.
Why fees continue to rise, and housing is becoming less affordable
According to Mark Uh of Trulia, fees are rising in association governed communities because residential structures are getting older. Of course, this is true, and, on a daily basis, we see evidence of aging condominium housing in need of extensive repair and renovation.
And of course, as Uh points out, size matters. That’s common sense. Larger condo associations are more likely to include common area amenities than smaller residential condominiums. Also, taller buildings with more units are likely to include elevators, costly architectural and structural design, higher service levels (such as doormen and concierge services), and high-end finishes.
But there are many other reasons that assessments continue to rise.
Aging infrastructure serving the community. Private roads, parking lots, private water and sewer treatment facilities, storm water ponds and drainage components, electronic security gates, and similar features of association governed communities are also getting older and beginning show signs of wear and tear. Many of these common elements are costly to maintain properly, and even more costly to repair. And don’t forget recreational facilities such as private lakes and dams, boat launches and docks, private beaches, golf courses, swimming pools and spas, club houses, fitness and sports facilities. The more bells and whistles in the HOA, and the older the community, the more it will cost homeowners to maintain them over time. Some communities choose to abandon non-essential recreational amenities, unable or unwilling to absorb the high cost to repair or restore them to their former glory.
Rising utility rates. Many condo associations, especially older communities, roll up the cost of heat, water, sewer, cable, or internet into the monthly assessment. So as utility rates continue to climb, assessments must increase to cover those costs.
Construction defects. A recent study by Community Associations Institute (CAI) highlights the costly impact of unresolved construction defects, particularly for condominium associations. Developers and home builders in several states are currently battling consumer protection advocates over proposed legislation to deal with an epidemic of construction defect litigation.
Failure of developer to adequately fund reserves prior to turnover of association to unit owners. This is another hot legislative issue in some states. A recent court decision in Florida sent ripples through the industry, when a Judge ruled that a developer has the duty to contribute to association reserves for unsold parcels.
Fraud, theft, and embezzlement. Dozens of reports have hit the media all across the U.S. And most of the time, white collar crime in private associations goes unreported. But the fact is, when associations are affected by financial loss due to nefarious misconduct, and if the association is not adequately insured, homeowners often have to pick up the slack through increased assessments.
Rising insurance rates, insurance fraud. It’s old news that insurance costs continue to skyrocket in most parts of the country. And in some states, fraudulent claims spike following loss from fire or natural disasters.
Natural disasters. Hurricanes, tropical storms, tornadoes, floods, heavy snow storms, wildfires, and earthquakes have hit some regions of the country hard, causing millions of dollars in damage. Of those communities that choose to rebuild, assessments rise to cover insurance deductibles and increased policy premiums.
Rising management fees. The management industry does not talk about this subject publicly. But over the past decade, many management companies have gradually added additional fees that are not included in the base price of their contracts. Most now charge fees for home or condo resale packets and transfer fees, homeowner access to archived documents, service fees for processing each violation notice, and controversial finder’s fees or commissions for steering associations to particular vendors or lenders. Guess who picks up that extra cost?
Litigation due to association collections and disputes with owners. Homeowners might be surprised to learn just how much their association spends on legal fees pursuing homeowners, not just for unpaid assessments, but also for disputed fines. Others engage in bitter disputes over contested elections or board member recalls, or refusal of the association to provide unit owner access to official documents. In fact, these issues have become so common that dozens of states are grappling with legislative amendments to deal with the problem of frequent litigation. All of this cost is absorbed by homeowners.
One other note
Take a look at Trulia’s tables that note the change in number of condo associations. Did you notice that the number of associations has remained flat or decreased slightly since 2005? This is consistent with data collected from Census Survey of Construction (covered in a previous blog).
More evidence that perhaps common interest association-governed housing has reached its economic peak, and may be approaching a downward slide?
Additional references:
Questionnaire archive for American Community Survey
https://www.census.gov/programs-surveys/acs/methodology/questionnaire-archive.html
Question regarding condominium status has not changed since 2005 (see screen shot below):
What is IPUMS (University of Minnesota)?
https://www.ipums.org/whatIsIPUMS.shtml
The Newest U.S. Homeowner Is a ‘Landlord Buyer’
Your observation that Special Assessments were not included in the original study is very keen. Special Assessments are the great equalizer, causing associations who artificially keep monthly assessments low to periodically “catch up” with the true cost of their own deterioration. Special Assessments are by nature disruptive and distasteful.
It is my observation that associations experiencing a Special Assessment are inclined to increase monthly assessments (well above the rate of inflation) to offset the ongoing “true cost” of deterioration and minimize the chance of a future Special Assessment. Once bitten, twice shy.
Reserve underfunding is so prevalent and unpalatable that I believe one of the major reasons associations have been increasing monthly assessments is to finally catch up with the true costs of operating the association, representing a net improvement in fiscal responsibility.
Dan, I agree with your observations in general. But there is something else at play here, too. Blind trust. Quite often the person (or persons) behind theft and embezzlement are well-lilked and trusted neighbors. Sometimes a professional manager or accountant is on the take. And in many cases, reviewing the many reports I have read, the person is well-respected in the community at large. No one would suspect wrongdoing or deception.
In a few cases, the fraud goes undetected for years, mainly because the records are falsified or the books are cooked. It might take a seasoned forensic accountant to determine that theft has occurred.
In most cases, however, the more eyes that are looking at financial records, the better. Not only should all board members be reviewing actual bank statements, invoices and receipts, ALL owners should have free and ready access to financial records at all times. Too often, only board members have access to detailed information, and sometimes the board foolishly hands too much control over to one board member or a manager.
There is never a good reason for a manager to have signature authority on association bank accounts. Nor is there a good reason for a manager to have access to a debit or credit card.
At least two board members signatures need to be on association accounts, checks, and credit and debit cards.
An association should never waive an annual audit, and the owners should select an auditor that has no relationsip to the manager or board members with signature authority.
The board member or owner that suspects money is being stolen or misappropriated should contact vendors or utility companies to see if the bills have been paid in full and on time. Double check the amount that shows on the invoice on file was the actual amount paid.
Any red flags that turn up must be reported to local law enforcement discretely and promptly, so that a professional investigation can continue.
I am sure there are accounting and law enforcement experts that can add to these thoughts.
Most how-to books on residential condominium ownership that I’ve read do not go into detail about the possibilities of fraud, theft and embezzlement. These are very troubling topics that should be openly discussed in a forum like this one and in the media to educate the condominium owning public as to how to recognize them and what owners can do to remedy such “nefarious misconduct” short of paying in the form of increased fees. In my personal experience as a condominium owner I have discovered that most of my neighbor owners do not understand our governing documents and have little interest in wanting to read the governing documents to find out how the association should be governed and how the properties should be maintained and preserved. Such ignorance and indifference are recipes for fraud, theft and embezzlement.