Thinking outside the HOA box – considerations for housing policy makers

Is “Living the Dream” truly possible for residents of homeowners associations?

The stark realities of HOAs, condominium associations, and various types of housing cooperatives are well documented

By Deborah Goonan, Independent American Communities

In the real estate industry, the concept of achieving the American Dream is alive and well. And, for many people, the Dream is not complete without owning real property.

For some, that means owning a home of one’s own, a place to live the good life or raise a family. For others with additional money to invest, it means owning a vacation home or investing in rental property to enhance a financial portfolio.

But the gap between Living the Dream and Reality can be as vast as the Grand Canyon, especially for those who own property in an association-governed, common interest communities, commonly known as homeowners’ associations, or HOAs.

The Fantasy Island syndrome

Back in the 1970s and early 1980s, ABC had a hit television series called Fantasy Island. (If you’ve never heard of it, check out this link.) The theme of the show was that visitors would arrive on an isolated Pacific island where, according to rumor, their wildest dreams and fantasies would come true.

As Ricardo Montalban famously declared, guests of Fantasy Island “deserve miracles.”

Of course, visitors to the island soon discovered that things would not turn out exactly as they expected.

So it is with homeownership in association-governed, common interest communities. Housing consumers buy into the “miracle” of affordable homeownership, but, sooner or later, they discover that HOA life is not quite as wonderful as they expected.

Homeowners share their real life experiences

I participate in dozens of lively online HOA discussion forums. Generally, homeowners in these groups have experienced significant conflict and financial challenges within their HOAs. They stumble upon various social media groups in their search of answers and assistance with their HOA problems.

Unfortunately, the HOA industry is, at best, loosely regulated. Homeowner rights are restricted to the terms of their Association’s governing documents and weak state laws. The industry has ensured that the only options for frustrated homeowners are to a) sue the HOA in an environment that puts individual owners at a distinct legal disadvantage, or b) move out of the community, selling one’s home if at all possible.

Consequently, many of these property owners are now very disillusioned. While some have chosen to move on, if they are able, others are literally stuck in a bad situation, unable to sell their properties. Many have invested their life savings or more than a decade of their lives just trying to make things work in their struggling and failing communities.

Despite these harsh realities, some homeowners still cling to the Dream. They are convinced that, if only the problems and shortcomings of association-governed common interest communities could be fixed, then their fantasy of the perfect Dream Home would become reality.

The realities of condo life

The plight of condominium owners is clearly explained by Tyler Berding, a seasoned real estate and construction defect litigation attorney from California.

The Uncertain Future of Common Interest Developments

by Tyler P. Berding
OBSOLESCENCE THEORY

Everyone knows that certain consumer products become “obsolete.” The phrase “planned obsolescence” applies to a manufacturer’s scheme to insure profitability by building into a consumer product the seeds of its demise, and thereby create future demand for its replacement. Obsolescence also happens to real estate. Neighborhoods can become “obsolete” when the condition of the property no longer supports the use for which it was originally intended. Residential neighborhoods that gradually industrialize become ill suited as a location for homes. Similarly, ranch land that is developed into suburban enclaves usually can no longer support viable agricultural operations.

Traditional downtown shopping districts can reach obsolescence and deteriorate when a modern mall is built on the outskirts of the city. Property that has become obsolete may languish in value and use until such time as a city or private developer chooses to “re-develop” it into a more appropriate use.

Virtually all urban property reaches obsolescence if given enough time. Obsolescence concepts are equally applicable to common interest developments. The idea that a project will last forever in its original form is no truer for common interest developments (CIDs) than it is for any other kind of real property. In most cases, physical obsolescence follows a loss of economic value due to the changing conditions of the neighborhood. In the case of a CID, however, it is usually a combination of physical and political factors that leads to loss of economic value. And it may be this political factor, e.g. the inability to reach group consensus on such important issues as funding for major repairs, as well as the natural “cycling” of ownership interests in common interest developments that hasten a CID’s demise.

Read more:

http://berding-weil.net/articles/uncertain-future-of-common-interest-developments.php

Needless to say, Berding’s ominous viewpoints and many written publications highlighting the fundamental flaws of common interest development  are not particularly popular among many of his colleagues in the HOA industry.

But Berding is a realist.

Furthermore, my own study and observation of condominium associations, based upon a voluminous amount of reading and research, confirms Berding’s conclusions.

The truth is, aging condominium associations face especially steep challenges. Except for a minority of very high-value condo buildings, most owner associations are  woefully underfunded.

The vast majority of condo owners face declining maintenance standards as building components break down due to normal wear and tear. Most condo associations transition from majority owner-occupied to majority investor-owned units as standards suffer. Many mid-range and “affordable” condominium associations approach financial insolvency or obsolescence within 2-3 decades.

In the past decade, investors have taken advantage of some well-located but weak condo associations, purchasing units in bulk, terminating the condo association, and converting the properties to rental apartments.

But most condominium structures have evolved into poorly managed low rent communities with multiple landlords. Others have been all but abandoned to criminals and squatters.

Yet the elusive vision of the perfect condo lingers for some. In regard to the Dream of owning a water view condo, one home owner laments:

[it] is a shame that an individual can’t own a view of the ocean from the 30th floor. 😞 😞

The idea that carefree, luxurious condo living is attainable, even for homebuyers of modest means, is nothing short of pure fantasy created by real estate marketing and sales experts. The truth is only the very wealthy can afford to own a unit in a high-quality condominium tower with stellar views and amenities.

And even well-to-do condo owners sometimes get burned: Consider the infamous leaning Millennium Tower in San Francisco.

Cooperative associations fare somewhat better

Yes, luxurious urban cooperatives do still exist in a few major cities, such as New York and San Francisco. A few reputable co-op associations have survived for many decades, mainly because co-op boards carefully screen potential shareholders and reject real estate investors that do not intend to reside in a unit.

The co-op board makes certain that each new apartment owner has ample financial resources to maintain the building and grounds to high standards. That explains why so few co-ops have filed bankruptcy.

Interpersonal conflict is still as common in co-ops as in condo associations, however. Conflict is a fundamental reality with any shared investment or communal living arrangement.

On the other hand, limited equity cooperatives tend to face similar financial challenges to condominium associations. For one thing, most co-op owners live on low incomes, and cannot afford steep increases in maintenance fees. But even a middle-income shareholder, who can only expect to reap a limited return on investment when it comes time to sell, will be very reluctant to spend money on updates and upgrades, let alone necessary, but costly repairs.

Owners of homes in planned communities with HOAs face different realities

Owners of homes in HOAs – even detached single family homes – face somewhat different risks, but, based upon my observation, most HOAs also face certain obsolescence.

In planned communities large and small, HOA members must reach consensus and maintain a voluntary willingness to adequately fund basic infrastructure and shared recreational amenities over time.

Unfortunately, most fail to do so.

Gated communities with private roads to maintain are particularly likely to have underfunded reserves. Amenity-rich communities and resort style or active adult communities are also at risk of insufficient reserve funding when most of their members are of modest financial means.

The resort community often devolves into an Airbnb vacation destination, creating bitter conflict with owner-occupants. Age restricted planned communities face severe limitations on their ability to generate revenue, because most of the owners are surviving on finite retirement resources.

Golf communities are slowly dying across the nation. Only the most affluent communities are able and willing to support golf courses. The cost to irrigate fairways and putting greens is prohibitive, especially if the course is located in a desert or subtropical climate. Younger generations tend to reject golf, due to the time and expense required to play, not to mention the heavy use of potentially toxic fertilizers and pesticides.

Even no-amenity HOAs with public roads are stuck maintaining and repairing their privately-owned stormwater drainage systems. In some parts of the country, on site stormwater control is the ONLY common property. This is especially true of small communities with less than 100 homes. In fact, in the northeast U.S., you can find HOAs with as few as a dozen homes. Yet these small groups of homeowners are somehow expected to fund tens or hundreds of thousands of dollars to rebuild or upgrade poorly functioning storm drains and retention ponds.

On this website, I have accumulated dozens of articles detailing a myriad of stormwater and flood control problems faced by HOAs — poor drainage, chronic flooding resulting in property damage, erosion, sinkholes, cesspool-like “lakes” and ponds that fill up with silt and become swampland over time.

Decades-old recreational Lake communities that cannot afford to repair private dams are also rapidly becoming obsolescent, as they are forced to permanently drain their beloved lakes.

Private water and sewer systems are also a problem for some HOA communities. Too often, homeowners lack financial resources to bring their systems into compliance with federal environmental standards. Making agreements with public utility companies to bring in supply and waste lines is challenging and expensive — and may be impractical or impossible in some cases.

In conclusion, dozens of factors create major obstacles to attaining the Dream of the “perfect home” and “perfect community” for most U.S. home buyers. And most of these obstacles exist because of fundamental flaws in the economic, social, and governance structure of HOAs.

Legislative change can do little to address these fundamental flaws.

In order to alleviate problems, public policy makers must consider next steps for millions of residents of obsolete HOAs, finding ways to wind up the affairs of nonfunctioning or poorly functioning associations, while preserving or redeveloping communities as necessary.

And, in order to prevent future problems, housing policy makers must also begin thinking outside the HOA box when it come to planning new housing development.