HOA, condo owners often pay for deferred maintenance of previous owners

By Deborah Goonan, Independent American Communities

Yesterday I wrote about several recently enrolled bills in California, that directly affect owners of property in association-governed communities.

One of those bills, SB 721, was originally intended to apply to condominiums, but was ultimately amended by Legislators to apply only to owners of apartment home communities.

SB 721 began as comprehensive legislation that would have required owners and landlords of multifamily buildings, including condominium associations, to conduct regular inspections of “exterior elevated elements” such as balconies and catwalks. The bill was written in response to a tragic balcony collapse that occurred in Berkeley in 2015. That incident resulted in the death of 6 exchange students from Ireland. The cause of the balcony failure was determined to be wood rot that occurred due to moisture infiltration behind the siding of the building, resulting in hidden damage to the balcony’s support beams.

SB 721 was opposed by trade groups and condominium homeowners alike, due to the cost of inspections, which would have required a costly, invasive procedure to examine the interior structure of 15% of elevated elements every 6 years.

A few weeks ago, in response to widespread opposition, the Legislature amended the bill to remove all references to condominium associations from the bill. The bill is currently enrolled, but now applies only to apartment buildings and future apartment-to-condominium conversions.

For now, the issue of how to best ensure safety of balconies and other exterior elevated elements in condominium buildings remains unresolved.

 

Shortly after yesterday’s post was shared on my social media accounts, I received a message from Tyler Berding, of Berding and Weil LLP in Walnut Creek, California.

Berding referred me to his September 1, 2018, podcast On the Commons with Shu Bartholomew. He writes about this week’s show:

It focused on an issue that is almost invisible to the industry–the ability of owners to avoid assessments for deferred maintenance by passing that obligation to their successors. It happens when assessments are kept artificially low by the present owners which defers funding for repairs to later owners who have no voice in those earlier decisions and who have no idea what they are buying into.

The Berding Weil law firm specializes in construction defect claims and real property disputes involving association-governed, common interest communities.

Most of Berding’s clients are condominium associations and owners of condos. His blog, Condo Issues, summarizes some of the most fundamental challenges faced by shared ownership of residential real estate.

Readers can listen to the 1-hour podcast at any time, by following the link below:

Tyler Berding, On the Commons with Shu Bartholomew September 1, 2018 (Podcast)

Money with wings
(Pixabay.com free image)

Nobody likes to pay assessments

Tyler and Shu discuss several examples of associations that ‘kick the can down the road,’ deferring maintenance for years, in order to keep assessments as low as possible.

Even worse, it’s all too common for condo and homeowners’ associations to ignore defects, damage to infrastructure, and environmental contaminants, simply to avoid the cost of fixing problems.

Berding says that association boards, especially in condominium communities, are sometimes more fearful of making the unpopular short-term decision to raise assessments, than they are of the long-term financial, health, and safety consequences of delaying repairs.

In other words, many board members lack strong management skills, which are necessary to make difficult by prudent decisions, in spite of the potential for opposition.

I think Berding is absolutely correct on this point, however…

…to be fair, I will add that critics often complain that association boards and managers tend to spend other peoples’ money too freely.

Homeowners repeatedly point to instances of boards and management agents steering inflated maintenance and renovation contracts to favored contractors and vendors, without obtaining competitive bids. That explains why homeowners are often skeptical of the association’s “need” for an assessment increase, especially a costly special assessment.

Board meeting cartoon transparency

While it’s hard to deny that conflicts of interest sometimes exist in association-governed communities, the true cause of unexpected assessment increases is usually a combination of poor long-term planning and unrealistic expectations about the cost of maintaining real estate assets.

Clearly, as Berding points out, most people simply aren’t fully committed to sharing the true costs of ownership. On that point, we agree.

Another challenge of shared ownership is the complexity of internal politics. Individual owners have a tendency to behave in ways that serve their own personal interests.

Some common examples and horror stories, many of them illustrated by example on this website:

  • Upper floor condo owners have recurring water damage to their ceiling and drywall, due to a leaky roof. But lower floor owners won’t approve a special assessment to replace the roof, because they are not directly affected by leaks.
  • Homeowners adjacent to a retention pond deal with erosion of their back yard or property flooding whenever it rains. Sometimes a pond develops a sinkhole that drains it dry. Yet the HOA won’t take action to repair the storm water infrastructure, because of the expense. The problem is that none of the other owners can even see the pond, so they don’t care, and certainly don’t want to pay for repairs.
  • Ground level condo units are repeatedly flooded by storm water runoff or, worse, sewage backups. But owners of upper floor units don’t care, and don’t want to pay for the fixes.
  • In a multi-building seaside condo association, two structures are destroyed by storm surge. The association’s insurance coverage proved to be inadequate to cover the cost of rebuilding the lost units. But owners in unaffected structures don’t think they should have to pay to rebuild condos they don’t own.
  • After a fire that burns several condo or townhouse units to ashes, remaining owners complain about higher assessments to pay for the insurance deductible and inevitably larger insurance premiums. Meanwhile, owners of inhabitable units will wait months, if not years, for the board and management to coordinate unit owner insurance claims with those filed by the association, and to obtain local construction permits, before rebuilding can even begin.

Because of the politics of shared ownership, it’s not surprising that the majority of association-governed communities fail to save enough money to cover emergencies.

The human instinct for short-term self-preservation explains why association-governed communities rarely set aside enough money in reserve accounts to pay for inevitable future repair and replacement of common property.

cropped-condo-2618421_1920.jpg

Comparison: purchasing property inside vs. outside of an association-governed common interest community

When purchasing a home that is not governed by an association, buyers will normally pay for home, pest, and environmental (mold, radon)inspections. Those inspections often discover property defects and reveal the ill effects of deferred maintenance. Armed with the facts, an informed buyer negotiates a lower price to make up for the cost of repairs.

Of course, some defects are hidden behind walls or beneath foundations, and certain adverse site conditions are not obvious to a buyer. That’s where a seller disclosure becomes important for a buyer’s due diligence. If a seller intentionally or negligently misrepresents the condition property, the future homeowner has legal recourse to recoup financial losses, by filing a legal complaint against the seller and the seller’s agent.

In cases where the seller disclosure is incomplete or unavailable (such as an estate property or foreclosure), the buyer generally understands the risks involved, and, therefore negotiates a discounted sale price to cover the cost of hidden liabilities.

This level of pre-purchase inspection and due diligence is virtually impossible for condo/co-ops. Inspectors for the buyer only examine the condition of the unit for sale, not the condition of the building or surrounding grounds or amenities. Some state laws require disclosure of basic information about the condo or co-op association, but the association isn’t likely to reveal the last time the roof was replaced, or that the plumbing is old and leaky.

Likewise, with regard to HOA private infrastructure and amenities in planned communities, the buyer is not provided with an evaluation of the condition of the commons. So, there’s no transparency as to the condition and future maintenance costs of big ticket items such as private roads, gated security systems, storm water drainage systems, or amenities such as swimming pools, sports courts, or golf courses.

Compare the HOA or condo association to a municipality or county. The latter *real government must maintain public records, including regularly audited financial reports, operating and reserve budgets, public works expenses, government contracts with private companies, competitive bid procedures, and more. Meetings are open to the general public, including members of the local media and consumer watchdogs.

HOA, condo and co-op boards generally restrict access of information to members of the association. And, even members of association-governed communities find it difficult to obtain full access to official records of the organization.

HOA planned community aerial view
(pixabay.com free image)

Lenders know which cities/counties don’t have their acts together, so they are less willing to lend money, or provide less favorable mortgage terms for, homes located in less desirable or distressed municipalities.

On the other hand, mortgage lenders don’t experience complete transparency from HOAs either, especially with regard to HOA foreclosures in states that allow priority liens.

Another invisible drag on home values — associations that are consumed by litigation or insurance liabilities.

Bottom line: outside the context of a common interest community, the buyer is far more likely to know exactly what they are buying, and the sale price is negotiated accordingly.

Unfortunately, buyers don’t know all the facts when they buy association-governed property in a common interest community. As a result, home sale prices can be artificially inflated, until the condition of the community and its association deteriorate to the point of being obvious.

Leading up to this point, the association may opt to shield homeowners from learning about looming liabilities and financial debt, before it’s too late.

 

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