Condo HOA reserves — Why all the controversy?

By Deborah Goonan, Independent American Communities deborahgoonan@gmail.com

Condominium and homeowners association advocates are dismayed that Florida lawmakers have been unable to agree on legislation that would prevent another catastrophic building failure, like the partial building collapse of Champlain Towers South condominium in Surfside, FL on June 24, 2021.

In a previous post, I summarized both HB 7069 and SB 1702 which were debated for weeks. Both bills required more frequent building safety inspections, and more transparent disclosure of reports to owners and buyers with regard to building safety and reserve fund status. These were steps in the right direction.

Unfortunately, neither bill offered a common sense solution to safeguard homeowner fees paid to HOA reserve funds. The bills lacked requirements for HOAs to protect the peoples’ money from misuse or outright embezzlement.

Floridians generally agree that it’s important to hold association funds in a secure bank escrow account, where dishonest HOA board members or management agents can’t withdraw funds for their pet projects or, worse, their personal use. And, believe me, that sentiment is not based on an isolated incident. For example, in the past year, nearly 3 dozen condo and homeowner associations in Collier and Lee counties sued their former management company, after they discovered most or all of their HOA reserve funds were missing. A state investigation is underway.

Yet Florida Legislators made no attempt to prevent theft and embezzlement of the peoples’ money paid to their HOAs.

Despite this obvious oversight, most homeowner advocates following HB7069 and SB1702 thought that FL legislators would strike a compromise bill, one that would have made it to the Governor’s desk. At a minimum, advocates thought we’d see new laws requiring more frequent and timely building inspections, and much better disclosure of written safety reports.

We were wrong.

Why did Florida Legislature fail in its attempt to pass a building safety law?

Two words: Reserve funding.

The big difference of opinion between the House and Senate was whether to require condominium and cooperative associations to maintain reserve funds, and, if so, at what level.

The Senate version of the bill required condo and co-op associations to fund their reserves; the House version continued to allow a majority of unit owner to opt out of funding reserves. The Senate voted unanimously for their version of the building safety bill. But the Speaker of the House, opposed to mandatory reserve fund requirements, refused to put the Senate’s bill on the House calendar.

Both bills died in their respective committees, as Florida’s legislative session came to an end. There’s some public pressure on the Governor to order a Special Session, so the Legislature can resume discussion on the issue, and get a bill passed this year. Don’t count on this happening.

Why is HOA Reserve Funding so controversial?

Even among homeowner advocates, there’s fierce disagreement over the concept of requiring condo, co-op, and homeowners associations to beef up their reserve funds, with the goal of having the necessary funds to pay for critical structural and safety repairs to buildings or community infrastructure.

Those who favor the use of HOA reserve funds say that it’s far better to save money, a little bit at a time, over many years, than to have to impose huge special assessments on unit and homeowners when it comes time to make major repairs. On its face, that sounds reasonable.

On IAC, I’ve posted many examples of condo and homeowner associations imposing 5- and 6-figure special assessments to pay for roof replacements, new exterior siding or stucco, reconstruction of private roads and driveways, and replacement of dangerously fragile bridges or dams on private lakes.

Unfortunately, the majority of HOAs haven’t been saving money in a reserve fund for decades. Or they have a relatively small reserve fund. Many owners are lulled into thinking their owners association has an adequate reserve fund, when, in fact, it will barely cover one tenth of the cost of necessary repair and replacement.

When the HOA-governed community finally decides to address major issues, the result is often a huge special assessment. But a significant percentage of homeowners cannot afford to pay. And with Freddie Mac and Fannie Mae refusing to purchase first and second mortgages for condo and co-op units in buildings with questionable structural problems and low reserves, owners can’t tap their equity to pay a special assessment.

In fact, when facing large special assessments, some, perhaps many, owners are forced to sell. More often than not, the unit is sold to a cash buyer or bulk investor, at a discounted price. In a hot housing market, a desperate homeowner facing a lien for a huge special assessment may not receive enough money at the close of sale to buy — or even rent — decent replacement housing.

It would seem that having a sufficient condo HOA reserve fund would prevent this outcome.

But, maybe not.

You see, for similar reasons, many homeowner advocates oppose legislation that requires HOA-governed communities to suddenly fully fund — or even partially fund — a reserve account. Critics argue that, if HOAs were to be required, by law, to double or triple their fees, in order to make up for many years of neglecting their reserve fund, then a large number of owners would no longer be able to afford to stay in their condo, co-op, or home. This is especially true of owners on fixed incomes, such as retirees and disabled persons, as well as many households with low to middle range incomes.

Today’s inflationary environment and the looming threat of a recession add to the political pressure to avoid hitting voters with additional housing costs.

Mandating condo and co-op owners to pay much higher HOA fees, under threat of lien and foreclosure for nonpayment, will lead to forcing the majority of them to sell their units and homes to cash buying investors. In Florida, that would displace tens, perhaps hundreds of thousands of homeowners. Increasing the share of investor owned housing would also have the domino effect of putting upward pressure on monthly rents for tenants. The demand for rental housing would rise even higher as former owners would be forced out of their homes.

In short, attempting to prop up reserve funds at this point in time isn’t necessarily a better option than ignoring the community’s future needs, only to impose a multimillion dollar special assessment on owners. The ultimate outcome is essentially the same — housing becomes unaffordable to many owners, and the HOA becomes insolvent without private vulture investors swooping in to ‘save’ the day.

So, to their defense, state Legislators are facing a lose-lose, damned-if-you-do, damned-if-you-don’t situation.

In short, attempting to prop up reserve funds at this point in time isn’t necessarily a better option than ignoring the community’s future needs, only to impose a multimillion dollar special assessment on owners. The ultimate outcome is essentially the same — housing becomes unaffordable to many owners, and the HOA becomes insolvent without private vulture investors swooping in to ‘save’ the day.

The psychology behind the resistance to HOA assessment fee increases

At the same time, condo and co-op homeowners are also divided on the issue of mandatory reserve funds.

Think about it. If you’re a unit owner living on a pension or Social Security, you have better odds of selling and cashing out your equity, or dying and leaving your estate to future heirs, before your HOA finally drops that dreaded special assessment.

If you own your home, apartment, or condo as a second home, or rely on the renting the property to supplement your income, why would you want to start reducing your positive cash flow with higher HOA fees? You probably hope to squeeze every dollar you can out of your investment, and you think you’ll have the good fortune to sell before the special assessment. If not, you’ll be happy to sell to a bulk buyer.

Of course, the collapse of Champlain Towers South condominium was a rude awakening to its unit owners. Sadly, ninety-eight residents lost their lives. Dozens of others will suffer long term effects. Surviving owners and heirs continue to argue over how much money they deserve from insurance and legal settlements

But, the sad fact is, most condo and co-op owners in the U.S. will just continue to deny that they could ever face a tragic demise. They’ll rationalize the Miami-Dade County condo collapse event as an isolated incident, assume that their multistory building has far superior construction quality, and console themselves in the belief that their neighbors and co-owners are reasonable people, capable of mutual cooperation.

When you combine these realistic scenarios with the very real possibility that some HOA board members or HOA community managers misuse or embezzle big, fat reserve funds, it’s not really that surprising that there’s so much opposition to mandating HOA reserves.

If you’re a townhouse, condo owner, or co-op shareholder, and you’re genuinely concerned about the safety of your building or your community’s infrastructure, then you may already be planning your escape. And, if you can afford it, you’re probably considering the purchase of a single family home in a more affordable location.

the sad fact is, most condo and co-op owners in the U.S. will just continue to deny that they could ever face a tragic demise. They’ll rationalize the Miami-Dade County condo collapse event as an isolated incident, assume that their multistory building has far superior construction quality, and console themselves in the belief that their neighbors and co-owners are reasonable people, capable of mutual cooperation.

When you own a single family detached home, with no HOA, you won’t be forced to save money in a reserve fund

That’s right. As long as you’re not required to pay HOA fees for common infrastructure (roads, stormwater management, community wells or sewage treatment) or recreational amenities (walking trails, parks, swimming pools, lakes, or a golf course), YOU get to decide if, when, and how you’ll pay for maintenance and repair of your home.

(Side note: of course, your property and local taxes pay for public infrastructure and amenities, but the financial burden is spread out among a larger population. And you’d be paying these taxes in addition to HOA fees.)

As a single family homeowner, with no HOA fees, you are free to save up for inevitable repairs and improvements, but you can also adopt a pay-as-you-go financial plan. If you’re a frugal saver, you have the option of controlling where to keep your money, how to invest it, and when to withdraw it to pay for repairs or renovations. If you’re not much of a saver, you might choose to concentrate on paying down your mortgage principle, so that you can tap a home equity loan in the future.

Maybe you’re not planning to stay in your home for the long term. In that case, you may only make the minimum, necessary repairs. No HOA is going to force you to proactively replace your water heater or your roof, on their terms, using their approved materials and approved contractors.

Of course, when you sell, the value of your house will be based on its condition, relative to competing listings. The more renovation your home needs, the less a buyer will pay for it. The better you have cared for your home, the higher the sale price. If you didn’t replace your leaky roof, you’ll get less money for your house, but you’ve also avoided depleting your savings or going into debt. It’s a balancing act, but, ultimately, it’s your decision when to spend money on your home, and how much.

Maybe you planned on staying in your ’forever’ home, but your circumstances have changed. If you have saved for years for a new kitchen or relaxing spa bathroom, but your sell before the planned renovations, you get to take your money with you. Not so for HOA reserve money you have paid to your condo association! The money your pay in HOA reserves are sunk funds — if you move or die before the HOA moves ahead with repairs, you may never see a return on your investment.

The money your pay in HOA reserves are sunk funds — if you move or die before the HOA moves ahead with repairs, you may never see a return on your investment.

Planned communities are destined to see rising HOA fees, too.

Safety and maintenance of multifamily buildings is a hot topic right now. But planned communities are also aging, along with the common property that is funded by HOAs.

If you own a single family home in a planned community with an HOA that owns and manages the common areas, you’re not immune to special assessments. You will likely face future requirements to pay for years of deferred maintenance of community infrastructure or common property such as recreational amenities. While Florida is debating about reserve funds for condo and co-op associations, some other states are considering reserve funds for HOA-governed planned communities, too.

The more private and elaborate your HOA-governed community, the larger your future costs will be. Road resurfacing, flood control projects, dredging of stormwater ponds, installation of new water and sewage treatment lines, are just a few of the issues facing homeowners in maturing planned communities. Some communities will need to reach out to local governments for assistance with planning and funding their essential infrastructure projects.

Homeowners in amenity rich communities will also debate amongst themselves. They must decide if it’s worth paying more money in HOA fees to restore their neighborhood swimming pools, clubhouses, playgrounds, lakeside beaches, community boat docks, and golf courses.

Anyone who believes the HOA-industry’s claim that ”HOAs are not going away” is simply denying reality. Condo and co-op owned multifamily buildings, HOA-governed houses, and common interest community infrastructure won’t last forever. And since the majority of owners show little personal interest in paying higher HOA fees for the benefit of future owners, I believe that HOA-governed property will continue to deteriorate — and lose value — at a faster pace than owner-occupied single family homes.

It’s too late for the vast majority of communities to start back-funding inadequate condo HOA reserve funds, and too costly for most owners to pay for decades of deferred maintenance.

References:

Defrauded HOAs See Bank Accounts – 23 Were Closed By Michael Braun (Florida Realtors, March 23, 2022)

Florida condo owners grow anxious waiting for lawmakers to act —The biggest issue appears to be helping older condo associations accumulate the reserves needed for future repairs. By Melea VanOstrand | April 05, 2022 at 01:00 AM

Special Assessment articles on Independent American Communities

On the Commons with Bill Davis (podcast, Feb. 17, 2022)

Hammocks residents pushing back against HOA board, won’t pay 400 percent increase in fees by Annaliese Garcia, Reporter Published: March 5, 2022, 2:19 PM Updated: March 6, 2022, 10:08 AM