Rental Property Investor · San Diego, CA · Member since 2014 · 30 posts · 23 votes
We had a pleasant emergency HOA special assessment meeting this week. Due to updated CA codes & regulations, coupled with the lack of foresight & planning by the HOA Management & Board, our complex has to update 400+ balcony railings in order to maintain our insurance policy.
The railings are integrated into the stucco and balcony weatherproofing, so it’s not an easy remove & replace project.
HOA board received 5 bids and started using Capital Reserves to start this process. 1 year in and the HOA has nearly depleted all reserves! We're now in-line for a $4mil loan to complete the project and replenish the reserves. This equates to a $24k special assessment for each owner ($35k after interest on a 15 year loan).
The clubhouse chaos would have made Jerry Springer blush! The room was packed with people from every demographic - first time home buyers, RE investor, seniors living off SS & families struggling to make ends meet…especially with inflation and the always increasing San Diego Sunshine tax/costs. $24/$35k is a lot of money for anyone, but it will be a crippling financial blow to a lot of people!
This is our primary residence, but we having invested in Condos in the past & I was left thinking, what if this happened to us back then? It would have wiped out any/all cash flow & reserves for those investments. Wanted to put this out there for first time home buyer’s and new investors as a heads up and offer up some tips that have been shared on several other forums.
1. Have plenty of cash reserves!
2. Due diligence. Review the overall complex & financial status of the HOA prior to purchase. (Ours was solid up until a year ago)
3. Be conservative when evaluating properties & always include vacancy & capex allowances
Would I ever buy into a HOA again? Yes, they have been very good to us with tax benefits & appreciation (Not so much with cash flow).
Just throwing out my 2 cents into the BP world. Hope it helps someone✌🏼
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
3y
I have owned numerous condos as investments and lived in a couple of others. Any high rise building having structural issues is going to find solutions VERY EXPENSIVE. But, here are the two biggest problem areas with “special assessments”
1. Many condo associations do not collect anywhere near enough dues to create sufficient reserves to pay for either anticipated capital expenses/improvements or unanticipated problems. It’s always very unpopular to significantly raise monthly fees especially to create a fund for FUTURE expenses. I saw a recent survey that stated that 60% of the condo associations in Arizona do not have sufficient reserves to meet anticipated maintenance/repair items it’s important to understand the financial condition of the condo association before you invest in purchasing a unit
2. Most buyers hire an inspector to inspect their unit only. It takes both a structural engineer and a mechanical engineer, NOT AN INSPECTOR, to inspect a high rise building. The fact that in the unit you’re buying the toilets flush and the stove gets hot is wonderful. The big expenses are when the roof leaks, the balconies need replacement, or the chillers go out.
Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
3y
Yikes. You hear about these risks but it's rare to get real life examples of these massive 'special assessments'
I'm curious what happens when half the residents just say "I'm sorry, I literally do not have the money." The HOA I suppose would put a lien on their property which would only be repaid upon resale?
Thanks for sharing. Sorry you are going through this.
It is hard with associations like these, because I have many condo's but I can't be on the board for all of them. It certainly is a risk that people have to accept before they buy one.
Real Estate Agent · San Diego, CA · Member since 2014 · 338 posts · 176 votes
3y
I have a client that I sold a condo to going through a similar situation. The HOA reserves were great until they weren't. It's been one special assessment after another and now they are considering selling so they can buy a SFH without HOAs.
Rental Property Investor · San Diego, CA · Member since 2014 · 30 posts · 23 votes
3y
@Scott E.
We sold a couple of condos in the Ciento complex (Old Town Scottsdale) a couple years ago. Loved the location and potential but it was slow drip of issues including a couple of smaller special assessments…a couple thousand here and there, but nothing like $24/$35k!!! We purchased those in 2017 so there was some great appreciation, which added to the reserves, and which is why I wouldn't shy away from purchasing into an HOA again. You just have to go into it with your eyes (and sometimes pockets) wide open!
Rental Property Investor · San Diego, CA · Member since 2014 · 30 posts · 23 votes
3y
@Mark Frattini
Where in the same boat Mark, but with limited supply and increased interest rates. It makes it very tough to walk away from a sub 3% loan. The San Diego market is still crazy! At least in the areas (OB, PL & PB) & price range we’re looking at.
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
3y
I have owned numerous condos as investments and lived in a couple of others. Any high rise building having structural issues is going to find solutions VERY EXPENSIVE. But, here are the two biggest problem areas with “special assessments”
1. Many condo associations do not collect anywhere near enough dues to create sufficient reserves to pay for either anticipated capital expenses/improvements or unanticipated problems. It’s always very unpopular to significantly raise monthly fees especially to create a fund for FUTURE expenses. I saw a recent survey that stated that 60% of the condo associations in Arizona do not have sufficient reserves to meet anticipated maintenance/repair items it’s important to understand the financial condition of the condo association before you invest in purchasing a unit
2. Most buyers hire an inspector to inspect their unit only. It takes both a structural engineer and a mechanical engineer, NOT AN INSPECTOR, to inspect a high rise building. The fact that in the unit you’re buying the toilets flush and the stove gets hot is wonderful. The big expenses are when the roof leaks, the balconies need replacement, or the chillers go out.
We sold a couple of condos in the Ciento complex (Old Town Scottsdale) a couple years ago. Loved the location and potential but it was slow drip of issues including a couple of smaller special assessments…a couple thousand here and there, but nothing like $24/$35k!!! We purchased those in 2017 so there was some great appreciation, which added to the reserves, and which is why I wouldn't shy away from purchasing into an HOA again. You just have to go into it with your eyes (and sometimes pockets) wide open!
Oh I know Ciento well! My wife lived there when we first met. She still does property management on a few units in Ciento for an out of state landlord. Great location. But definitely some deferred maintenance around the complex.
Honolulu, HI · Member since 2008 · 3k+ posts · 2k+ votes
3y
Aloha,
Your Board Members over at least the past five years, likely longer, have failed at their ONE job- Protect, Preserve, and Maintain all common and limited common elements. Depending on local law, as Fiduciaries, they can and should be held personally responsible, as well as being voted out of their seats. Google HOA Board Powers and Duties.
If you want to invest in condos/HOA properties, it is critical to get an understanding of not only the operating budget and monthly financial reports, but also their Reserve Funding Plan. Incomplete or grossly inaccurate information in these documents can result in severe underfunding that will catch up with the Homeowners at some point resulting in Special Assessments or dramatically increased monthly fees. Funding for repairs comes from only one place...your pockets as an owner in the project. Failure to properly plan for statistically predictable replacements of every major element is a guarantee there will be a Special Assessment. See if there is a local Chapter of the Community Association Institute in your area, they are a fantastic resource for Owners and Board Members to learn about how to effectively operate Associations.
An HOA is only as good as the management. I used to manage a couple HOAs and one of them had $0 reserves and didn't even think of building a reserve until I explained it. Fast forward eight years and they have a very healthy reserve and had to use it last year for some emergency repairs.
You may be able to absorb it, but a lot of other owners may not. It could cause a mass exodus and the value of your property could take a big hit for the next couple of years.
Rental Property Investor · Indianapolis, IN · Member since 2020 · 562 posts · 554 votes
3y
@Moses Moreno this is what happens when people don’t attend board meetings or read meeting minutes. This was probably talked about for months beforehand and now everyone is suddenly surprised.
We had a pleasant emergency HOA special assessment meeting this week. Due to updated CA codes & regulations, coupled with the lack of foresight & planning by the HOA Management & Board, our complex has to update 400+ balcony railings in order to maintain our insurance policy.
The railings are integrated into the stucco and balcony weatherproofing, so it’s not an easy remove & replace project.
HOA board received 5 bids and started using Capital Reserves to start this process. 1 year in and the HOA has nearly depleted all reserves! We're now in-line for a $4mil loan to complete the project and replenish the reserves. This equates to a $24k special assessment for each owner ($35k after interest on a 15 year loan).
The clubhouse chaos would have made Jerry Springer blush! The room was packed with people from every demographic - first time home buyers, RE investor, seniors living off SS & families struggling to make ends meet…especially with inflation and the always increasing San Diego Sunshine tax/costs. $24/$35k is a lot of money for anyone, but it will be a crippling financial blow to a lot of people!
This is our primary residence, but we having invested in Condos in the past & I was left thinking, what if this happened to us back then? It would have wiped out any/all cash flow & reserves for those investments. Wanted to put this out there for first time home buyer’s and new investors as a heads up and offer up some tips that have been shared on several other forums.
1. Have plenty of cash reserves!
2. Due diligence. Review the overall complex & financial status of the HOA prior to purchase. (Ours was solid up until a year ago)
3. Be conservative when evaluating properties & always include vacancy & capex allowances
Would I ever buy into a HOA again? Yes, they have been very good to us with tax benefits & appreciation (Not so much with cash flow).
Just throwing out my 2 cents into the BP world. Hope it helps someone✌🏼
Hi, this reminds me of when I do DD to a condo HOA docs in Concord,CA. It was on the MLS listing, I read a very detailed HOA report and condition of the property. But in this particular property, what happened is, the HOA is delaying maintenance so much that someone reported to the city that the outside condition "is not safe", so the city is giving tickets to make the outdoor esp. stair much safer. The assessment is in million.
Although every HOA is different, from the casual look and when the condo is built, you could guess an estimate of when there would be a problem for the house. If they keep delaying a project; if there're more than 4 floors, and if the roof/siding is not maintained well, it's best to skip the property condo complex at.
Analyzing HOA docs is very serious business, almost like deciphering financial condition of a company.
My first place was a condo and I lived there for a few years and then turned it into a rental. It was poorly managed from a financial perspective (it was well kept up). They did a similar thing just after I sold it. I was happy I sold it because I have no idea how much each of the owners had to pay, but it was a lot. The 'sad' thing is the guy on the condo board who arranged for the massive loan got a kick back and then sold his unit. I have two condos now and happily they are better run.
Rental Property Investor · San Diego, CA · Member since 2014 · 30 posts · 23 votes
3y
@Nathan Gesner
I hear you and it’s going to be interesting to see how this all plays out. I’ve heard rumblings of that from some of the owners, followed by…
“I wish I could sell, but where would I move to? It would cost me more to move.”
The CA exodus is real and I’m sure many wish they could pick up and move to other states with better quality of life…especially when watching HGTV. But for those of us that love this city. It will be another thing we need to suck up, until it reaches the breaking point.
⬆️ taxes
⬆️ homeless
⬆️ energy costs (with the mildest weather)
⬆️ cost of living
Our complex has 166 units and we’ve only had a handful of sales over the past 2-3 years, with nothing on the market for over a year. It’s going to be interesting to see if that trend shifts at all.
Rental Property Investor · San Diego, CA · Member since 2014 · 30 posts · 23 votes
3y
@Chris Seveney
They do, but as @Carlos Ptriawan mentioned it takes someone that knows finances to fully understand the numbers and trends.
Here’s how things progressed over the years.
Year-HOA Mo. Fee-Reserve % funded
2015 - $295 - 45%
2016 - $295 - 35%
2017 - $310 - 15% (which triggered⬆️)
2018 - $335 - 17.5% (which triggered⬆️)
2019 - $370 - 27%
2020 - $400
***Enter CA Senate Bill SB-326***
2020 - Quotes received and mid-year increase to $480 was implemented to cover costs - 27%
****unplanned railing work begins***
2021- Current - $480 - 3-5%
Board send multiple votes out for special assessment. Neither meet quorum requirements.
This recent vote included the options that started this thread.
Two things happened around the same time. New Senate Bill requirement causing the railings to be inspected. They are not per current CA code so they needed to be updated for compliance and to maintain our insurance coverage. Second thing was the City stopped recognizing our complex for trash disposal. Since 1970 the city covered the trash & recycle pickup. Last year this abruptly ended and all of our bins were collected by the city. HOA scrambled to get trash service and has since added an additional $100K to our annual budget. Not sure why the HOA is covering this expense and not each homeowner??? Still looking into that.
I’m sure we can trim costs here and there, but these 2 costly unexpected events is the primary reason we’re in this predicament. After reading all the other comments, I’m hoping this loan will get us back on track🙏🏼
Why did the city stop picking up the trash and did your utilities to the city go down (they should as they aren't providing you with garbage pick up anymore).
They do, but as @Carlos Ptriawan mentioned it takes someone that knows finances to fully understand the numbers and trends.
Here’s how things progressed over the years.
Year-HOA Mo. Fee-Reserve % funded
2015 - $295 - 45%
2016 - $295 - 35%
2017 - $310 - 15% (which triggered⬆️)
2018 - $335 - 17.5% (which triggered⬆️)
2019 - $370 - 27%
2020 - $400
***Enter CA Senate Bill SB-326***
2020 - Quotes received and mid-year increase to $480 was implemented to cover costs - 27%
****unplanned railing work begins***
2021- Current - $480 - 3-5%
Board send multiple votes out for special assessment. Neither meet quorum requirements.
This recent vote included the options that started this thread.
Two things happened around the same time. New Senate Bill requirement causing the railings to be inspected. They are not per current CA code so they needed to be updated for compliance and to maintain our insurance coverage. Second thing was the City stopped recognizing our complex for trash disposal. Since 1970 the city covered the trash & recycle pickup. Last year this abruptly ended and all of our bins were collected by the city. HOA scrambled to get trash service and has since added an additional $100K to our annual budget. Not sure why the HOA is covering this expense and not each homeowner??? Still looking into that.
I’m sure we can trim costs here and there, but these 2 costly unexpected events is the primary reason we’re in this predicament. After reading all the other comments, I’m hoping this loan will get us back on track🙏🏼
WOW! No mystery here, you are showing Reserve % Funded ranging from 45% down to 27%. Take a look, or better yet post the Reserve % Funding chart from your annual packet. It is not a "private" document, generally anyone with even an interest in purchasing a unit can purchase a copy from management. There should be a column of figures that indicate "shortage" or "unfunded". The total at the bottom of that column tells you the total amount Owners need to pay to become fully funded. Divide by the total number of units to get an approximate number per unit (or use the actual percentage of common interest for your particular unit if there are different percentages).
What does "Fully Funded" mean, with respect to Reserve Funding? Each major element the HOA is responsible for has a statistical, "normal life" of X years as shown on the chart. If "normal" for that element is 20 years, and it is 10 years old, in order to have the funds to replace or perform major maintenance, you need TODAYS estimated cost to do so, and divide that amount by the 10 remaining years. This amount needs to be added to the reserves each year, in order to have it available in year 20. You determine similar numbers for each major element ...roof, exterior paint, windows and doors, water supply and waste systems, elevators, etc. All will have differing "due" dates, which are, early on, pure estimates, but as they age and get closer to end of life, annual inspections will allow the Board to refine the "due date", either earlier if in poor condition, or perhaps a few years later if regular, proper preventative maintenance has been occurring.
Reality is, the "Today's Cost" is/should be based on an actual estimate at some point in time, and the calculations on the chart will automatically account for an inflation amount each year, adjusting that amount to be reasonably close to an actual cost. Depending on the element, and particularly when the BOD knows it it close to replacement, you would get a current estimate to again refine the numbers. The goal with the chart is not to provide a "to the penny" cost, but to ensure that IF you meet the recommendations for funding, you will not have any major surprises or special assessments.
In the first paragraph I mentioned the "shortage" column. This does NOT indicate how much you are short for the TOTAL final cost of a particular element when it reaches "0" years remaining. It DOES tell you how short you are in relation to what you SHOULD have accumulated by this year end just to be on track for the final due date for each element. Some elements appear to be "fully funded" because the full amount actually has been collected in the reserve funding for that element. Others will show the shortage. Look at the remaining life for those elements that are "short". If, for example, a roof was just replaced last year, it will show no funding as yet, but you have the entire useful life to set aside X amount each year for the number of years shown. If another element shows 3, 2, or 1 remaining life, AND a large shortage...your are running out of time to fund it. You cannot "steal" from one element's allocated reserve to pay for something else deemed more important at the time, because the element you steal from still has it's own timeline to follow.
Regarding your railings, I doubt this was a real surprise, particularly if Insurance was requiring it as well. That is generally a high risk component that should have some level of regular inspection. Building codes do not change overnight, so somebody should have been aware of the potential years ago...whether the management company, or any consultant or contractor that inspected or repaired them should have raised the subject. Trouble is, many BOD's don't want to spend money for actual Consultants, which is a major failure.
Trash service sounds like a bit of a nightmare, but the refuse companies certainly are proud of their dumpsters...ridiculously expensive! Add to that the fact you usually do not get credit if the "miss" a pickup (unless you have video records!), they can be hard to deal with. Regardless, the HOA certainly should be handling the issue, it would be a bigger nightmare if owners were left on their own to use multiple services, on different days, and fewer pickups, especially if you have any rental units. Rubbish is critical to be handled efficiently and properly. Suddenly having to purchase a large number of dumpsters for a complex IS actually a reasonable "unexpected" expense, however they should have some un-allocated contingency funds in both operating and reserve accounts.
Contractor · NC · Member since 2017 · 45 posts · 26 votes
3y
Condo investing can be profitable if you buy at the right price. If you are looking to hold long term and are buying mainly for cash flow make sure you always ask for the financials and maintenance history of the property as well as the reserves. No reserves and no recent updates on big ticket items is a sign of a special assessment. I currently own a property in South East Florida that has 2 assessments, i bought with the intention of holding short term. I recently sold another condo in South East Florida that had one assessment as well and $0 reserves. If you are a long term buy and hold investor do yourself a favor and buy a single family home with no HOA otherwise you can see your monthly fixed expenses increase beyond your control.
Rental Property Investor · San Diego, CA · Member since 2014 · 30 posts · 23 votes
3y
@Richard F.
The thread is Trending now! There’s a lot of good info on this thread so let’s keep it going👍🏼
Just to clarify on the trash. Each unit has its own individual trash & recycling bins & we all have the same pick up dates (no different than SFH), so I'm not sure why each owner doesn't have their own account set up with Republic Services (like SFH homeowners).
Here’s a link with the most recent reserve study & financial reports
Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
3y
@Moses Moreno you mentioned they are getting a loan which means making payments. There are multiple ways to spread the assessment out with some preferring to pay cash for their share and some taking their portion over time. That actually isn't a big deal and to blame the board is just plain stupid.
If the reserves are short then you have owned without paying enough in which means a free ride during that time. Being a board member is such a thankless job. It is natural to not want to pay for future peoples repairs so it is typical to have low dues early and high ones later.
If you don't like the board get a group together and take over. Your board will probably be sick of the homeowners anyway and the homeowners will be sick of the board.That way you can enjoy accusations and complaints all the while you donate your time and work for free. Been there done that.
The thread is Trending now! There’s a lot of good info on this thread so let’s keep it going👍🏼
Just to clarify on the trash. Each unit has its own individual trash & recycling bins & we all have the same pick up dates (no different than SFH), so I'm not sure why each owner doesn't have their own account set up with Republic Services (like SFH homeowners).
Here’s a link with the most recent reserve study & financial reports
With regard to the trash service, the HOA should have been able to negotiate a competitive bulk deal of some sort (getting quotes from several vendors), which would be less of an administrative load for the vendor vs. 166 individual accounts. Nothing unusual about that.
Soooo...your Executive Summary shows exactly what I was describing with regard to the shortage (deficiency), of your Reserve Funds. It is telling you that to meet the anticipated timelines for replacement of each of the identified elements, you should have, as of the date of the report, $2.1M and change; BUT, you are short (underfunded) $1.5M and change as of the date of report, which amounts to just under $10K per owner just through this (2021 per the report) year end. You still need to continue accumulating additional funds for every element, for every year "remaining life".
Scroll down past the pretty graphs to the "Theoretical 30 Year Funding Plan", look at the columns for "Current Funding Plan", and you see a lot of rows with amounts in parenthesis- these are negative numbers...you will be that much short for each of those years based on current "remaining life" of certain elements that will be due for replacement.
A few more pages down is your "Component Summary", which shows the "Useful Life", "Remaining Life" and "Total Cost". Useful life being a statistical figure initially, but should be realistically refined during the 3rd and 4th quarters of that life, adjusting the "remaining life" accordingly.
The chart for "Annual Expenses by Component" is actually a "cash flow" view of the scheduled replacements based on the component summary "remaining life".
Now for the bad news...back to that $10K per owner shortage, or underfunding, to correct that and get on track with the actual 30 year plan (and for the moment we will assume the "Total Cost" figures are reasonably close, and all major elements are included in the component list), your maintenance fee needs to be increased by $795 per month for 12 months. Or pay a special assessment of just under $10K. But you already know that since you just voted on a loan. Which means now, not only are you paying the $10K, but also the interest over the life of that loan. Everyone would have been better off following the 30 year plan, building the reserve for that element, and NOT needing to get a loan. What you probably have not figured out yet, is that next year's maintenance fee will need to be increased, otherwise you will be back on the road to underfunding the overall plan. A 3% increase is nothing more than inflation adjustment. Your Theoretical 30 Year Plan shows five years in a row of negative balances, meaning either more money is needed from owners, or defer more maintenance, AGAIN. Ballpark figure you are looking at $200K shortage each year for five years...or $1M. Divided among 166 owners, that is another $100, per month, per owner, for five years, before inflation.
Now lets talk about the Financial Reports. Your Balance sheet shows nearly $400K "total assets" (or cash). Sounds like a healthy number if you are unaware of the separate Reserve Funding needs. Unfortunately, most Buyers, IF they look at all, generally do not go much beyond that "Total" figure. "That's a lot of money, they must be doing well". Only when you study the Reserve Funding Plan do you see the $1.5M they are actually short this year.
