The term “under water” in real estate usually refers to a property that has no equity. That is to say that the money owed on it is more than what it can sell for. Seldom do we hear about an entire HOA or Condominium Association being “under water.”
The brutal truth is that your entire community association can be under water. Unfortunately in many communities, nobody in authority acknowledges it until it’s too late. Too late is when homeowners are hit with a large special assessment for a capital improvement project. A special assessment so large it actually endangers your family’s economy.
So the question is: How do you know if your HOA or Condo is Under Water?
Under water means your community association has not budgeted for its expenses accurately
So let’s start by defining what it means when we say a HOA or Condominium Association is “under water.” It’s quite simple. Under water means your community association has not budgeted for its expenses accurately.
The situation compounds itself by allowing this to happen year after year. The result is a negative cash flow. The effects are a reduction in services and lack of preventative maintenance. Then there is the matter of an absence of capital improvement projects. These are signs that your HOA or Condominium association is going under water.
A special assessment to try to fix a situation will be placed
Signs Your Association is in Financial Trouble
The symptoms are:
- Lack of preventive maintenance
- Absence of capital improvement projects
- Reduction in property values
- Deterioration in curb appeal
- Erosion of amenities, lowering the quality of life
- Reduced staff or cancellation of vendor contracts
- Distressed looking property
- Municipal fines and violations
- Increased complaints to the management office
- Special assessments
A special assessment may be placed by your board to try to fix the situation. A special assessment that should never have happened. Now nobody is happy and to a certain extent it’s the fault of the membership for not being vigilant.
Everybody in the association has the ability to diagnose the symptoms. You don’t need to be an accountant or an engineer. You need to know what to look for.
Take a walk around and see if your HOA or Condominium Association is looking a little worn out. Is the paint fading, are the common areas clean, is the pool closed more often than it is open? Are there fewer security personal around? Do you see less personal servicing the property’s common areas? These are easy things to determine and now you need to drill down and see what is causing these problems.
What Causes a Community Association to Go Under
The main culprit is an inadequate budget and you don’t even need to leave the house to see if you have one. If your Association has not increased the fees by a small amount every year then something might be wrong. As a member of a community association you have a right to see the budget and the financial reports. No state in the union prevents community association owners from accessing this information. Ask for a document inspection.
The first thing you should look for is if the association has had a reserve study. Then you should see if they are funding the reserves. Reserves are usually kept in a separate bank account so look at the bank statements. See if the board has been making withdrawals. Only withdrawals for capital improvement projects are allowed. The reserves are not a cushion to pay for budget shortfalls. Review the budget and see how it performed last year.
Did they budget 100k for water and paid 150k? Did they spend an inordinate amount of money on attorney collections. Only to recover a fraction of what they paid the lawyer? What about delinquencies? Is the association carrying non-paying owners without sending them to a collections agency? Delinquencies and bad debt can make a big difference. If your HOA or Condo is under water find out how you can know it.
What You Can Do if Your Condo or HOA is Under Water
When there is going to be a budget meeting this is the time for you to stand up and ask the hard questions. Make the board accountable for the decisions they have been making and are about to make. If they are trying to keep the maintenance fees low, that may feel good in the short run, but, the long term effects can be very painful.
If the board keeps fooling itself, soon enough you will feel the pain. Why should your quality of life be affected by penny pinchers? When for a few more dollars each month your property can be beautiful and at the same time more valuable.
It is important for every member to be a part of the budget process. Don’t allow another “cooked” budget to get passed. Don’t allow your association to be “under water.”
