Real Estate Market

Tough economic times for homeowner associations

by Broderick Perkins

(11/3/2010) More than half of the nation's community associations struggle with financial issues associated with the mortgage foreclosure crisis and related economic downturn, according to a national survey by Community Associations Institute (CAI).

Forty-five percent of community managers for an estimated 310,000 developments say associations they serve face "serious" problems as a result of the housing and economic downturn, while 9 percent describe the impact as "severe."

The survey also says 38 percent of the estimated 310,000 developments have postponed planned capital improvement projects and 35 percent have reduced landscaping services to reduce budgetary shortfalls.

Homeowner associations (HOAs) are the fastest growing form of housing in the nation.

HOA home owners buy a home in a community governed by a non-profit association. The association's board of directors manage the care and upkeep of the community and they manage enforcing the rules and by-laws, often with the help of an outside management company hired to carry out the board's orders.

In most, but not all associations, owners typically own and care for their own homes, on their side of the wall. The HOA cares for common areas, infrastructure and other elements shared by all.

Also known as common interest developments (CIDs), they come in a variety of flavors with varying types of governance, including planned-unit developments (PUDs) of single-family homes, condominiums, townhome developments and cooperative apartments.

According to the Community Association Institute, in 2010 there were nearly 310,000 community associations, with nearly 25 million units and 62 million residents.

Associations rely upon monthly homeowner assessments or dues to fund a budget for services including utilities, trash pickup, snow removal, road and building maintenance and repair, landscaping and upkeep. Assessments also fund a wide variety of amenities like swimming pools, gardens and playgrounds.

Unfortunately, more and more often, home owners hit by a tough economy can't afford their dues and/or face foreclosure, like other home owners who don't live in an association community.

Assessment delinquency rates have more than doubled since 2005.

Today, 65 percent of associations have delinquency rates exceeding 5 percent, up from just 19 percent of associations in 2005. More than 30 percent have delinquency rates exceeding 10 percent, and for one in 10 -- nearly 30,000 associations -- the delinquency rate is more than 20 percent.

"High delinquency rates put a lot of pressure on associations to meet their obligations to the homeowners who are paying their fair share," says CAI Chief Executive Officer Thomas M. Skiba.

"When some owners -- including banks that have foreclosed on homes and now own them -- don't pay their share, other homeowners often must make up the difference in higher regular assessments or special assessments.

More than 70 percent of bank-owned association properties are not making timely assessment payments to associations.

A quarter of community managers say more than 5 percent of their units are vacant.

This is largely due to foreclosures, the inability of non-resident owners to sell or rent their properties or owners simply walking away from their mortgages -- and homes.

Another 29 percent report vacancy rates of 3 to 5 percent.

All of this has a negative affect on home values.

Associations are taking a number of steps to address budgetary shortfalls:

• Thirty-one percent have reduced contributions to their reserve accounts, funds that are set aside for major maintenance and repairs.

• Twenty-three percent have borrowed from the association's reserve account.

• Sixteen percent have levied special assessments.

• Twelve percent are allowing residents to perform minor tasks in the community.

• Six percent have borrowed from banks and other lenders.

Says Skiba, "They are making difficult choices because they have few alternatives. Board members in every community association manage the business of their communities, and businesses must pay their bills."

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