Condominiums offer the ability to own a home (as opposed to renting), while sharing some of the maintenance and upkeep costs to make the price more affordable. Rather than being the sole owner of a “single-family home,” and responsible for all the upkeep of the entire building, condominium unit owners pool their resources and handle various aspects of the infrastructure (e.g. roof, stairs, exterior, HVAC, etc.) collectively. This is good, in that it removes a barrier to entry to homeownership. However, it can also lead to issues regarding preserving and maintaining that home. Specifically, an owner of a single-family home does not have to agree with anyone else regarding how to prepare for, budget for, or prioritize major expenses on the home. They only need look at their own finances, the projected needs for their home, their intentions regarding the property, and any other personal factors. Whatever decision they make is inherently “correct” because they are making it while considering only the factors relevant to them, and they have to deal with any fallout from a miscalculation or budgeting error.
Reserves in the Single-Family Home Context
For instance, consider the purchaser of a twelve-year-old single-family home. That owner should take into account that the useful life on the HVAC system is 12 years, the useful life on the roof is 20 years, and the useful life on the windows is 15 years. As a result, the owner should be setting money aside to replace those items immediately (HVAC), in three years (windows), and in eight years (roof).
Now, say the owner decides not to do that. Maybe there is a global pandemic and incomes suffer. Maybe the owner has a bad week betting on the ponies. Maybe they just take a big trip instead of saving. Regardless, in year thirteen (or one year after purchase), the HVAC system goes kerplunk. Now the owner has to figure out how to replace it. If that owner has not saved the money or set anything aside, then the options are less simple and perhaps less attractive than “just write a check.” Borrow against the house. Gift from family. Finance through the HVAC company. Do the repairs on the cheap. Or just live without air conditioning or sell the house. Regardless of which one the owner goes with, they are the only ones responsible for not anticipating the (very predictable) expiration of the HVAC system. And if they go through the same process again for the windows and roof, then the owner certainly has no one to blame but themselves.
But not so in a condominium! In the same scenario, there may be several factors at play as to why the funds are not saved and placed in reserves. The board or owners may have known for quite some time that they should have been saving more for known and predictable repairs and maintenance, but been dissuaded from doing so, or simply decided not to. Think back to our single-family homeowner above. Now try to place that person in context within a condominium. Did they just buy the unit? Are they projecting the useful life of the big-ticket items? Is their plan to simply finance or get a loan for any repair or maintenance that may come up?
Take your answers to those questions and place them into a matrix or spreadsheet; multiply the potential answers by the number of units in the condominium, and then amplify certain of the answers by the “noise factor” of owners more willing to speak their mind (complain) about the budget:
Now you have some understanding of what it takes for a condominium board to create a budget that agrees with everyone’s opinions. In short, it is impossible.
One reason it is impossible is that the fiction we took as an assumption above – that all owners can collectively take on the maintenance and repair obligations and do so in the same fashion as a single-family home owner would – is preposterous. To understand why, we are going to briefly examine the different types of single-family home owners who might exist, and consider their strategies for handling maintenance items like this. Then we will attempt to reconcile those into one holistic approach. Buckle up.
The Starter Home
The first single-family home owner we will consider is that group who considers it the “starter home.” Typically young and early in their career, this homeowner has scraped up enough money for a down payment and has started on the path to financial solvency and the American Dream that is all wrapped up in owning one’s home. However, this particular home is not their “forever home;” they may already have their eye on another one down the road. This owner certainly wants the home to be pleasant and livable now, and to remain within their budget. Every action they take on the maintenance side, however, will be considered through the lens of: how does this impact resale value? If the owner is not going to see appreciable return on this investment when they sell the property in 2-4 years, then they simply won’t plan for it. Windows are at the end of their projected useful life, but there is no observable wear and tear? Forget it! That’s the next owner’s problem. Roof has a few dings but is still in year ten of a projected twenty-year lifespan? Patch it up – no way are we investing in a new roof that won’t increase our resale price. This owner is not interested in saving for the maintenance that will come due in twenty years; they will own a different house by then.
The Fixed Income
How many times have you heard this one in the condominium context – “I’m on a fixed income”? Typically a retiree, this owner has one source of funds and has budgeted them very strictly to cover their known monthly expenses (apparently there’s even a song about it). They use this deflection to argue against an increase of costs. But in the single family context, this argument gets more easily exposed for the logical fallacy that it truly is. If you own a single family home, and your hot water heater suddenly hits the fritz, who has to replace it? You do! And regardless of the fixed nature of your income, that will cost something. What do owners of single family homes on a fixed income do in this instance? Typically, they have either some family member assisting with budgeting, or equity in the home sufficient to allow them to finance the repairs. But the mindset of this owner is very apparent: pay the minimum amount every month to keep this property. Usually they have lived there for a long time, probably have little to no motivation to move or significantly upgrade the property at this juncture, and are looking to minimize expenses. Saving for a roof replacement ten years from now is not even on this person’s radar screen; they are planning to make issues like that the next owner’s problem.
The Crash Pad
Perhaps this owner has a busy job, or a long commute, or family in another state. For whatever reason, this owner spends only the bare minimum of time at the residence, and treats it accordingly. Sparsely furnished, this home gets no upgrades, and needed repairs and upkeep are pushed to the absolute limit. Saving money to sink into this place in the future is not high on the owner’s priority list.
The Investor
Not everyone who owns a single-family home resides in it; some are owned by investors and rented out for profit. Now investors come in all shapes and sizes, from the married couple keeping this property as a side-income to the real estate company looking to expand its vast rental empire. So to paint them all with the same brush would be foolish. But generally, they have a few characteristics in common: budget-conscious, minimizing disturbances or interruptions, and preserve the value of the asset. Typically, investors also have a fund on hand to address contingencies; that is, by nature, they are more liquid than the average owner. So occasional unexpected expenses are part of the business.
The Forever Home
Confession time: I hate this phrase. It seems like a realtor-concocted platitude meant to entice a buyer into spending more than they otherwise might choose to. Regardless, it conveys a certain concept: usually a family who intends to be in the home for a great deal of time, raising children, making improvements and shaping the residence to their needs. This family is (or should be) planning for the long haul: predicting when the roof, or the garage door, or the deck might need to be repaired or replaced, and budgeting accordingly. The home for them is a long-term investment, and they intend to get the maximum amount of enjoyment out of it.
Reconciling the Differences
By now you probably see where we are heading with this. In the single-family home context, each of these owners is free to save money for major repairs, or not, as they see fit. They will either reap the rewards or pay the consequences of their decisions on their own – and they may never even realize it. The starter home owner may sell just before any repairs are needed – or they may get caught by a major structural repair needed before they can cash in. The investor may make every needed repair at every turn, but still have a tenant break something in the property that destroys their equity. The best laid plans of boards and management often go awry, as the man said.
What happens when a condominium board tries to take all of these conflicting strategies and make one coherent policy for the association? Rarely anything good.
Now, don’t get me wrong. There are plenty of responsible boards out there who take a strong position on the issue, regularly raise their assessments, and fund their reserves. There are even other associations (more akin to our investor owner above) where most or all of the owners agree that reserves do not need to be funded for every contingency, and they just special assess when it becomes necessary. (note: this strategy is fraught with potential problems and not recommended for most associations) But often what happens is that the clamor for lower assessments is the loudest, and what occurs is that the pay less, plan less, hope for the best strategy wins. But it is a kick-the-can down the road mentality, and eventually it comes home to roost. Condo ownership becomes like a game of musical chairs, with owners not knowing who will be left with no place to sit when the music stops.
The board has a difficult job. It is thankless, and unpaid, and frustrating at times. Truthfully, if a board successfully budgets for future expenses, properly funds reserves, and makes repairs at the proper times, no one will ever know. Sure, that board member will be aware that they preserved not only the value of their own unit, but also the value of each of their fellow unit owner’s properties. They will know that they made every effort. But when each of those owners sells their unit for market value, or is able to refinance and take cash out, or collects rent seamlessly for years, the are not going to say, “Man, I should call Board President Jane from six years ago and thank her for getting me to this point.”
Where It Can Go Wrong
Interestingly, the inverse is also usually true. If a board fails to budget for reserves, and a huge repair project comes along that the association does not have funds on hand to complete, the meetings where the fateful decision was made will not be identified and rehashed. The board members who underfunded the reserves will not be brought out in the street and publicly flogged. There will be some general griping about the “condominium” or the “old board” or just “costs,” but in most cases the responsible party will never really be named – in part because the responsible party is actually many parties over a significant period of time. The deferred maintenance and underfunding of reserves is a chronic problem that can accumulate but go undetected for many years – but when its full impact surfaces, it can be devastating.
What You Can Do
So to sum up: owners are going to disagree about how to fund reserves, because they are coming at it from different perspectives. This can lead to a game of musical chairs, where owners operate within the condominium as the common elements slowly deteriorate due to deferred maintenance. And eventually, when the music stops, you don’t want to be anywhere nearby, because the results can be extremely negative on the value of the condominium units, and even on the ability of the association to continue to function.
So is that it? Are we stuck with this doom and gloom view of a condominium as a deteriorating asset and a ticking time bomb?
No. The fundamental concepts behind the condominium construct remain sound. They just need to be carried out in practice. The most important ones are:
— Get a reserve study, and follow its recommendations. More and more jurisdictions are mandating this, so not only is it good practice, but it may be a legal requirement, with communities facing penalties for failure to comply. There is just no substitute for good planning and preparation.
— As a board member, listen to all the opinions, but take them with a grain of salt. Consider the perspective that might be driving comments of owners; are they in one of the situations we described above? If so, perhaps your role as a board member is to do the right thing for the entire association, even if it upsets some people in the short term.
— As an owner, remember that your opinion is just one part of what goes into the calculus. Perhaps you would rather fund the budget on the cheap and leave maintenance for the future owners to deal with. Understand that when you get outvoted or overruled on that issue, it is not a personal attack; it is the association doing what is in the best interests of the association. If you truly cannot accept that, then perhaps, with all due respect, condominium ownership is not the right fit for you.
— As a manager, get your boards the information they need and present it to them in a way that demonstrates just how essential reserve funding and structural engineering studies are. Green managers can benefit from educating themselves well on the topic so that when it comes up, they can answer the questions, and also so that they can bring this issue to the board’s attention on their own. More seasoned managers can trust their experience, but also make sure to take the time to explain some of the issues we regularly confront to each board and let them make an informed decision. Always keep the mindset of giving the board the tools to make the right decisions, rather than telling them what to do.
— For everyone, keep in mind this: it is a complex ecosystem, this thing we call a community association. It is built on the assumption that people can join together to accomplish a common goal – the maintenance of a residential building. To accomplish that, everyone will probably have to give a little. Keep the larger mission in mind and the smaller decisions become easier to make.