Your Home is a Prized Personal and Financial Asset, Avoid Hurting Both.

Special Assessments Result from Hidden Debt that can Rival Your Original Down Payment.

Special assessments are increasing for condos, townhomes and homes in Homeowners Associations (HOAs). These assessments affect property value and can create personal and financial distress. Market realities have changed faster than current approaches address. The resulting lack of clarity and understanding puts homeowners in difficult situations.

Could you come up with another down payment?

It is challenging to buy a home. Here in the San Francisco Bay Area home prices are exorbitant with the median home price at $860,000. With HOAs, there is additional co-owned property. Co-owned property includes the roof, mechanical systems, parking, facilities and so on. These are assets that you benefit from. They are also a long-term obligation you are financially responsible for. On average, this is an additional $180,000 for the Bay Area which could be similar to the original down payment.

Home = Dwelling + Co-Owned Property

$860,000 + $180,000

Co-owned property obligation range for San Francisco Bay Area
Co-owned property obligation range for San Francisco Bay Area

Why this debt is so high

The housing market has evolved over the last decades. Yet the methods used to manage and track these obligations have not. The traditional model of reserves budget estimates is a good start but falls short. Specifically, they help understand co-owned elements and current estimated costs. But reserves require a 30-year long-term financial plan. Deeper economic and financial disciplines better predict and navigate what can happen.

cost increase
Costs are growing ~2.5x faster than inflation

The correct inflation is a key factor. Costs in real estate are accelerating faster than daily expenses. Even if current costs are reasonable estimates, future projections are inaccurate.

Furthermore, reserves studies are constrained to focus on what can be physically observed. As properties age, out of sight problems will occur. Reserves studies don’t accommodate for these potential future problems. The result is a larger hidden obligation.

Why this debt can result in special assessments

Many HOA communities treat these obligations like an expense. Though advised to save more, the goal is often to avoid common dues increases and deferred dues. Thus, obligations grow faster by combining the unknown debt with these known deferred funds.

When these obligations come due there’s little discretion to postpone. Often putting off these obligations will add cost and risk. The challenge is that when these items come due, even set aside reserves funds are inadequate. This puts the owners, boards and mangers in difficult situations. Though the expected maintenance or replacement occurs as planned, the lack of funds creates shortfalls. This results in special assessments.

Debt creates special assessments

Debt creates special assessmentsBig assessments create financial distress

When these obligations come due they can be bad surprises both in cost and frequency. If owners don’t have the funds on hand, they can seek an individual loan if the HOA does not seek one for owners. Owners that do not pay can face a lien on their property and could lose their home.

What you can do with your reserves funds

For HOAs that do collect reserves, this is a good way to offset this obligation. Thus, whatever the HOA collects as part of dues, it reduces the individual debt burden.

A significant number of HOAs hold these funds in bank accounts. This is a good and appropriate approach for near-term needs. But the challenge is reserves address long-term obligations up to 30 years.

Banks do not keep up with cost growth

You and your HOA need a better long-term approach

Unfortunately, interest-bearing bank offerings do not keep up with cost growth. Their interest rate is controlled by the federal discount rate which is set by the Federal Reserve. Banks can not address the greater inflation or cost growth facing HOAs.

Given this lack of long-term return, some HOAs won’t place long-term funds in bank products. They choose special assessments. They disclose this approach and give owners the opportunity to save themselves.

HOAs can put funds into better longer-term strategies. As required by law, HOA boards are fiduciaries and must act in the long-term best interests of the ownership. Boards can seek greater returns on reserves that are compliant with legal requirements. It is important to realize and understand the key processes to address. Following these requirements can give HOAs a better chance to meet their obligations.

Treat this part of your home as an asset

As owners, our homes are personal assets where we live our lives. They can provide enjoyment and sanctuary.

Our homes are also an important financial asset and for some it may be their only one. It is very important to understand what you fully own in shared ownership models like HOAs. Unchecked, this obligation will create debt hurting your prized personal and financial asset. Take notice of this part you own. Treat it as an asset and safeguard your home.

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