Cohousing-L Mailing List: Re: HOA Dues Increase & Reserves

[Sharon Villines (sharon]

> On Jul 6, 2019, at 5:29 AM, R Philip Dowds <rphilipdowds [at] me.com> wrote:
> 
> Sorry. but I’m not sure I’m persuaded that the typical homebuyer is 
> especially interested in, or capable of analyzing, reserve funding.  Nor do I 
> have reason to suspect that the average buyer of a cohousing unit is more 
> sophisticated than the average buyer of an ordinary condo, or a single family 
> home. 

I agree with Diana — if new residents don’t, other people do. Real estate 
agents, for example. Their business comes from referrals and repeat customers. 
They won’t list or sell properties with bad tax records, inadequate reserves, 
legal battles, etc. They want satisfied customers. Even if your community 
doesn’t sell through agents, agents influence the market. A person who is 
looking at your building may be looking at others with an agent. They may be 
friends with an agent. Many tax and mortgage records are available online now.

In many areas of the country, condos and HOAs are relatively new. And even 
suspect. Cohousing is relatively new. At 20 years major repairs and 
replacements come due and that is when the money problems will appear. And 
cohousers will understand why adequate reserves are important. Understanding 
now would be better than in 20 years when they have no savings.

Very wealthy condos prefer to keep bare bones reserves because their residents 
are capable of handling large assessments and believe they can make more money 
with their money if they invest it. Reserves are invested in low risk 
securities and during high inflation years can actually lose value. But if we 
want cohousing to remain relatively affordable, we need to finance it properly. 
Households that live paycheck to paycheck cannot absorb even an extra 
assessment of $1,000. I don’t know everyone’s financial condition but we have 
at least 3 households in that position. Many of us would never even be able to 
move in now. The prices have quadrupled since 1999 when we signed our contracts 
and we had special mortgage and downpayment aid from DC because they were 
trying to increase homeownership. (And tax base.)

> None of this, however, is directly related to saving ahead for major capital 
> replacement projects.  Consider the ever-popular single family home and its 
> owner.  A minority of American households has the financial flexibility AND 
> the financial management skills to save ahead for the new roof and the next 
> paint job.  But to pay for these big hits, many others must rely on either 
> (a) re-financing the first mortgage, or (b) supplemental borrowing (e.g., the 
> home equity loan, which is the modern euphemism for the previously 
> much-stigmatized “second mortgage”).  Absent these versions of the “special 
> assessment”, households often learn to live with the disappointments of 
> deferred maintenance.  Foreclosures and forced sales sometimes fall upon 
> households that simply never factored in the correct costs of operations and 
> maintenance over time.  (Good lenders will set limits that help keep novice 
> borrowers from getting in over their heads …)

Is that what cohousing communities should be advised to do? My idea of 
cohousing is to develop a community that functions in the best interests of the 
community members—whether they are owners, roommates, renters, or others. That 
means responsible financial planning. Insufficient reserves is not responsible.

I can envision a community that does develop with the understanding that in 
10-20 years costs will increase to cover additional debt, but the financial 
documents should clearly state that and have a plan so current residents don’t 
have to sell, unless that is their plan.

There is a difference from individual homes and a condo. Residential costs for 
single homes are different from multi-household complexes. There are different 
standards and zoning requirements for condos vs single homes. We have to meet 
insurance standards and hire licensed and insured vendors. Small and one-person 
services don’t like to work in condos because it isn’t “residential”, it is 
commercial.  They don’t want big headaches. I can hire unlicensed workers, but 
the HOA can’t without incurring liability risks. This adds cost and moves many 
decisions out of discretionary. The work is required by law. 

We just had to have  all our indoor and outdoor sprinkler heads replaced 
because many were painted over and didn’t meet code anyway. Individual homes 
don’t even have sprinkler systems.

AND if the delayed repair causes damage to an individual unit, the Board can be 
sued for not protecting the capital value of the unit. One purpose of the 
reserve study is to protect the HOA from lawsuits. That’s why it is important 
to use a certified reserve specialist and fund to the average level that most 
condos achieve which I think is about 60-80%

>  But saving ahead can be unpopular because it implies, to some, that the 
> occupants of today are subsidizing the occupants of tomorrow.  In general, 
> despite its incredible technical aptitudes, the human species is not so hot 
> at making, and adhering to, plans for fifty years ahead.  (Which is why our 
> civil infrastructure crumbles away.)

Again, I hope cohousing is also educating people about how sustainable and 
affordable housing works best. How do we design a sustainable future?

> None of which is to say, Don’t bother with a “reserve plan”.  Just recognize 
> that the classical “fully funded” reserve plan — one that anticipates total 
> replacement of a physically and functionally obsolete structure after five 
> decades plus or minus — is stunningly costly.  Partial plans focussing on the 
> next ten or twenty years, and offering a funding strategy that covers just 
> the “major” or critical systems, can look and feel more realistic. even to 
> the solvent and future-oriented.

The cost of a reserve study by a certified reserve specialist in DC is the same 
for one study as the other—an initial study with a site visit is $5,000, an 
update with a site visit is $3,000. It includes a maintenance study. 
Association Reserves also offers calculations based on your own list of 
facilities without a site visit at $300 — that may be an old price but it is 
not incredibly expensive. There is also a spreadsheet floating around in 
cohousing that will do the calculations.

What period of time is covered is a computer calculation based on projected 
inflation and interest rates. Clearly it will be less accurate 50 to 100 years 
out, but a graph of 100 year costs has been incredibly important in convincing 
our members that we need to save now for the big stuff 50 years out. The 100  
year chart shows the huge hump at 50 years (we are now at 30 years) which was a 
visual representation of dollar amounts that communicated more than the 
numbers. The costs for the first 15 years were about half an inch high on the 
graph but the hump at 50 years is at about 8 inches — and also wide. There are 
several years of major expenses for big things like the roof, resurfacing the 
parking lot, sidewalks, etc.  But because we have planned, we will have the 
money before it comes due without huge increases in fees or assessments as we 
get closer.

Our reserve study person retired last year so we have a new company. They do a 
30-year projection but explained that 30 years includes savings for the large 
items that will be due in 50 years. In other words, they use the same base 
value for both the 20 and 100 year studies but don’t make an attempt to project 
the yearly savings required beyond 30 years.

Our reserves have also allowed us to take advantage of opportunities that we 
wouldn’t have otherwise. Solar panels recently became cost effective for 
buildings like ours. To install the panels it made sense to re-shingle the roof 
early. I think it was a 25-30 year roof but not in good shape. By replacing it 
before installing solar panels, we saved the expense of removing the panels to 
replace the shingles. And we replaced with better shingles with a 50 year 
guarantee. So now we can save for the shingles over a 50 year period.

We were able to pay for early replacement with the money we had already saved 
for the shingles (20 years of savings) and borrowing additional funds from the 
reserves. That extra amount will be paid back with the savings from the 
electricity bills for the CH and grounds. I’ve forgotten the details of the 
funding of the actual panels but it was some combination of reserves and DC tax 
allowances.

We now have no electricity bills for the CH and grounds and are paid I think 
$400 a month for extra energy we produce. Without strong savings, we wouldn’t 
even be able to consider that option.

It is enormously anxiety reducing when the HVAC goes out in the CH or we have 
to dig up the green to find the loops for the geothermal heat pumps. When we 
see all those trucks and crews of repair people we know it won't raise monthly 
fees.

(I know this is long and I keep saying the same thing, but I think it is 
important and that it convinces someone to start saving.)

Sharon
----
Sharon Villines
Takoma Village Cohousing, Washington DC
http://www.takomavillage.org