Homeowners in Bellingham, Wash., got a jolt last fall when they learned their HOA was proposing an increase in annual dues from $832 to $1,237 to pay for much-needed repairs and regular maintenance.
Sudden Valley Community Association board members said the nearly 50 percent increase was necessary because the previous board had ignored even routine upkeep on the beleaguered property, leaving some buildings in serious disrepair.
The homeowners rejected the increase in a vote in November. But board members said the situation was so dire that if funds weren’t approved soon, they would have to start shutting things down. Homeowners ended up approving a smaller increase early this year.
Across the country, a growing number of homes associations are facing a critical problem: a lack of sufficient reserves.
A 2014 study by Association Reserves, a California company that determines whether community associations have enough to pay for major projects and repairs, found that 72 percent of HOAs are underfunded — up nearly 13 percent from 10 years ago.
Robert Nordlund, CEO of Association Reserves, said the economic downturn is partly to blame because it led to more foreclosures, leaving more homes sitting empty and owners not paying HOA dues.
But Nordlund also blames ignorant and inexperienced HOA boards.
“You need to maintain and protect the assets of the corporation,” he said. “That’s your job. You need to have the courage to do the right thing and not kick the can down the road.”
If board members don’t have the background and financial resources, they just fund their operating expenses without setting enough money aside for future repairs, said Evan McKenzie, a housing law expert and political science professor at the University of Illinois at Chicago.
And eventually that’s going to be a disaster, he said. Everything is fine until owners stop paying or extraordinary expenses arise, like attorney fees, judgments against the association for mistakes the board made or a major structure wearing out.
“Then you hit everybody with assessments of 20, 30, 40 thousand dollars,” McKenzie said, often catching homeowners off guard. “And then people lose their homes.”
Homeowners don’t want to end up like some in Ohio, where condo associations that had failed to build their reserves ended up slamming owners with massive special assessments when large expenses such as roof or siding replacements arose.
In one case, a person who bought a $170,000 condo was socked with a $27,000 special assessment five months later. It got so bad that the Ohio legislature passed laws requiring homes and condo associations to fund their reserves.
Underfunded reserves are such a concern that the California Department of Real Estate issued a consumer warning in 2012, saying a growing number of HOAs did not have sufficient funds to maintain their common areas.
“HOAs facing severely underfunded budgets often must resort to levying special assessments on the owners … in order to pay for needed repairs or maintenance,” it said.
Underfunded reserves can also make it more difficult for homebuyers to secure financing. Lenders are reluctant to approve loans when an HOA isn’t meeting its financial obligations, the real estate department said.
Last fall, residents of the Las Brisas community in Las Vegas were incensed when they found out their HOA was proposing to raise dues from $154 to $255 a month, a 65 percent increase.
The board said the association hadn’t been properly funding its reserve for decades, and the state of Nevada was threatening to place it in receivership. The HOA’s new management company said the fund contained $20,000 but should have been at $1.3 million.
“That’s the overarching problem,” said Carson Horton, co-founder of Capital Reserve Consultants, an Oregon-based company that conducts reserve studies for condominium and homes associations. “Nobody is concerned with the long term.”
Boards often are reluctant to raise the dues because of pressure from homeowners, Horton said, and because they’re afraid the homeowners won’t be able to afford the increases and will stop paying altogether.
“It’s a vicious cycle,” said Horton, who has called the underfunding “the other housing crisis.”
With the aging of homes associations, maintaining adequate reserves is more crucial than ever, Horton said.
“It’s a serious problem, and it’s only going to get worse,” he said. “The central issue is what happens to a community when it gets to be 30 or 40 or 50 years old. …
“These properties are poised to be the slums of tomorrow.”