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September 20, 2014

HOAs Seek Shelter in Professional Management

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HOAs Seek Shelter in Professional Management

Looking to expand your property management portfolio? Self-managed HOAs are reaching out for assistance with finances and operations.

Fallout from the recession and the increasing complexity of property management are prompting HOAs and common-interest developments (CIDs) to rethink self-management and look beyond their members for professional management services. This trend is creating new opportunities for real estate professionals who offer property management services.

Gauging HOA Health

According to the Community Associations Institute, 24 percent of U.S. homes were in community associations as of 2013. A study conducted by the group this year sheds some light on how these groups are emerging from the recession:

What is your current delinquency rate?

Delinquency

Respondents

0-3%

60%

4-6%    

21%

7-10%

11%

11%

8%

 

Looking ahead, how do you see your association’s financials?

Forecast

Respondents

Much better

17%

Slightly better

37%

About the same

42%

Worse

4%

While HOAs were hurt badly by the housing downturn, they are emerging from crisis mode now.

“Our members are telling us they’re seeing fewer foreclosures and lower delinquency rates on monthly HOA assessments. In addition, HOA boards of directors have been able to reduce their expense-line item for bad debt on their budgets, which indicates an overall improvement in the financial health of HOAs in California,” says Karen Conlon, president and CEO of the California Association of Community Managers. “However, HOAs are not out of the woods yet due to the long-term impact of non-recoverable assessment revenue.”

That picture is supported by a just-completed annual economic survey by the Community Associations Institute, which found the overall health of HOAs and CIDs has improved. “During the recession, a lot of associations were really hurting, especially in Florida, California, and Las Vegas,” says Frank Rathbun, a spokesperson for CAI, noting that associations were plagued by solvency issues caused by underwater and financially strapped residents entering foreclosure or failing to pay HOA fees.

An improved outlook is freeing up funds to allow many HOAs to seek professional management services. In California, there are approximately 40,000 CIDs, and more than half are self-managed, notes Melinda Young, chair of the board of directors of California Association of Community Managers. For them, she says the recession was a wake-up call. “They [HOAs and CIDs] are realizing that it’s important to have a professional service to get their financial house in order and navigate certifications requirements,” she says. Many of these self-managed associations rely on volunteers, and “that’s an unappreciated position to hold.”

Linnea Juarez, CEO of Concord, Calif.-based Condo Financial Management Inc., agrees: “Their [volunteer managers’] time is limited and their knowledge of the documents and laws governing the operations of the association is usually sketchy at best. They should be able to enjoy their residence without owners knocking on their door at all times of day and night or calling them to argue about assessments, late fees, and collections.”

Juarez’s company recently acquired a new client that had not prepared or distributed a budget for the last five years. It also had failed to complete actions that were by required by both civil code and the CC&R’s of the association, such as prepare a reserve study every three years, hire a CPA to perform a review of the association’s books and records, and distribute that review to the membership.

“These are serious issues,” Juarez says. “Our contract is less than 30 days old, and we have obtained three bids for the board to engage a reserve specialist and to engage a CPA to review the last three operating years. We also have produced a budget for the current operating year for the board’s review and approval.”

Charlotte, N.C.-based Henderson Properties has experienced an uptick in call volume from HOAs seeking professional management services, according to company president Phil Henderson. Henderson says the phone inquires suggest that HOAs are struggling with finances, a lack of volunteers, and an awareness that HOA management is becoming “a more litigious situation.” The company has taken over some half-dozen communities that were self-managed and is currently in negotiations to manage a community of 900 single-family homes.

The benefits of professional management are especially self-evident for groups that maintained such help throughout the recession, says Condo Financial Management Inc.’s Juarez: “We have clients that have achieved a comfortable level of reserve funding and stable operating assessments over the years. Their position held up during the real estate decline between 2007 and 2013.”

While experts note that this type of property management is tough to break into, real estate professionals who are already ensconced in the world of property management may indeed see increased demand for their services as HOAs continue to recover from the recession.

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