One of the key texts in the last 20 or so years regarding gated communities and homeowners associations was Privatopia, published in 1994. With a recent book, Beyond Privatopia: Rethinking Residential Private Government, the same author updates his thoughts and talks about the financial viability of homeowner’s associations:
A: The (housing) boom is clearly over, and right now few of these associations are being created. The problem shifts to sustaining the ones we have. What was sustaining them was an endless rise in housing prices. People could always sell at a profit, and the association would get its money. Now we have foreclosures and people not paying their assessments for six months or a year, and associations aren’t getting their assessments. The banks in foreclosures don’t want to pay overdue assessments…
It’s presumed that monthly assessments will cover operating expenses, which can include things like trash collection, pool maintenance, even resurfacing the streets. But studies that have been done show they probably don’t have enough money in reserve. At least a third of them … don’t have half of what they should have. After the housing collapse and the foreclosures, it’s probably more like half don’t have enough. Many of them are having to go to the bank and get a loan, but if you have a high delinquency rate, you can’t get a loan…
Q: Do you have any numbers on how many such associations are in dire financial straits?
A: No, and that’s a problem. I’m starting a six-month sabbatical now to work on exactly that. Everything I get is anecdotal, and I want to get a quantitative handle on how bad the problem is.
If many local governments are having budget problems, it is a surprise that many homeowners associations are facing similar troubles? I would imagine that the locations with more associations in financial trouble would mirror locations with more foreclosures and the most depressed housing prices. I wonder how many people within these associations are aware of these troubles. Actually, I wonder how many residents pay much attention at all to what their associations are doing.
Ultimately, perhaps this will all end up in the courts as associations and lenders who own foreclosures battle over assessments.