Tuesday, June 25, 2013

You say Tomato, I say Tomato

You say Tomato, I say Tomato
Have you ever gone to an HOA meeting.  They can be very interesting.  Or they can be very boring.  Most times, they can often be a little of both.  Hopefully, though, they will always be informative.  However, before we discuss the meetings themselves, let’s make sure everyone knows what an HOA is.  HOA stands for Home Owner’s Association.  For planned developments, the HOA is the organization that controls the common areas of the community and oversees the management of the community covenants, which set the general rules for the community.  For the large majority of the community development timeframe, the HOA is usually controlled by the developer.

And this is where the issue starts.  You see, no matter how reputable the developer, most community residents seem to have an inherent distrust of the master developer the second they begin to discuss community expenses and community governance.  It is kind of like that family dog that gets along with everyone until the mailman shows up.  Then Fluffy turns into Cujo and you begin to wonder if an animal exorcism is in order.  It really makes no sense.  Consider the methodology of the home purchase decision.  You find a community that you love.  You love the neighborhood, the aesthetics, the amenities, the home plans and the elevations.  In fact, the basic community elements, coupled with the affordability for your budget, are what drove you to buy a home in that development in the first place.  Then, you sit in on an HOA meeting and all of a sudden you see neighbors finding a common enemy in the developer for doing nothing more than sharing information on the community governance that you were privy to when you purchased the home to begin with.  Go figure.

There is, though, a way to make the meetings much more palatable for the community and actually increase the trust factor between developer and homeowner.  The answer is actually quite simple.  It is called transparency.  To accomplish this, all a developer needs to do is include residents on the various community committees and then make them the reporting voices at the HOA meetings.  Let’s take this step by step.  Finance, Landscaping and Architectural Review.  If residents are participants in these three major committees and are truly given the ability to understand, if not offer input, into the operation of these groups, then you are creating a platform to inform the community, creating transparency.  I always take the approach that every home sold increases your number of partners by one.  Think about how you need to treat your partners to keep them happy.  Keep them informed.  Once informed, these individuals become your advocates.  They talk to neighbors, they spread goodwill and they let everyone know that you have represented the community interests in the management of the community by giving homeowners a voice. 

Now, let’s get back to the HOA meeting.  The developer has two choices to communicate information to the attendees.  They can manage the meeting by being the lone voice passing along information to those in attendance.  Or, and here is where the lightbulb over the head goes on, they can let the resident committee participants be the ones to convey community information to the other residents.  It is amazing how the same information is perceived depending on who is conveying that information.  Let’s go back to my Cujo reference.  When the developer conveys information, there is always a certain degree of mistrust.  Not necessarily justified, but it is what it is.  Instead, if your neighbor who you have drinks with, and golf with and share a carpool with is the one passing along the same information, you are much more inclined to both accept the information as accurate and also feel that your interests are being represented.  Everyone is happy, the sky is blue and there is goodwill towards your fellow man.

It is all in how you choose to communicate.  Remember, Fred said Tomato and Ginger said Tomato, but in the end, by compromising together, neither was willing to call the whole thing off. (Really, you can check out the You Tube and see for yourself!)

Until next time…

Keep kicking the dirt!


Friday, June 21, 2013

Do We Have To Pay Extra For A Drawbridge And Moat?

Do we have to pay extra for a drawbridge and moat?

Some communities are gated.  Others are not.  Does a gate provide a different perspective for you as to the quality of the community?  Is it a nuisance?  A benefit?  Does it matter?  Do you care?

 Let’s first review the aesthetic impact of having a gate.  Most gated communities will tend to have a gatehouse.  Not all, as some are unmanned gates.  However, in most cases, you will typically find a manned gatehouse (or at least partially manned gatehouse) when you have a gate.  These gatehouses take many forms.  Some are simple, fairly understated structures.  Others are approximations of McMansions.  The funny thing is, I have never seen a large gatehouse that was not meant to impress.  I have, however, seen many smaller, tastefully done gatehouses associated with some very impressive upscale communities, where the community knows what it is and does not need to overstate itself with a monstrous gatehouse.  I know this is a setup for a cheap joke about size matters.  I am not going there.  In general, though, the more elaborate the gatehouse, the more expensive the community.

The funny thing is, outside of aesthetics, why bother having a gatehouse at all?  Most people assume that a gatehouse equates to community security.  In some cases that is true.  There are communities where the guard attendants are armed and there are some communities that even have guard dogs to support the staff as well.  However, most guard attendants are just that, attendants.  This is not meant to detract from their function.  They do a very admirable job of monitoring the comings and goings of guests and visitors and keeping watch over questionable activities.  However, most attendants are not empowered to perform police functions.  This is an important distinction.  They cannot hand out tickets or make arrests.  They can, however, call the police when they suspect suspicious activities.  They do also act as a deterrent to individuals that would rather not state their intentions for entering a community.

OK, so they are watching the entrance and calling the police if necessary.  I can feel safe, right?  Well, yes and no.  (There I go again, refusing to take a position.  I really feel I have a future in politics).  Unfortunately, one of the things I have found over the years is that the greatest abuse in a community does not come from the outside, but rather from the inside.  In a number of gated communities, the gate is not manned 24 hours a day.  In these cases, you will often see a keypad out front to allow off hours access.  Many times, people will give their keypad code to others, such as family, friends, Fed Ex, the pizza delivery man, you get the idea.  It becomes difficult monitoring access when you don’t know who is driving the dry cleaning delivery truck unannounced into your community.

Anyway, many people also feel gated communities add value to a home.  Let’s review those basic economic for a minute.  Let’s assume your community has a 24 hour manned gate at $15/hour.  That comes out to $131,400/year.  If your community has, let’s say, 500 homeowners, that equates to $263/year per home.  In terms of purchasing power, using a 4% interest rate on a 30 year mortgage, that comes out to about a $3,700 value.  Seems pretty affordable for a gated entrance, right?  Well, maybe.  When you have a gated community, the municipality tends to not take ownership of all of the community infrastructure.  In other words, those roads that you drive on past the gate are usually yours and yours alone.  You will want to make sure that your community reserves are sufficient for long term maintenance of these items.  Roads are a funny thing when it comes to reserves.  Most people assume that a community amenity is the most expensive reserve item.  The reality is that it is usually roads.  You will most likely be responsible for street lights as well.  They can prove to be pricey too.  Once again, this is not to say that gated communities are bad.  It is just to make sure you understand the financial impact.

There is another interesting item about gated communities.  They predominantly grew out of the urban sprawl that started in the 1970s and 1980s and have continued to this day.  When you drive through towns and communities that have seen explosive growth over the last 30 years or so, take count of how many gated communities you see off of the main thoroughfares.  Now, drive through an area that has been around for 40, 50, even 100 years or more and tell me how many gated communities that you see.  While now is not the time for a discussion on traditional neighborhoods, new urbanism and the like, I do feel the need to stress that gated versus non-gated is not always a delineating factor between the haves and the have nots.

So, next time you are considering a gated versus non-gated community, please be cognizant of those factors and cost items not always so apparent with your little slice of heaven.  They should never be the reason to choose one area over another, but they should still factor into your decision.

Until next time…


Keep kicking the dirt.

Thursday, June 13, 2013

It's my club, isn't it?

It’s my club, isn’t it?

When searching for our own little slice of heaven, there are many of us who are attracted to those communities with amenities.  These amenities can take many shapes and sizes.  Some amenities are as simple as a community swimming pool and adjacent tot lot.  Others prefer tennis courts and a community clubhouse with meeting rooms and fitness facility.  Still others prefer the macdaddy package with golf, restaurants, spa and everything except the French maid who cleans the home twice a week.  Anyway, you get the point.  There is an attractiveness to buying a home in a community that has some form of amenities. 

 People take pride in being able to come home and dine at their club.  They enjoy having friends come and golf at their golf course.  They relish in seeing their kids and grandkids swimming in their community pool.  However, what happens if that cool new fitness facility that you thought was your own really is not your own?

 I know.  I am confusing you again.  How can my pool not be my pool, my golf not be my golf, my fitness not be my fitness.  After all, I live in a gated community, or at least a community with an entry feature, and all these reasons why I bought here are right in the middle of the community.  Of course they are mine.  I pay monthly fees, I have my monthly newsletters.  Heck, I am even president of the bridge club.  Sound familiar? 

Well, the reality is that it may not be your club.  You see, when a developer builds out a community, they do not have any obligation to deed the amenities to the community.  Oftentimes, a developer will keep control of the amenities through the build out of the community.  While your HOA fees will typically have charges associated with the club and amenities, in these instances the charges will be use fees that the developer charges each homeowner for the use of these features.  This is different than when the club and amenities are owned by the HOA and your HOA fees include fees associated with the management and maintenance of the club.  In those cases, the HOA already owns the club.

OK, so what does that mean to me, right?  Well, if the developer keeps ownership of the club, there are several choices available to them at build out.  First, they can continue to own the club and collect the cash flow stream associated with the use fees that they charge you in your HOA fees.  Second, they may just deed it over to the community in the future.  Third, they can sell the club to the HOA.  In this case, the HOA will either need to institute a special assessment to all the homeowners to purchase the club, or they can obtain a loan for the purchase, in which case the homeowners pay debt service on the loan.  Fourth, they can sell the club to a third party, whereby you may or may not continue to have access to the amenities. 

Now, I could devote a whole new blog to what each of these scenarios may mean to you.  However, what I want to accomplish here is nothing more than to put you on notice when buying real estate.  It is not necessarily a bad thing buying into a community where the amenity has not been turned over to the HOA.  You do, though, need to recognize that there is probably an expense at some point in the future that you need to factor in if you want to make sure that the club you love so much remains your club to love.

On a positive note, it is very easy to find out who owns the club.  Just ask.  It is one simple question.  Does the HOA own the club.  If the answer is yes, you are done.  If the answer is no, or the salesperson or homeowner starts to dance around the question like Fred Astaire leading Ginger Rogers, then you have some more digging to do.  Remember, it is not a bad condition.  It is just something you need to be aware of.  After all, when you call your friends and ask them to come over to hang by the pool, it would be nice to be able to tell them whose pool they will be hanging out at.

Until next time…

Keep kicking the dirt.

Wednesday, June 5, 2013

CDD Is Not A Four Letter Word

CDD is not a four letter word.

Never have I seen such polarization among homebuyers as when these three letters are used in conjunction with housing developments.  However, we are getting ahead of ourselves.  First, let’s take a moment to describe what these letters represent.

Community Development District.  At least that is what they are called in Florida. Mello-Roos CFD, MUD, there are different names for these types of municipal financing districts in different states throughout the country.

A CDD is a financing mechanism where a developer can float debt to help pay for certain community infrastructure improvements.  That debt, in turn, becomes a lien on each homesite, effectively passing along the cost of that infrastructure to the future homeowners who will be paying down that debt over time – usually about 20 years.  The improvements paid for with the CDD debt are then managed through a quasi-governmental process that is very transparent to homeowners through public meetings, with ever increasing homeowner participation on the CDD boards.  In a nutshell, general community expenses that would otherwise be managed through an HOA (Home Owner’s Association), would instead be managed through a CDD. 

So, is a CDD a good or a bad thing?  Well, it can be both (how is that for straddling the fence?).  When done in a fiscally responsible manner, CDDs can be very good for a community.  Some of the benefits are as follows:

·         Enhanced infrastructure – more landscaping, better streetscapes, entry features, etc.

·         Greater community amenities.

·         Improved financial transparency to homeowners.

Potential pitfalls tend to be financial in nature:

·         Increased yearly homeowner expenses due to debt service.

·         Developer bond default in poor economic times.

Let’s look at these individually, and simply.  As with any business, real estate development only works if the returns justify the expense.  By using CDD financing to allocate debt to the lots, a developer can provide better infrastructure to a community than if they had to bear the cost 100% themselves.  In turn, this typically results in a more upscale development that would command higher price points and a more sophisticated community lifestyle environment that if those dollars were not spent on the community.  Though the homeowners bear some of the burden of these costs through the allocated debt service, they are receiving homes with higher values and an improved lifestyle experience.  Furthermore, as a CDD is a quasi-governmental entity, financial transparency as to the CDD expenses and management is very strong.  Basically, everyone should experience a win-win.

When it goes bad, it becomes a financial burden on everyone.  If the development fails, the CDD operating expense burden for the community may fall upon the shoulders of the existing homeowners, either requiring them to step up monthly expenses, or allow common elements to be shuttered or fall into disrepair.  Now, you may be saying to yourself, “How is this any different than if a developer goes bust without a CDD.  The homeowners still need to shoulder the burden, don’t they?”  I will keep the answer simple and straddle the fence again.  The answer is, “kind of yes”.  With no CDD, if a developer goes under, the bank takes over and assumes developer obligations.  Usually, that means that the bank would then be responsible for the shortfall obligation in community expenses.  It does not mean that they won’t scale back expenses, but it does not obligate the remaining homeowners to carry a shortfall expense.  Also, after a property is foreclosed upon, the bank will most likely have written down the asset to market value and look to sell the property to recoup whatever portion of the original investment they can.  With a CDD, bondholders typically have a longer time horizon and are not so quick to either foreclose out their asset or move quickly to sell their bonds at a loss.  You may see a CDD community remain stagnant for a longer period of time as the bondholders are more apt to try to ride out a downturn than a bank.

OK, you may still be confused.  I get that.  You are not alone.  Now, let me make it real simple.  When times go bad and a developer goes under, it stinks for everyone, whether or not there is a CDD.  When times are good, the birds sing, the grass is green and everyone is happy.  Homeowners will just end up paying probably between $500 - $1,500/year more due to the CDD debt service, but will receive improved community benefits in return.  See, simple.

So, the next time you see one community touting itself as a non-CDD community to sell against a community that has a CDD, don’t let yourself get confused.  You should compare the communities on their own housing and common area merits.  If the CDD community seems better executed, then the bond funds were probably well spent to justify the extra expenses.  If you feel there is no difference between the communities, then you may want to consider the non-CDD community and save yourself some yearly bond debt carry.

If the community, regardless of whether or not it has CDD debt, appears in disrepair, the grass is brown and there is a good deal of areas fenced off with chain link with high degrees of neglect, then run for the hills. 

Until next time…


Keep kicking the dirt.