Make Sure Your Homeowners Association Has Its House in Order

Ted Leber isn’t worried about his finances. He whipped his financial life into shape years ago and is now comfortably retired. But the policies of his condominium’s homeowners association weigh heavily on his mind. He knows that a serious misstep by the committee could put a crimp in his financial life.

Unfortunately, the only unusual thing about Leber is that he’s aware of how dramatically his homeowners association’s decisions can affect his own finances--and he got involved long before there was any real sign of trouble. Most condo owners only discover trouble when they start paying for it through higher fees or special assessments.

In fact, Leber recognizes that his Virginia complex is currently in great financial shape. He just disagrees somewhat with the association’s board about how the group’s substantial reserves ought to be invested.

If only all homeowners association troubles were that simple.

One uncomfortable fact of life for the roughly 42 million people who live in condos, townhomes and subdivisions governed by homeowners groups is that they are bound together in one economic entity that can collect--and increase--monthly dues, demand special assessments and put a lien on your property if you don’t pay up. A bad community association can even decimate your property value.

Just ask Patsy Cashmore. She’s a Washington-based speech writer, president of the Crystal Park Condominium Assn.--the complex where Leber lives--and owner of another condominium unit in Milwaukee. While Crystal Park has set aside 100% of the money it expects to need for upcoming expenses, the board of the Milwaukee complex doesn’t even know how much money it ought to have saved, she says. The two complexes are similar in size and required upkeep, but the Milwaukee association has just one-tenth the financial reserves of the Virginia group. As a result, cracks and frayed carpeting go unrepaired, Cashmore sighs. When a repair is made, the Milwaukee board levies “special assessments,” which require all homeowners to come up with a chunk of cash at a moment’s notice.

After years of writing letters and trying to get the Milwaukee association to shape up, Cashmore sued its board. She said the action was a last resort she took only after the board failed to correct structural damage. She still hopes the problems will be fixed before the parties go to court, partly because Cashmore knows she’ll lose either way.

“When you sue your homeowners board, you are essentially suing yourself,” she says. “If I win when we go to court, we will get the legal bills paid by the condominium, which will turn around and bill us back in a special assessment. The bottom line is, it is going to cost me money either way.”

Indeed, experts maintain that a bad homeowners board can damage your long-term investment in a condo, townhome or subdivision.

Yet, remarkably, roughly one in three individuals who bought homes that are governed by these groups didn’t even know that the homeowners association existed before they made their purchases, according to a survey by the Community Assn. Institute, a Washington-based group that represents homeowners associations.

Worse, many of those who were aware of the association failed to learn about its policies and finances before buying. These mistakes can be disastrous, says Donna Reichle, spokeswoman for the institute.

“Community associations function very much like small governments,” Reichle says. “They can determine everything from whether you can keep a pet to what color you can paint your house. You have to make sure that you get a copy of their rules and know whether you can live with them before you buy.”

Increasing numbers of homeowners are affected by the associations today, and the figure is expected to grow, Reichle adds. That’s because a variety of factors--including budget constraints plaguing city and county governments--are causing a boom in group living, whether in townhome and condo complexes or simply in gated suburban subdivisions.

Over the last five years, the number of people governed by homeowners groups has surged 31%. And some industry experts predict that nearly half the urban housing built in coming years will be governed by community associations of various types. Some financially strapped cities and counties will approve only housing developments that are governed by them, Reichle adds.

That’s mainly because homeowners associations are responsible for the upkeep and repair of all the common grounds in the development, ranging from the swing set at the community park to the plumbing going into and out of the development. That takes the burden off the city or county to fund improvements and repairs to the community’s infrastructure.

Moreover, lenders appear to be increasingly aware of the financial impact these groups can have on home buyers. As a result, Reichle predicts they will begin to require homeowners groups’ financial statements before approving loans, something that’s now done only rarely.

In other words, whether your current home is governed by a community association or you think your future home might be, you ought to become familiar with the association’s fiscal basics.

“You are not just buying a condominium as a home, it is also one of the largest investments that you will ever make,” says John Russo, another Virginia-based condo owner. “It should be researched carefully like any large investment.”

Kathy M. Kristof is a syndicated columnist and author of “Kathy Kristof’s Complete Book of Dollars and Sense.” Write to her in care of Personal Finance, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail kathy.kristof@latimes.com.