Controlling Condo Cash Crashes

Imagine that you are living in a desirable city in a desirable condo and that all the residents have just been presented with a projected repair bill from their Home Owner Association (HOA) for $80,000 – per condo unit. It can (and has!) happened.

Furthermore, the demand is all legal and above board: the estimates had been presented in triple and the needed replacements/repairs were engineer-backed, so there is no room for argument!

Wow! This is a real eye opener; you can be cruising along quite happily and suddenly you are in debt – big time! It raises many questions for condo owners.

Do you know how much your HOA has in its coffers? Are you aware of what type of property insurance your HOA has? Does your HOA have any limits written into their agreement as to how much can be demanded in one year?

Is it customary (or if not, should it be?) for everyone to pay a little extra once a year so that funds can accumulate against this type of disaster? If the word ‘reasonable’ is used, has it been defined – a millionaire may think that $80,000 is reasonable.

Do you know where and how the HOA invests your monthly reserve funds when they are not used? Everyone else seems to be losing cash on their stocks these days – is your HOA doing the same thing? When was the last up-to-date (up-to-date is the key phrase here) statement you saw from the Board?

Very few investments are safe at the moment, perhaps there should be a Board and Members discussion about the HOA’s funds. In the HOA mandate regarding the investment of reserve HOA funds, the wording of the investment policy may not be appropriate for these days of price hikes and an unstable economy.

For instance: achieving highest long term investment performance is not a priority in a falling economy, how about ‘no risk loss of principal’?

Safe investing will have to replace profits; treasury bills, notes or bonds are still considered to be safe. Certificates of deposit are considered safe in FDIC-insured financial institutions, but they must be less than $100,000 (the usual Government insured limit) per institution.

Certain sums of money must be ‘liquid’ and these can be invested in short term securities (say three monthly) with varying maturity dates. (This is called ‘laddering’ and it ensures that some funds are always available for unforeseen emergencies without paying a penalty to withdraw it.)

While you are reviewing the entire financial situation of the HOA, make sure that other safety features are in place. For instance: that two signatures are required for changes and withdrawals (usually the Treasurer and the President), that all investments are made in the name of the HOA and that regular (perhaps monthly?) investment reviews are included in the Board meetings for the short term, at least.

These precautions are only what you would take with your own money – oh yes, it IS your own money!



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