Condo Pitfalls – A Lesson to be Learned by All

A client I helped finance a few years ago forwarded me some information about an issue at his condo complex that should be a wake-up call for anyone who currently owns a condo, or wishes to someday own one.

Hawaii is a geologically young place. Our islands were formed only a few million years ago. Hawaii Island is still creating land. On Oahu, Koko Head, Diamond Head, and Punchbowl erupted less than 100,000 years ago. Our islands are infants in relation to property on the mainland. This is important, because young geologic features are generally unstable. And with some large storms that have hit our islands the past few years, residential areas thought to be safe, have shown issues that need to be addressed.

My client’s condominium project is located in Mililani. Like so many places built in the islands, this project is built abutting a hillside. That hillside now has issues of stability. It is the responsibility of the condo association to remediate the situation.

But this story isn’t about soil erosion or rocks falling. It has to do with how the condo association engaged the owners in the project to fork up the money to fix things, and how the owners responded. The Association went through all the right steps. It was determined that to fix the problem it would take several million dollars. That’s more money than the association had in reserves. The condo board looked at ways to raise the funds needed. As a former condo board President, I know all too well the rallying cry of owners demanding to keep their monthly maintenance fees low. So the board determined that securing a long-term loan would have the least financial impact. While it would result in higher monthly costs to each owner, it was better than an assessment.

For those unaware of what an assessment is, your condo association has the right to assess a lump sum fee against owners if the need for money is required. Condo boards try their best to avoid assessments. Forcing owners to come up with several thousand dollars in one shot could result in a financial hardship for owners. It could also force owners to delay paying their regular monthly maintenance fees, which would create instability in managing the condo project’s day-to-day operations.

The Mililani condo project’s board sent notices to all owners explaining the situation and the solution of getting a loan was the best option. What happened next is very typical for condo associations where critical issues require owners to vote on proposals – low owner voter participation. I’ll speculate that many owners didn’t want to see an increase in their monthly fees, so they decided to not vote. They thought incorrectly, that without a majority of votes, the project wouldn’t go forward. I’ll also speculate that many owners get notices in the mail from their condo boards and just disregard them.

The condo board did not get sufficient voter participation and lacked the required percentage of votes to move forward with the loan. Only 33% of the owners sent in a ballot. The hillside still needs to be fixed. Without the option to finance the repairs, the board’s only option now is to assess each unit owner several thousand dollars due in 2 payment. One in October, and the other due January 1st. It will not be a merry Christmas for many of the families with young kids that live in this project.

I wanted to share this story because how a condo project operates is as important as its location and amenities. I define how a condo project operates not only on how the board and property management company functions, but also how responsive and willing the owners are at maintaining the project. You could buy into a great project today, but with poor management or owners rather having the place go to hell versus spending the money for upkeep, the project’s value could suffer.

If you are interested in buying a condo, I urge you to read all of the condo disclosure forms you get from the seller. It’s sad that sellers pay hundreds of dollars to provide buyers these forms, and rarely are they reviewed. Especially read the minutes of the condo board meetings. Read enough of them, and you may see a pattern emerging of owners that may not think the same way you do about homeownership. If you already own a condo, when was the last time you went to your own condo board meeting?

In the end, I am sure if all the owners were aware that the hillside was going to get fixed – no matter what, an overwhelming percentage of owners would have opted for the loan.