What if I offered you $100 now, or told you I’d give you $120 in a month? Would you wait around?
In The 50-year Problem Part 1, The Renter Mentality, we explored the renter-like inclination of HOA owners to offload or defer the responsibilities of homeownership to someone else. Here we will fully realize why that’s a really bad idea.
A. The 30-year reserve study
Humans are remarkably horrible at budgeting and planning ahead. Dean Buonomano Ph.D. posted Temporal Myopia: Making Bad Long-term Decisions to the Psychology Today blog. In it, he described the “I give you $100 now, or $120 if you’ll wait a month” experiment. You can read it for yourself, here, but in a nutshell, people chose a $100 gift far more often than the impressive 20% investment gain available by waiting a mere month.
The takeaway: Typical humans don’t make wise decisions in a long-term consequence vs. short term gain dilemma.
But no matter what you think about the logic of accepting $100 now versus waiting a month for $120, it is utterly unthinkable that anyone would wait a month – even for $10,000 – if that person knew they couldn’t be around in a month to collect. No sane person would ever invest in something they had almost zero chance to benefit from.
The takeaway: We’re not stupid. If there is no chance of future gain, of course we’ll grab ours now.
And yet the modern CID is organized as if the 2 Take-aways above don’t apply to it. A disturbingly large percentage of HOAs in their 4th and 5th decade, have been victims of these two concepts.
First, corporate decisions are often made with expediency as the highest motive.
Let’s keep dues low and never pass a special assessment, to keep more cash in my pocket right now.
Let’s get this board meeting over (or I’ve skipped it altogether) so I can watch the game – while crucial decisions are delayed until next month.
Let’s look for a new/cheaper management company that doesn’t expect so much from the directors.
The list of ways humans sacrifice future benefits on an altar of expediency is endless – as with individuals, so it goes with HOAs and board members.
Second, if my condo is a starter home, or I’m retired on a fixed income, or for whatever reason doubt I will be around to benefit – no matter what the future gains to the HOA – I won’t buy-in. Why would I agree to commit tens of thousands of my hard-earned dollars to a special assessment or increased dues which will largely benefit the next set of homeowners? (And this presumes I have the available cash with which to get behind the assessment or increase anyway)
In 1985, recognizing these weaknesses, the state of California integrated the “30-year reserve study” into the Davis-Sterling Act, requiring homeowners associations to set aside reserves for future maintenance expenses. While well-intentioned, and probably better than nothing, the reserve study portion fell short of being truly impactful. The 2013 DSA update clarified some details but still failed to give the reserve study real teeth. Predictably many homeowners associations are content to implement the bare minimums while ignoring the true intent – reserving enough cash to perform preventive maintenance and executing repairs as soon as they are needed.
But worse than encouraging contentment with sub-mediocrity, easy compliance has engendered a crippling consequence; Many communities now have an “Emperor’s New Cloak” of compliance to cover their failure to adequately plan ahead. They are very literally – exposed.
Many communities are stumbling toward a mid-life crisis, oblivious to metastasizing cancer just below the surface… taking yearly drags on their 30-year reserve study.
B. The 50-year time bomb
The 50-year Time Bomb – Q&A
Q – So what do short-sighted board members do when they see a complicated reserve study and a growing list of deteriorating assets? (sometimes literally growing – with mushrooms)
A – They hire a handyman to put more caulk around the windows, and tell the manager to solicit a different reserve study.
Q – What do they do when a construction manager reviews the community and tells them that they need to spend $2,000,0000 to get the community back on track?
A – They toss the construction manager and continue whacking moles.
Q – What do you do when foundations, elevator shafts, and other elements not represented in the reserve study, with a life-span in excess of 30 years, fail catastrophically in year 40?
A – No good answer.
Q – How long does it take for a tree, 20 feet from the building, to grow roots large enough to compromise the French drains, the patios, and the foundations?
A – Want to guess?
Q – What do you do as the experiments of the post-lead paint, post-asbestos, EPA-affected 1970’s and 1980’s systemically fail, and begin to be realized as really bad ideas? (I will go into this in detail next time)
A – You wonder what it is that they are doing right now in construction that our kids will regret in 50 years.
This is not intended as a critique of the reserve study, a condemnation of board members, or a general criticism of the industry at large; what is intended here is something not unlike the orange flag of the highway construction flagman warning you to slow because you are too quickly approaching a narrow and hazardous place – where a cement truck just might back into your lane.
Like most sociological issues, the problems in The Great Sociological Experiment we call the HOA, lie with human nature itself. Therefore, as in all sociological advances, it’s going to take maturity and innovation to outsmart human nature here too and successfully incentivize and implement lasting change.
Next time, I will begin to unwrap why the 1970’s and 1980’s were a uniquely BAD time to be booming with condo construction. Bring your flashlight next time – we’re going to be getting “under the hood.”
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Reprinted from Unlimited Property Services, Inc. Newsletter