HOA Detective™ – Mar 7, 2025: Standing on the precipice of 2025, Homeowner Associations (HOAs) across the United States and Canada find themselves confronting a convergence of challenges that threaten their financial stability and operational viability. This “perfect storm” is characterized by three interrelated issues: escalating insurance premiums coupled with insurers’ growing reluctance to cover certain properties, surging utility costs that HOAs are contractually obligated to pay, and the long-standing problem of underfunded replacement reserves in aging communities.
Escalating Insurance Costs and Coverage Challenges: The insurance landscape for HOAs has become increasingly precarious. Properties situated in areas prone to natural disasters—such as wildfires, hurricanes, and floods—are experiencing unprecedented hikes in insurance premiums. In some cases, insurers are outright refusing to renew policies. For instance, in California, major insurers like State Farm and Allstate have ceased issuing new homeowner policies due to escalating wildfire risks and rising costs.
marketwatch.comen.wikipedia.org
Not Confined to California: In Florida, the condominium market is teetering under the weight of soaring insurance premiums after a decade or more of seemingly nonstop hurricanes, and stringent safety regulations enacted after the tragic Champlain Tower South collapse in 2021. Regulations which now mandate rigorous inspections and timely repairs, which in many cases involves buildings that are approaching the half century mark, all of which combine to further inflate costs for condo owners. sfchronicle.comnypost.com+1apnews.com+1
The implications for HOAs are profound. Most mortgage agreements stipulate that borrowers must maintain adequate property insurance. If an HOA cannot secure sufficient coverage, homeowners with mortgages are at risk of defaulting on their loan terms, potentially leading to foreclosures and a cascading decline in property values.
Surging Utility Costs: Utility expenses, particularly for water and sewer services, have been on an upward trajectory. Many HOAs are contractually obligated to cover these costs on behalf of their members, making them vulnerable to market fluctuations. The increasing frequency of droughts and other climate-related events has strained water supplies, leading to higher rates imposed by utility providers.
For example, in parts of Washington state, HOA fees have more than doubled in the past year, driven in part by escalating utility costs. These rising expenses force HOAs to either deplete their reserves or impose special assessments on homeowners, both of which can lead to financial strain and discontent among residents.
Underfunded Replacement Reserves in Aging Communities: A significant number of HOAs, particularly those established several decades ago, have chronically underfunded their replacement reserves. These reserves are essential for covering major repairs and replacements of common property elements, such as roofs, elevators, and plumbing systems. The median age of U.S. homes now stands at 40 years, indicating that many communities are facing the very tipping point predicted 15-years ago by the founders of CIDAnalytics, where substantial capital expenditures are imminent while many HOAs face the reality that the organization simply doesn’t have the money to pay for these expenses.
https://www.wikiwand.com/en/articles/Reserve_study
https://cidanalytics.com/2020/03/24/the-tipping-point-i/
The lack of adequate reserves has been spotlighted in Florida, where new legislation requires condominium associations to maintain sufficient funds for major repairs and conduct so-called “Structural Integrity Reserve Studies (SIRS) every decade. This move aims to prevent disasters like the Surfside collapse, but has resulted in significant increases in HOA fees, placing a heavy burden on residents, especially those on fixed incomes. https://legalclarity.org/florida-condo-reserve-fund-rules-a-comprehensive-guide/
https://apnews.com/article/florida-condo-association-cost-increase-62de80fcc5de498309d9fea2b78a2984
Notwithstanding the long overdue good intentions of the Florida Legislature, the fact is that the recent changes in Florida’s reserve funding statutes is one step toward mandatory reserves and mandatory funding of those reserves, a reality that will serve to make homes located in HOAs even less affordable than they already are.
If this legislative trend were to gain traction in states where housing is more expensive than Florida many would-be homeowners in those states can shut the front door on their dreams of homeownership!
Role of Industry Policymakers in this Debacle: Over the past half-century, industry policymakers have played a role in this predicament. A lack of stringent regulations and oversight allowed many HOAs to sideline the importance of adequately funding their reserves. This oversight has culminated in the current scenario, where aging infrastructure requires immediate attention, but the financial means are lacking.
In California, the insurance crisis has led to a situation where communities like Rossmoor, a retirement enclave in Walnut Creek, are facing a “cash-only” real estate market due to the inability to secure adequate insurance coverage. This development not only hampers property sales, but also affects residents’ financial planning, particularly those relying on reverse mortgages. https://www.sfchronicle.com/california-wildfires/article/rossmoor-cash-only-home-sales-20025908.php
“Perfect Storm” – The Impending Collision: The convergence of these three forces—skyrocketing insurance premiums, escalating utility costs, and underfunded reserves—sets the stage for a crisis in many HOAs. Communities may find themselves unable to meet financial obligations, leading to deferred maintenance, reduced property values, and increased homeowner dissatisfaction. Mortgage lenders, who are starting to take notice of this impending financial disaster, are all but certain to adjust their underwriting criteria in those instances. The perfect storm is on the horizon.
In one example of failing HOA governance, this Sunrise, Florida HOA board, abruptly resigned leaving homeowners with unexpected bills exceeding $20,000 for unpaid insurance, highlighting the potential for financial and operational chaos within associations. https://www.the-sun.com/news/13482599/homeowners-rage-bill-forced-pay-hoa-fee-boards-decision/
Moving Forward: To navigate this impending storm, HOAs must adopt proactive measures:
- Conduct Regular Reserve Studies: Engage qualified professionals to assess the condition of common elements and determine accurate funding requirements.
- Implement Transparent Financial Practices: Ensure homeowners are informed about financial decisions, fostering trust, and encouraging timely contributions to reserves.
- Advocate for Legislative Support: Work with policymakers to develop regulations that balance the need for financial preparedness with the economic realities of homeowners.
- Explore Alternative Funding Mechanisms: Consider options such as phased-in fee increases to bolster reserves without imposing sudden financial burdens on residents. Or a transaction fee paid by a seller when a home changes hand to make up for at least some of the underfunding of the reserves that has occurred during the seller’s 20-year tenure as a HOA “stakeholder.”
- Governance Tune up: Proactive HOAs must develop strategies that lead to more homeowner participation in the governance process. Entrenched Board members, which is almost always a bad thing, is often the result of apathy among the very stakeholders (homeowners) who stand to benefit the most by successful HOA governance. Short of hiring professionals to serve on HOA boards (a dubious proposition already proposed by some industry thought leaders) HOAs MUST find ways to compel owner involvement in the governance process.
- Management Tune up: There is no question the HOA management profession needs a tune-up. The long-standing “portfolio management” business model employed by many of the largest companies in the country may result in lower management fees, but at what cost? As in all walks of life, when it comes to HOA management you get what you pay for. To justify higher levels of compensation HOA managers must up their game by becoming better educated, more professional, and more responsive to the “clients” who ultimately pay their salaries; the owners of the 27M homes located in HOAs.
By acknowledging and addressing these challenges head-on, HOAs can mitigate the risks posed by the impending perfect storm, ensuring the sustainability and prosperity of their communities for years to come.
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