Ignore This Property Investing Due Diligence At Your Own Risk
Buying a piece of property in a gated community or an apartment building means that, as an owner, you’re going to be part of some kind of home owners’ association (HOA). How that association is run will affect not only the value of your property, but also your enjoyment and experience of the place overall. Not all associations are managed the same, and, unfortunately, not all are managed well.
Generally speaking, an owners’ association should have a board of directors that oversees an administrator, either an employee or a management service, who deals with day-to-day management of the association and of the building. That team should work together, making decisions jointly.
In practice, what usually happens is that a single person, maybe the president of the board, maybe the hired administrator who ends up working very independently, typically a power-hungry, ego-driven individual, takes control. In the beginning at least, everyone else is happy to sit back and let this happen. Who wants to manage an apartment building?
Over the years, I’ve been involved in several different owners’ associations in several different countries, but not because I wanted to be. I got involved when I recognized a problem and thought I might be able to help. Otherwise, like everyone else, I’ve got other things to do.
I’m about to get involved again, with the management of the building where we now own an apartment in Medellin. In the course of our renovation, we’ve noticed some problems with the building’s façade, some cosmetic, some structural. Everyone we’ve spoken with has a different story for why the exterior of the building has been left to deteriorate as it has been. We aren’t so interested in the stories of Who Struck John to this point (the administrator says no one pays their building fees, meaning she has no money for this kind of work…one board member we’ve spoken with says the administrator won’t cooperate with the owners and has resisted help with the accounting…).
We’d just like to have the repairs made and the building repainted.
I’m also currently involved with the management of a building in Panama City where I own an apartment. Here I’m on the HOA board of directors. In this case, the administrator is an employee, rather than an outside service company (as in Medellin). This is a cleaner relationship and can make it easier for the board to control things. Still, someone has to be in charge.
Fortunately, in this case, the gentleman who has stepped up to take charge is not on a power trip. He just wants things to function as they should, and he likes to fix things. He’s a retired guy who spends about half his time in Panama. When he’s here, he’s in residence in his apartment in the building and working full-time on building-related issues. It’s a 200-unit building (compared with a 14-unit building in Medellin), so there are lots of issues. Managing a 200-unit apartment building takes a lot of time and attention.
In the Panama building, when something breaks, it gets repaired. The pool and social area are always clean and well-maintained. A cash surplus has been set aside for future repairs. Generally speaking, everything runs smoothly. The HOA operates as a model of efficiency, thanks entirely to this one guy.
I hear horror stories regularly from owners in other buildings in Panama City, about water pipes not working, elevators out of service, pools sitting empty because they leak… Nothing gets fixed, there’s never enough money, and everyone’s always arguing with everyone else.
When you buy in a situation where you’re going to become part of an association of owners, you want to try to figure out, in advance of your purchase, where in the spectrum of management the building falls. Is it being run efficiently or inefficiently? Sometimes you can tell by the state of the building. Is the exterior in good repair? Are the common areas clean? But it’s safer to dig a little deeper before you buy. Ask the seller about the HOA management team. Ask to see the most recent financial statements for the association. Speak with other owners to get their opinions on how things are run.
Here I’ll add a caveat. Speak with several owners, and don’t place too much stock in what any one or two tell you. Everyone has his pet peeves, his specific complaints. In the Panama building where I’m on the board, one owner wants us to install solar panels. Another obsesses over fire safety (it’s a solid concrete building). Another isn’t happy with the paint color in the lobby. If you were to ask any one of them if he or she were happy with the current building management, they’d say no. But their reasons for being unhappy are unreasonable.
Skip this due diligence at your own risk. We didn’t skip it completely in Medellin. We did ask for copies of the association financial statements in advance of our purchase. In hindsight, what we received in response to this request should have raised a flag for us. What we got was a typed (from a typewriter) partial income statement. We didn’t question the statement we received, and we didn’t pursue any other real due diligence in this regard.
It was the apartment we wanted in the location we wanted. And it’s such a small building that we figured we’d be able to work with the other owners to take care of whatever needed to be taken care of.
We still believe this to be the case, but we’re already running into road blocks. No one to blame but ourselves.
Lief Simon
