Academic journal article Journal of Housing Research

Revealing a Public Choice Variable for Condominiums and Condominium Conversions: Percentage Funded for Maintenance Reserves

Academic journal article Journal of Housing Research

Revealing a Public Choice Variable for Condominiums and Condominium Conversions: Percentage Funded for Maintenance Reserves

Article excerpt

Abstract

This paper is the first to investigate the impact of homeowner association dues and percentage funded for maintenance reserves on condominium and condominium conversion pricing. Homeowner association dues are typically readily available to buyers via the MLS; however, the percentage funded for maintenance reserves is not easily accessible to prospective buyers. This paper constructs a three-step funding policy model. Results indicate that buyers should be mindful of the level of homeowner association dues and to the heretofore unavailable percentage funded for maintenance reserves.

(ProQuest: ... denotes formulae omitted.)

Reserve studies typically performed by accounting firms for homeowner associations (HOAs) reveal whether or not an HOA is fully funded to meet future maintenance and capital expenditures (i.e., are sufficient maintenance reserves present). According to the 2006 Community Association Treasure's Handbook, which contains Northern California Common Interest Development (CID) survey data, the percentage funded amounts for condominium conversions, condominiums, and planned unit developments (PUDs) were 44%, 46%, and 63%, respectively.1 By not being fully funded, an HOA may need to borrow funds or charge homeowners a special assessment fee for expenditures not covered by its operating budget. Due to a number of factors, condominium conversions are more likely to experience cases of special assessments and borrowing than either non-converted condominium structures or PUDs.

Overall, a public choice issue may arise from under-funded maintenance reserve accounts for CIDs, especially for condominium conversions. Samuelson (1954) and Tiebout (1956) suggest that the level of expenditures sought by consumers to meet their consumption needs in choosing goods and services is meaningful. Given the HOA for condominium conversions serves the function of providing goods and services to its homeowners, then this paper can frame percentage funded for maintenance reserves around public expenditure and choice theories. That is to say, when homeowners choose to purchase a specific condominium conversion unit over another unit, the choice of unit is directly affected by the amount of known future expenditures such as the HOA dues and unknown but expected future expenditures such as maintenance reserves. A prospective buyer may make a conscientious decision in selecting a unit based on HOA dues, but may not have sufficient information over the level of funding for maintenance. More to the point, multiple listing services (MLSs) typically report HOA dues but do not report the percentage funded for the maintenance reserves, making the purchase decision problematic. Since this information is not easily accessible to prospective buyers, then they may overlook the percentage funded as one of their decision-making parameters.

Results from the dataset used in this paper indicate that the sold price for a condominium conversions has strong correlations with the HOA's dues and percentage funded. These values are 58% and 51%, respectively. Although buyers are adversely impacted by the lack of funding (Berding, 2005; Berding and Levy, 2006), the current literature on condominium conversions does not address this important public choice variable. The present paper fills in this gap in the literature. Sections on the extant literature, data, modeling, results, and concluding follow in order.

Condominium Conversion Literature

Sternlieb and Hughes (1975) provided the first detailed analysis of condominium conversions, investigating purchasers and former apartment tenants who chose not to purchase the converted condominium unit. Tax law changes in the 1980s made condominium conversions more appealing investments (Benjamin, Chinloy, Hardin, and Wu, 2008). The recent rise in interest in the market place for condo conversions has ignited other recent research in this area. These research papers focused on a variety of topics, such as tenure choice (Lea and Wasylenko, 1983), tax reform effects (Lauber, 1984; Whinihan, 1984), tenant absorption (Diskin and Tashchian, 1984), and rates of return (Crone, 1988). …

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