Why Are Condominium Assessments So High?

  

Intuitively, many homeowners believe that their assessments are too high.  But when other associations charge similarly high amounts, it may seem that the monthly assessment is reasonable.  What is going on?

 In recent decades there has been an explosion in the number of condominiums and townhomes developed or converted.  The property management industry has grown to provide services to homeowner associations.  As the industry grew, companies hired “property managers” with limited training in the areas of association organization and legal requirements.  Today, a “property manger” needs no experience or formal training in either traditional management nor the building trades.  One company advertised that it was looking for “mature hard working individuals”.  Many property management companies are designed around people without a professional management or technical background, and as result, a lot of associations are not getting good value for their money.  

 Association boards are made up of homeowners who want the best for their association.  They want the best result at a reasonable cost.  Usually board members feel under financial pressure from other homeowners not to raise assessments.  With these factors in mind, the board members seek the best value for the association’s funds.  To consider how associations can save money, it is worthwhile to identify probable inefficiencies that can be made more efficient.

 In­-efficient Property Management

 The first decision may relate to the property management company.  All the companies have seem to promise great results at a great price.  Many have impressive websites, and a lot of the property managers have letters after their names like – CPM or CMCA.  At first glance, it appears that all property management companies are qualified.  Thus, the board hires a property management company – possibly on the basis of price, how they feel about the people working for the property management company, or possibly they know about the reputation of the company, and it seems good.  Thus the first decision is made regarding the property management company.

 Layers

Now that the typical property management company is hired, let’s consider what occurs in a typical situation for a condominium association, if for example the association needs its grass mowed.  Following the common model of property management companies in Chicago –

                     The property management company,

hires a property manager,

who contracts with a landscape maintenance company,

that hires a foreman,

who supervises someone to cut the grass.  

 The same pattern is followed for janitorial services, snow removal, and other building/facility services.  Thus, there are four layers of people between the association and the person who actually does the work.  Each layer adds cost.

 

Three Bids

If the condominium or townhome association needs a small repair to masonry work, the property manager will probably call three masonry companies who will each come and bid the work.  All three bids come in around the same amount.  But all three bids seem very high.  Though the board members may think the prices are high – since the bids are all fairly close to one another, board members conclude there is no other option other than paying the price.[1]  Though it may seem that getting three bids is a way to get the market price for a small repair job, oftentimes – especially on smaller jobs -- it wastes the contractors’ time, and results in higher prices for the association.  This is called “transaction costs”.  Each company charges a similar hourly rate, but the quote on the bids is far higher than the hourly rate.  For a lot of jobs, three bids adds costs, and does not give reliable information about market prices.

 

Deferred Maintenance

In most associations, no one gets a pat on the back for doing preventive maintenance – neither the property manager nor the board members.  On the other hand, when something breaks down, the costs and inconvenience can be very high.  When mechanical systems, infrastructure, and other assets even including landscaping are ignored not properly attended to, more expensive problems result.

 

Reactive Management

If it is broken, get it fixed.  While that is obvious, usually reactive repairs are made without thoughtful consideration to costs, and the ways the costs can be managed. 

 

Non-Productive Costs

While every property management company will claim to get good value for the associations they manage, the reality is that a lot do not.  Property management companies are spending OPM – other people’s money.  With differences in properties, the potential for deferred maintenance, etc, it is not always easy differentiate between an efficient company and an inefficient one.  The efficient companies are those who can reduce the non-productive costs – overhead, transaction costs, logistics costs, and opportunistic costs (charging more than a fair price because the property manager is not aware of the fair market value for a service) – is more efficient. 

 

-- Practical Ways Condominium Associations Can Save Money

Efficient Property Management

Typical condominium or townhome developments are worth millions or tens of millions of dollars, and has substantial annual revenues from collection of assessments.  Efficient property management begins property managers with the tools and knowledge to efficiently manage the assets of your association. 

Reduce Layers

In recent years, there has almost been a foregone conclusion – in the corporate world, in government, and in homeowner associations -- that outsourcing everything is the best way to save money.  The reasons for outsourcing are:

1.     Outsourcing can bring expertise not available within an organization.

2.     Outsourcing can be more efficient when the outside company has specialized equipment and a work staff trained to efficiently focus on one type of work.

3.     Outsourcing can give the payroll and HR (Human Resources) headaches to an outside company.

4.     Outsourcing can help an organization focus on its core competence.

 All of the above are very legitimate reasons for an organization, including a condominium association to consider outsourcing various services.  The problem is, much of the property management industry has accepted that outsourcing is the only way, and most of the property management companies are structured to outsource most if not all of the work that they supposedly “manage”.

 As indicated in the example above, with 4 layers between the association and the person mowing the lawn, there are a lot of costs associated with those layers.  Efficient property management takes into account the trade-offs between the benefits of outsourcing and the costs of outsourcing in different situations.  While the business model of many property management companies prevents the possibility of managing basic lawn maintenance, other companies have the expertise in management and grounds care to be able to effectively and efficiently manage those services. 

 Reducing layers saves money in other ways.  Service workers can be cross-trained to do multiple tasks, and there can be savings and quality improvements as a result.  The savings come from fewer people on the payroll, and less non-productive time of working driving from place to place.  Better quality results from better communication, greater familiarity with the property, and a greater presence on the property. 

 

Time and Materials

Knowing when to get bids, and when to work with contractors on a time and material basis can also save money.  A lot of jobs are best done without having a contractor come in to give a quote.  There are a number of reasons.  When a contractor quotes a job, the time spent giving the bid is non-productive time, which will be factored into the job.  Additionally, many jobs in the building trades involve some degree of uncertainty.  The contractor does not always know what circumstances will be found when the job is begun.  Accordingly, quotes factor in an allowance for unforeseen circumstances that will cost more.  The contractor will make sure he is more than covered.  Another consideration is special or difficult to find materials.  If the contractor needs to match a brick, and then have the board approve the brick – that is a lot of time that will be factored into the quote.  Alternatively, if the property manager has the matching material available for the job, a major unknown is removed from the process.

 A property manager with some construction experience is in a better position to determine if a job requires three bids, or if it is only a few thousand dollars, and there is a quality and fair contractor available, the contractor may work on a time and materials basis to do the job more efficiently. 

 

Logistics and Planning

Many times condominium associations have numerous small jobs.  Not all of these jobs are urgent.  A wise manager can triage and plan the work, so that non-urgent jobs are deferred until a more urgent job needs to be done.  That way a technician can do multiple repairs on one service call, greatly reducing travel and set-up time for the condominium association.  Similarly, the type of management that trucking and delivery firms use to plan the logistics of their work, can be applied to service calls by technicians doing repairs for multiple associations managed by a property management company.  In many circumstances, a condominium association can save money simply by having a contractor close by do the work.  However, in areas like downtown Chicago, sometimes the downtown rates are significantly higher than from contractors located in outlying areas.

 

Good Design, Specifications & Preventive Maintenance 

Good design can reduce cost and useful life of capital improvements.  In an obvious example, a condominium lobby should not have a cream colored carpet.  It is practically too hard to maintain.  But similar considerations should be made about other decisions -- such as what material should the carpet be made of.  Careful selection of products that have both a long useful life and are easy to maintain should be part of the equation.  There is a saying: "There is never time to do it right, but there is always time to do it over."  Good management should try to do it right the first time.  

Preventive maintenance can save an association a fortune.  Water in the wrong place is one of the most expensive problems that condominiums have to deal with.  Water is wasted in leaking faucets and toilets.  Water freezes and thaws, destroying bricks and sidewalks.  Water leaks on floors, causing damage to ceilings and floors.  Most of these problems can be prevented with good maintenance.  Associations cannot save money by avoiding regular planned preventive maintenance.

The question for the homeowners’ association board is:  Does it make sense to hire a property management company with greater technical and management ability – to get better quality at a better value for the association?    

This paper is presented by Enlan Condominium Management Company managing Chicago condominiums on the basis of stewardship.  Enlan Condominium Management has a track record of improving quality while reducing costs. 

  www.enlan.com

 

See Also:

Capital Improvement Planning for Condominium Associations

www.condominium-property-management.com

360°  Value in Property Management

www.360degreevalue.com

Furniture for Condominiums

www.jhreid.com



[1] Though not a topic for this paper, there was a 2009 article about a number of Chicago property management companies getting kickbacks from contractors for preferred work.  A leading Chicago property management company defended the practice; saying that the fees are not that high, and that board can choose the “preferred vendors” or go with others.  Clearly in this practice involves a potential conflict of interest, and the potential for the association to pay the property management company twice – first in the management fee, and second in the mark-up related to the referral fee paid by a contractor to the management company.