The recent tragedy in Surfside, Florida, in which the Champlain Towers South, a condominium community, collapsed, killing 28 people and 117 people are still missing, shook the condo market across the nation. Condo owners, particularly those in South Florida where the tragedy took place, have become acutely aware of the risks of being a condo homeowner, and there's growing concern over how the wake of this tragedy could impact condo communities moving forward. So what should real estate investors and owners know?
The issue at hand
The structural issues that took down part of the Champlain Towers were discovered in 2018 during a structural engineering assessment and were estimated to cost the HOA $15 million to rectify, an amount the homeowners association (HOA) didn't have. That meant the HOA had to impose a special assessment, which in the state of Florida must be voted for and agreed upon by the residents of the HOA community.
Special assessments, which place the cost for necessary repairs as a shared responsibility among the homeowners of the community, are a nightmare for HOA communities. Not only is it a complicated, often lengthy process to get approved and fully funded, but it also shows signs of distress for new buyers, lessening the value of the condos today and deterring new residents to buy into the HOA, resulting in less funding. In the case of Champlain Towers South, the HOA assessment was asking its 136 residents to pay anywhere from $80,000 to $200,000 per home for the repairs.
This isn't an isolated problem
While the specific structural issues that were discovered may be an isolated problem, the greater problem of underfunded HOA communities is far more common than owners may be aware of. A report conducted in 2017 found that an estimated 70% of HOAs are underfunded, meaning any condo owner could be at risk for special assessments in the event a major repair is needed, which could put their condo and lives at risk if it's an imminent or serious repair -- such as this one.
How this could impact the market
Prior to the event, which took place on June 24, 2021, condo sales in Miami and South Florida were booming. In May 2021, Miami-Dade's existing condo sales increased 286.5% month over month and grew 51% over May 2019.
But this event has brought light to some of the challenges and major risks of condo homeownership and may cause a slight decline in condo sales, at least in the short term. Most people are very shortsighted and often focus on the scary headline before losing sight of the risks over the long term. Eventually, the draw and appeal of affordable housing with oceanfront views will draw people back to condo ownership, particularly in South Florida, where condos make up a large part of its housing stock.
Addressing the root problem
Instead, I hope this tragedy will refocus attention on what needs to be done to prevent such tragedies in the future: adequate HOA funding. Condo associations across the nation should be required to conduct an annual reserve study, which assesses the community's reserve ratios and ability to pay future repairs with minimum reserve ratio requirements.
Ideally, every HOA should be 100% funded, but many are a far cry from that goal. Establishing nationwide reserve requirements could prevent HOAs across the country from having to impose special assessments while reducing the financial burden and repair risks of the residents. While this would equate to higher HOA fees, in the long run, it's a better scenario for everyone involved.
HOAs should also conduct annual inspections to ensure major repairs, such as structural issues, roof or stair repairs, or other serious and potentially life-threatening issues, are discovered and addressed as quickly as possible. Condo owners should start taking a serious look at their community's reserves and ask what measures are being taken to identify potential threats and repairs and fund them adequately. Anyone looking to buy into the market should carefully review the HOA's budget and reserves to make sure the HOA is managing the property properly.
The Millionacres bottom line
It's unlikely condos will go anywhere anytime soon. They are an essential part of housing for many markets, especially as housing affordability continues to be a major concern. People need access to more affordable housing, and for many, that means shared communities such as a condo. Condo owners and HOA managers simply need to start asking new questions to ensure the safety and security of their communities.