Different industries like to rely on "indicators" of value. Indicators are "snapshots" to gauge the viability of a certain product, investment or service. For example, a car dealer may use the condition of the car interior as an indicator of the mechanical condition. The same principle can be applied to homeowner associations like condominiums and planned communities.

Three key "percent" indicators that help understand what is going on at the association are:

% of Owner Occupants
% of 90 Day Delinquencies
% of Reserves Funded

% of Owner Occupants. Lenders require 50% to 67% owner occupants to consider making a loan to a prospective purchaser. This requirement comes from proven experience that homeowners take better care of their homes than investors. Since a lender has a share of the common area liability, they want to be sure a majority of residents have a high motivation in caring for the property and are willing to ante up the money to do it. Homeowners have a higher likelihood of doing that than investors. Therefore, if the percent of owner occupants drops below 67%, financing options disappear. Real estate market value is directly related to the availability of financing. No financing will mean declining property values.

% of 90 Day Delinquencies. This is an indicator of how the association is handling its business. If a high percentage of owners are being allowed to be delinquent without aggressive collection, it appears that the board is not doing its job. Further, if people aren't paying, there is inadequate money to get reasonable maintenance done and the property will show it. If maintenance is not getting done, property values will fall.

% of Reserves Funded. Reserve planning represents the association's attitude about long range preparedness. Reserves include all is the common area components for which the association has maintenance responsibility having a useful life of three and thirty years. For each of these components, a remaining useful life and cost of repair or replacement is established. From all this information, a reserve funding plan (usually monthly) is formulated to pay for all those items without the need for special assessments. Components that can be excluded are those that can be reasonably paid for from the regular operating budget. Reserve planning is fair to all owners because all pay a proportional share of the costs based on the time they own the property. Special assessments penalize those owners who happen to be there when those predictable expenses come due.

So, the percentage of reserves that are funded indicate the association's willingness to perform long range planning. Ideally, it should be around 100% but will vary somewhat due to income and expenditures. For many associations, unfortunately, the percentage is much less and for way too many, O%. The poor maintenance condition of these associations is painfully obvious. Due to lack of adequate reserve funding and the unpopularity of special assessments, maintenance is usually deferred and the assets deteriorate along with the property values. The Percent Funded indicator is a strong and reliable one.

These three % indicators tell who is living there, how well they are doing managing their money, and how well they are planning for the future. It is like knowing the mileage, model year, and "brand reputation" of a used car.

Thanks to Robert M. Nordlund of Association Reserves, Inc. for the article concept.

For more information on this subject, see www.Regenesis.net.

Published: September 8, 1999

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Richard Thompson owns Regenesis, a management consulting company that specializes in condominium and homeowner associations. He is a nationally recognized expert on HOA management issues. Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. To subscribe, go to Regenesis.net. He can be contacted by email at .