Financing $26k Condo HOA Special Assessment

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JustGRC
Posts: 2
Joined: Sun Sep 26, 2021 6:38 pm

Financing $26k Condo HOA Special Assessment

Post by JustGRC »

I apologize in advance for the length of this post. This is my first as previously I was a casual lurker. On a scale of 1-10 (lowest to highest), our collective (partner and I) personal finance self-assessment is a 6. I say this because while we're strong at saving, planning, and spending, our finance and investing knowledge are average. I've held off posting because I'm not confident in the latter - our mindset is sock away what we can and hope for the best. We’ve gotten lucky, I guess.

Current assets:
Condo = $500k, $180,500 mortgage balance after year 8 of 30 (@ 4.375%)
TSP (federal government equivalent of a 401k) = $335k
Rollover 401k = $90k
Roth TSP = $160k
Partner's 401k = $175k
Taxable investments - TD Ameritrade (stocks and ETFs) = $166k
Taxable investments - Betterment (ETFs) = $33k
HSA = $6k
Cash = $25k

We are currently refinancing our condo in the SF East Bay from current mortgage. Refinance rate is 2.50%.

In the middle of all this, our condo HOA announced pricing on a $12 million siding project for our complex (425 units). The current siding is at 0 years useful life (think construction defect). The $12 million estimate is after all monies from a modest settlement with developers and reserves are included.

HOWEVER, the special assessment has not yet been approved by the owners. IT MAY never happen OR a higher assessment for failing to address issues now many happen down the road. There is also talk of potential retrofit work (earthquake country) that may be an additional assessment somewhere down the road. At all the town halls on the topic, many homeowners are not ready to commit to the project and historically we have not had much success with meeting quorums at elections.

We plan on staying here for a while (min 5 years) as our jobs are stable and Bay Area real estate is always hot and doesn't show signs of cooling.

My initial thought was to tack on $30,000 to finance the project to our refinance. Doing so will incur 0.75 in points, or an additional $1625 in fees. It will also raise our monthly payment by $210. Our goal with the refinance was to pay off the loan before retirement age (62), so while costing us more upfront and monthly, we can absorb the additional fees and monthly payment while still meeting our goal. However, I'm uncertain whether the cash out for a special assessment counts as a capital improvement that will allow us to deduct the total mortgage interest (researching this).

Given that the assessment is not certain yet and the potential tax implications, I question whether it is premature for us to include a cash out with our current refinance.

We could pay for the $26k any of the following ways, in the order we are currently considering. Any thoughts on what would be the smarter move for us? "Smarter" meaning what would allow us to maximize current taxable investments (we didn't start investing until 2016 and feel like we are just starting out as investors). Sometimes we also feel that we are oversaving for retirement - we lead simple lives (travel is our only splurge) and have no children (or plans for any). Also, as a Fed, I'd be getting a monthly pension.

1) Take out as a TSP loan from my federal retirement account (interest paid to us, albeit minimal)
2) Take out HELOC (likely at a higher rate than 2.5% refinance rate, but would not jeopardize our ability to deduct mortgage interest on a cash out if special assessments for an HOA are not considered capital improvements)
3) Take out from contributions to Roth IRA (I always said it'd be a rainy day fund and not just a retirement fund - we’ve contributed $64k of the $160k balance)
4) Cash in stocks or ETFs (incurring capital gains taxes and mentally cutting down on our "starting" gains - currently approx. $92k)
5) Accept financing that will be arranged by HOA for a 10 or 15 year association loan (currently @ 5% and term TBD); loan payments would be added to our monthly HOA dues. I will assume based on cursory research we would not benefit from any interest tax deductions for this loan.

Any thoughts on what would be the best source for paying the special assessment, if it ever happens, given where we are and our goals?

If I missed something that would help in any opinions, let me know.
sesq
Posts: 587
Joined: Wed Jan 30, 2013 8:24 am

Re: Financing $26k Condo HOA Special Assessment

Post by sesq »

I would bump up the refi amount. If in six months this blows over and you don't need the money you can push it against the mortgage and get a 2.5% return.
MrJedi
Posts: 3540
Joined: Wed May 06, 2020 11:42 am

Re: Financing $26k Condo HOA Special Assessment

Post by MrJedi »

This is easy. You already have most of the cash. Just save a little more into cash instead of taxable and pay with your cash. After paying the cash, just build your cash position back up to your desired asset allocation.

I do not see a reason to leverage up further with more debt. You already have a healthy amount of assets to pay from, keep it simple.
runninginvestor
Posts: 1796
Joined: Tue Sep 08, 2020 8:00 pm

Re: Financing $26k Condo HOA Special Assessment

Post by runninginvestor »

MrJedi wrote: Mon Sep 27, 2021 7:35 am This is easy. You already have most of the cash. Just save a little more into cash instead of taxable and pay with your cash. After paying the cash, just build your cash position back up to your desired asset allocation.

I do not see a reason to leverage up further with more debt. You already have a healthy amount of assets to pay from, keep it simple.
Agree with the cash option. Your refinance will give you back another $200 a month. Until the point the special assessment occurs, you'll hopefully be saving more money towards this. I'd avoid any debt that couldn't be paid off in a year. So for instance if you could save $10k a year after everything else, but can only put $16,000 down at the time, that's fine.

I'd avoid touching the retirement accounts.
jebmke
Posts: 25476
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Financing $26k Condo HOA Special Assessment

Post by jebmke »

I’d be inclined to pay cash.

But there is a broader issue here. It sounds like the condo association is not reserving for large capital needs. Are you comfortable with the composition of the HOA balance sheet? If not, how long do you really want to stay?
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Escapevelocity
Posts: 1145
Joined: Mon Feb 18, 2019 7:32 am

Re: Financing $26k Condo HOA Special Assessment

Post by Escapevelocity »

This is why I will likely never own a condo. Too many stories of surprise assessments running tens or even 100k+. This is the enemy of financial planning due to the uncertainty.
ncbill
Posts: 2053
Joined: Sun Jul 06, 2008 4:03 pm
Location: Western NC

Re: Financing $26k Condo HOA Special Assessment

Post by ncbill »

HOA board can't arrange with the contractor to pay over time as phases are completed?

Here in my townhouse development the residents prefer special assessments for capital projects instead of higher monthly dues.

So when it came time for roof replacements we added the option of paying $100/month over 5 years instead of a lump sum all at once.
Dottie57
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Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: Financing $26k Condo HOA Special Assessment

Post by Dottie57 »

Escapevelocity wrote: Mon Sep 27, 2021 7:52 am This is why I will likely never own a condo. Too many stories of surprise assessments running tens or even 100k+. This is the enemy of financial planning due to the uncertainty.
I just bought into a condo association. One of the documents I received before i proceeded to buy was a 25 year plan for maintenance. Very interesting reading. My HOA fees are high, but.part is savings for the future.

A house has maintenance too and may have unexpected expenses.
Escapevelocity
Posts: 1145
Joined: Mon Feb 18, 2019 7:32 am

Re: Financing $26k Condo HOA Special Assessment

Post by Escapevelocity »

Dottie57 wrote: Mon Sep 27, 2021 10:15 am
Escapevelocity wrote: Mon Sep 27, 2021 7:52 am This is why I will likely never own a condo. Too many stories of surprise assessments running tens or even 100k+. This is the enemy of financial planning due to the uncertainty.
I just bought into a condo association. One of the documents I received before i proceeded to buy was a 25 year plan for maintenance. Very interesting reading. My HOA fees are high, but.part is savings for the future.

A house has maintenance too and may have unexpected expenses.
Time well spent I'm sure. I hear you on the house having unexpected expenses, but at least then you have certain control over how to address those such as DIY, choosing a lower priced local contractor, opting for more basic materials or design, etc. I know that you can sit on the condo board, but that seems like a hassle too. I think it's also easier to predict most of the expenses for a house such as roof, HVAC, etc. If you live in a high rise condo building there are all sorts of unknowable problems that can crop up like the buildings in Florida that major structural repairs to ensure they don't collapse.
Dottie57
Posts: 12379
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: Financing $26k Condo HOA Special Assessment

Post by Dottie57 »

Escapevelocity wrote: Mon Sep 27, 2021 10:44 am
Dottie57 wrote: Mon Sep 27, 2021 10:15 am
Escapevelocity wrote: Mon Sep 27, 2021 7:52 am This is why I will likely never own a condo. Too many stories of surprise assessments running tens or even 100k+. This is the enemy of financial planning due to the uncertainty.
I just bought into a condo association. One of the documents I received before i proceeded to buy was a 25 year plan for maintenance. Very interesting reading. My HOA fees are high, but.part is savings for the future.

A house has maintenance too and may have unexpected expenses.
Time well spent I'm sure. I hear you on the house having unexpected expenses, but at least then you have certain control over how to address those such as DIY, choosing a lower priced local contractor, opting for more basic materials or design, etc. I know that you can sit on the condo board, but that seems like a hassle too. I think it's also easier to predict most of the expenses for a house such as roof, HVAC, etc. If you live in a high rise condo building there are all sorts of unknowable problems that can crop up like the buildings in Florida that major structural repairs to ensure they don't collapse.
I hear you about high rises. Mine is considered a low rise with underground parking and 3 stories. It is 40 years old. But the reserves are good. Planning is good.
alex_686
Posts: 13320
Joined: Mon Feb 09, 2015 1:39 pm

Re: Financing $26k Condo HOA Special Assessment

Post by alex_686 »

JustGRC wrote: Sun Sep 26, 2021 8:52 pmThe current siding is at 0 years useful life (think construction defect).
"Useful Life" is a accounting term. My condo has a 50 year old boiler with a initial useful life of 30 years. Still runs fine. For the past 20 years or so it has had a useful life of 5 years. As long as we can get parts from Germany we are good. On the other hand we had a set up concert steps that still had 10 years when they failed.

On the other hand these types of unexpected expenses pop up when owning a single home. Predicating the future is hard.

I would refinance you mortgage at the current rate. It has the lowest rate. This will matter ore if you stay longer than 5 years. Most people do underestimate how long they live in their home.

I would open up a HELOC and wait. It may be more than 26k - much more. I am reading retrofit work, earthquake. and quarm. To my ear this sounds slow and uncertain. Decided to do HELOC or taxable when the time comes.

Low cost and decent flexialbity.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
neowiser
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Re: Financing $26k Condo HOA Special Assessment

Post by neowiser »

I am on the condo board for a rental I own, and am working with another owner to update our CC&R's. California law now includes requirements for disclosing looming special assessments to prospective buyers. If your HOA delays repairs it will become very difficult for anyone to sell their property without substantial concessions. The best way to deal with a slackard HOA board is to become an officer and get things done. Encourage people to designate proxies and make use of Zoom or other virtual meeting software to increase attendance at meetings.
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prudent
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Re: Financing $26k Condo HOA Special Assessment

Post by prudent »

Some posts were removed for being off-topic to the OP's situation. Let's keep replies focused on the OP's situation.
cbs2002
Posts: 698
Joined: Thu Feb 27, 2020 1:10 pm

Re: Financing $26k Condo HOA Special Assessment

Post by cbs2002 »

A pay as you go association for major repairs, with relatively low monthly maintenance and insurance, is a perfectly legit way to operate and can be communicated to buyers as such. It probably is easier with a much smaller association than a large one like this. CIty condo HOA fees that are designed to cover capital improvements are in the thousands per month. It's completely unrealistic for a condo owner to believe their $200 monthly assessment is going to pay for the new roof or tuckpointing.

A couple other data points could be helpful - namely your age, when you want to retire, and whether you paid 500K for the condo 8 years ago or you think that's what it would sell for today.

1)you say you plan to stay,
2) You want pay off the mortgage
3) you have stable jobs and plenty of money
4) the HOA's cost of financing is 5% over 10-15 years!

To me all this points to paying cash and being done - use the cash you've got and then build it back up. With your assets and presumably the ability to open a HELOC if you need it, you are set for an emergency. I'd also refi to a 15-year.

Caveat is that if there is any evidence that siding issues are allowing moisture damage and you have a recalcitrant association, I'd probably look to sell and move on rather than hope people will see the light.
Northern Flicker
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Joined: Fri Apr 10, 2015 12:29 am

Re: Financing $26k Condo HOA Special Assessment

Post by Northern Flicker »

When buying a condo, ask the seller for the minutes of the HOA meetings for the previous 1-2 years as part of the investigation during the inspection period.
CoastLawyer2030
Posts: 989
Joined: Wed Dec 30, 2020 7:44 am
Location: The Buckeye State

Re: Financing $26k Condo HOA Special Assessment

Post by CoastLawyer2030 »

JustGRC wrote: Sun Sep 26, 2021 8:52 pm I apologize in advance for the length of this post. This is my first as previously I was a casual lurker. On a scale of 1-10 (lowest to highest), our collective (partner and I) personal finance self-assessment is a 6. I say this because while we're strong at saving, planning, and spending, our finance and investing knowledge are average. I've held off posting because I'm not confident in the latter - our mindset is sock away what we can and hope for the best. We’ve gotten lucky, I guess.

Current assets:
Condo = $500k, $180,500 mortgage balance after year 8 of 30 (@ 4.375%)
TSP (federal government equivalent of a 401k) = $335k
Rollover 401k = $90k
Roth TSP = $160k
Partner's 401k = $175k
Taxable investments - TD Ameritrade (stocks and ETFs) = $166k
Taxable investments - Betterment (ETFs) = $33k
HSA = $6k
Cash = $25k

We are currently refinancing our condo in the SF East Bay from current mortgage. Refinance rate is 2.50%.

In the middle of all this, our condo HOA announced pricing on a $12 million siding project for our complex (425 units). The current siding is at 0 years useful life (think construction defect). The $12 million estimate is after all monies from a modest settlement with developers and reserves are included.

HOWEVER, the special assessment has not yet been approved by the owners. IT MAY never happen OR a higher assessment for failing to address issues now many happen down the road. There is also talk of potential retrofit work (earthquake country) that may be an additional assessment somewhere down the road. At all the town halls on the topic, many homeowners are not ready to commit to the project and historically we have not had much success with meeting quorums at elections.

We plan on staying here for a while (min 5 years) as our jobs are stable and Bay Area real estate is always hot and doesn't show signs of cooling.

My initial thought was to tack on $30,000 to finance the project to our refinance. Doing so will incur 0.75 in points, or an additional $1625 in fees. It will also raise our monthly payment by $210. Our goal with the refinance was to pay off the loan before retirement age (62), so while costing us more upfront and monthly, we can absorb the additional fees and monthly payment while still meeting our goal. However, I'm uncertain whether the cash out for a special assessment counts as a capital improvement that will allow us to deduct the total mortgage interest (researching this).

Given that the assessment is not certain yet and the potential tax implications, I question whether it is premature for us to include a cash out with our current refinance.

We could pay for the $26k any of the following ways, in the order we are currently considering. Any thoughts on what would be the smarter move for us? "Smarter" meaning what would allow us to maximize current taxable investments (we didn't start investing until 2016 and feel like we are just starting out as investors). Sometimes we also feel that we are oversaving for retirement - we lead simple lives (travel is our only splurge) and have no children (or plans for any). Also, as a Fed, I'd be getting a monthly pension.

1) Take out as a TSP loan from my federal retirement account (interest paid to us, albeit minimal)
2) Take out HELOC (likely at a higher rate than 2.5% refinance rate, but would not jeopardize our ability to deduct mortgage interest on a cash out if special assessments for an HOA are not considered capital improvements)
3) Take out from contributions to Roth IRA (I always said it'd be a rainy day fund and not just a retirement fund - we’ve contributed $64k of the $160k balance)
4) Cash in stocks or ETFs (incurring capital gains taxes and mentally cutting down on our "starting" gains - currently approx. $92k)
5) Accept financing that will be arranged by HOA for a 10 or 15 year association loan (currently @ 5% and term TBD); loan payments would be added to our monthly HOA dues. I will assume based on cursory research we would not benefit from any interest tax deductions for this loan.

Any thoughts on what would be the best source for paying the special assessment, if it ever happens, given where we are and our goals?

If I missed something that would help in any opinions, let me know.
Was the litigation regarding the developer existing when you bought the condo, and if so, was it disclosed to you?
123
Posts: 10416
Joined: Fri Oct 12, 2012 3:55 pm

Re: Financing $26k Condo HOA Special Assessment

Post by 123 »

I would seriously consider selling and looking for an alternate place to live. The problem is not whether you can afford the HOA Special Assessment, it is to what extent the 400+ other owners can afford it. If there are major issues with the exterior facade it could mean a series of endless fixes if a major facade replacement project is not undertaken. Even if the exterior project is approved (and funded) you are probably looking at some point starting in the next 2 or 3 years (when the project starts) where the building will be relatively unattractive (meaning lower property value) will the work continues which could take a few years. If you consider yourself a "lifer" in the building maybe it's okay to stick with it. But if you think you will replace your home down the road I would accelerate that plan.

I've seen some of these exterior renovation projects. They either get done all at once, with the building gets scaffolded/wrapped for 6 months to a year or they are done piecemeal, with various portions of the building scaffolded/wrapped for a few months at different times, but the project gets extended over a number of years.
The closest helping hand is at the end of your own arm.
Daphne122
Posts: 23
Joined: Sun Jun 24, 2018 8:30 pm

Re: Financing $26k Condo HOA Special Assessment

Post by Daphne122 »

I would check your HOA's governing documents and see how the ratification of special assessments is handled. In the state of WA, the rules for HOAs are statutory in nature such that ratification of a budget or special assessment is a vote in the negative (>50% of the homeowners must vote AGAINST ratification). CA may have similar laws.
Topic Author
JustGRC
Posts: 2
Joined: Sun Sep 26, 2021 6:38 pm

Re: Financing $26k Condo HOA Special Assessment

Post by JustGRC »

Based on other HOA Special Assessment posts on the forum, I’m now inclined to pursue:
1) HELOC
2) HOA financing
3) (very distant at that) taxable investments

While I’d love to pay cash (and do for everything else), I should have disclosed we are taking a mini-sabbatical next spring. It is to celebrate my paying off my significant law school loans (6-figures, 10 years in the making), so we are earmarking cash for that. Also, in posts involving financing similar amounts, others cautioned against an upfront payment because of the lost opportunity value of the cash--which tugs at me for the reasons I mentioned above. I think if I hadn’t just paid off student loans, had even a few more years investing under my belt, and if there weren’t potential non-trivial assessments down the road, I’d go cash as well.

I’ve been here for 8 years (partner moved in 3 years ago). I bought when the market was still recovering from 2008 for $245,000. Neighbors are selling similar units for $500k and have been for about 3 years now, with only a minor dip during the height of the pandemic. Selling isn’t anything we remotely entertained as other condos in the SF Bay Area are going for the same if not higher, so no desire to lose our equity for the same thing. Homes in our neighborhood (not bad, but not “hot”) are going for $900k (we are in the inner SF East Bay). Homes in a decent suburb can be bought starting at $700k, but entail a commute of 60-90 mins each way. We’re city folks however and in 20+ adult years of working I’ve never had a commute longer than 25 minutes. Not interested in starting when we return to the office, even with expanded WFH. My pre-Covid WFH commute was 20 minutes thanks to public transportation both right outside our complex and in front of my office (key reason I chose this complex).

We are 44 and 45. If anything, our next goal is to finance a retirement property in about 10-15 years, hence our decision to refinance to a 15-year loan. We were thinking of renting out this condo at that time. I am hearing the words of caution about this assessment being the tip of the iceberg, however. Perhaps moving on from it down the road will be appropriate, but now is not the time for us to make this decision.

The HOA disclosed the issues, resulting litigation, and settlement very discreetly, so the issues have been shared with longer (and half-awake) residents but many new owners are upset this was not disclosed to them when they bought. The exact scope of the project was shared just last month and the financing/special assessment last week. Under CA law, we need a quarter of the homeowners to approve the special assessment (majority of a quorum, which is 50% of owners in CA for special assessments). I get the sense that there are non-vocal residents (the vocal ones are clearly upset and caught off guard) who see the project as one that shouldn’t be delayed, but who knows how many. I must say I am shocked by the level of misinformation held by some of my neighbors about HOAs. Most are educated professionals working in tech or finance here in the Bay Area. I knew HOAs weren’t perfect, but a condo was an entry point to ownership in an area where ownership for those without trust funds is near impossible. I don’t regret buying a condo, even with this assessment. We are, for now, committed to this place. Again the insights on how to finance given our present situation and future goals is greatly appreciated.
MrJedi
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Joined: Wed May 06, 2020 11:42 am

Re: Financing $26k Condo HOA Special Assessment

Post by MrJedi »

I don't think it makes a huge difference anyway you slice it, as the $26k represents about 2% of your net worth. That is why I opt for simplicity.
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