Here’s How The Problems Start
The board of directors of a homeowner’s association is entrusted by the residents to hire a contractor to perform a complicated reconstruction project. Unfortunately, condominium board members are not very good at writing contracts or issuing requests for proposal or collecting bids. When a contractor is selected, the scope of work is often poorly established. The expectations between the community and the contractor begin to diverge. Soon, a law firm is engaged my some residents to sue the contractor for damages. After a long battle, a settlement is awarded, but it is not enough to fix the problem after expenses are paid.
A Chain Reaction
Fortunately, the contractor in the suit was insured, but this does not cover the personal, professional, and opportunity hardship of defending against the suit. The insurance company also increases the premium for coverage for condo projects. Most good contractors say, “it’s just not worth the trouble.” As the pool of available contractors dries up and the price for reconstruction increases, many condos are forced into deferring maintenance in a distorted market.
Cascading Failures
After a while, a condominium springs a few leaks in their piping system. Each leak results in a relatively small water damage claim. When the insurance company notices several claims in the same building, they begin to fear that a mainline is about to rupture next, and threaten the condominium with cancellation of their policy unless the community replaces the entire system immediately. Now the insurance industry is in a double jeopardy: they force the contractor out of the market and they force the condo out of the market to basically avoid suing themselves.
The Dysfunction Deepens
Banks will not make construction loans to condominiums that are not insured. Likewise, they will not make mortgage loans to buildings that are not insured. The property values plummet and the owners are sent under water. Soon they begin to default on the mortgages that the banks already hold. More maintenance is deferred as owners move out and renters move in. Buildings fall apart and become unsafe. Banks pull out of the market to avoid defaulting on themselves. The wider community suffers.
Correcting HOA Maintenance Dysfunction
Community Engineering Services, PLLC is currently deploying The Value Game to the condominium reconstruction market with remarkable success. The Value Game is a new class of business methods that alters the incentive structure of a distorted market so that everyone acting in their own best interest is in fact acting in the best interest of the community.
Here Is How The Value Game Is Formed
The first thing is to identify the “shared asset” in whose best interest it is for everyone to preserve. In this case, the shared asset is the physical condominium building where preservation is the context about which a community interacts.
If we look at each of the players individually, we see some consistent patterns.
- It is obviously in the best interest of the residents to have a safe and well-maintained home.
- It is in the best interest of the contractors to have a successful and profitable interaction with the building.
- It is in the best interest for the Insurance industry to reduce the risks that they underwrite.
- It is in the interest of the financial industry to loan money into a viable, organized, and disciplined community.
- It is in the best interest of the real estate industry to represent strong values and complete insurability of assets.
- Finally, the broader neighborhood benefits from the presence of a viable condominium community.
Project Management is Incentives Management
It is actually in everyone’s best interest that the others are successful. Once incentives can be re-aligned, the project can be managed in a manner that reinforces the community instead of tearing it apart.
Social Capital has value:
Taken together, project risk is vastly reduced and social capital is vastly increased with a simple realignment of incentives and the proper communication channels appropriately open to all. Community Engineering Services, PLLC can orchestrate a tight project by managing the schedule, the design, contracts, risk, and quality; and therefore the cost.