An Investigation of the Effects of Professional Management on Homeowner Association Dues: A Field Study of the North Carolina Beaches

This paper addresses two questions concerning homwowner association dues: (1) whether professional management of a homeowners' association positively affects the amount of dues paid by its members; and (2) if so, what is the an economic justification for the difference. If a group of homeowner associations is being run efficiently, it is logical to speculate that the members of different associations providing similar amenities and services would pay similar dues. The findings of the present study tend to support previous research which suggests that homeowner’s in professionally managed associations do pay significantly higher dues (Sirmans & Sirmans, 1992). In an attempt to reconcile this issue, this field study investigates two hypotheses as possible explanations for the differential in dues between professionally managed and self-managed associations: (1) that professional management firms charge a premium to association members in order to compensate for the increased risk associated with the legal liabilities of management; or (2) that owners of properties located in resort areas are more likely to desire the services of professional management firms due the transient nature of the property’s occupants. The findings provide weak evidence in support of the premise that homeowners in professionally managed associations pay higher dues because of the increased legal exposure of the management firms. However, there is significant evidence which indicates that a substantial portion of the differential in dues for professionally managed associations can be attributed to the need for more intensive management, particularly when the units are resort type and transiently occupied. INTRODUCTION Many property owners and association boards-of-directors often lack the time, expertise and energy necessary to effectively manage an association and therefore outsource this responsibility to professional property managers. Although association homeowners who employ the services of a property management firm will relinquish some degree of control in the day-to-day operations they benefit from the peace of mind afforded by the property manager's specialized expertise, and perhaps some increased efficiency. These benefits are a direct result of third party management specialization and these firm's ability to achieve economies of scale through increased use of technology, knowledge of local markets and favorable negotiation of service supplier contracts. Further, the employment of a professional management firm will shift certain legal responsibilities and liability from the association's homeowners and board members to the management firm (Carlson 1992). The recent growth of property management firms has been nothing short of phenomenal, with the increased growth promoting intense competition among management firms. Due to this rapid growth and cosequent high level of competition, homeowners have been empowered to command high levels of service and greater accountability from professional property managers (Anderson 1994), while simultaneously placing downward pressures on fees (Rothe 1993). However a question of paramount importance is whether the "cost/benefit" relationship to homeowners of professionally managed associations amounts to an equitable trade-off. What amenities and services drive association dues and are the benefits derived from these amenities and services justified to cover these incremental differences in cost as part of association dues? Conversely is the risk/return relationship of professional management firms one of an equitable trade-off and are management firms receiving a return that adequately compensates them for assuming the increased exposure to legal liabilities. The first part of this study consists of a review of the relevant literature. Next, regression analysis is used to discern the pertinent factors that drive homeowner association dues. Third, tests are developed to determine whether members of professionally managed associations pay more in association dues than do members of self-managed associations. Finally two potential explanations are offered to explain the differential in dues that exists between professionally managed and self-managed associations. LITERATURE REVIEW A limited number of studies have investigated the relationship between professional management and an association's dues and, most have found higher dues to be significantly and positively related to professionally managed associations (Sirmans and Sirmans 1992). Sirmans and Sirmans (1992) suggest one factor to affect the differential in dues paid by association members is the professionalism of management firms, demonstrated by those who have attained professional designations such as the Certified Property Manager (CPM) or Accredited Residential Manager (ARM). Although Sirmans and Sirmans suggest that factors other than professionalism affect dues paid by association members, they offer no discussion on or findings of such factors. Baen and DuPlessis (1995) view property management from a risk/return perspective and suggest that the growth of third-party, property management firms may be at least in part an attempt by the owner to transfer certain risks and, that outsourcing management responsibilities may not be solely for reasons of efficiency. Additionally, Baen and DuPlessis (1995) suggest that smaller firms may be undercharging for their services considering the vast legal liabilities facing them in the litigious environment present in the marketplace. Some valid support for this theory can be found in that recently rendered court decisions have established a fiduciary duty to exist between an association and its agents (i.e., professional property managers) (Boken 1993). Additionally, management firms are also facing increasing liabilities in other areas such as the responsibility of overseeing an association's repairs and assuring adequately funded reserves for replacement. The courts have found, in some instances, that management firms, acting as agents on behalf of an association's members, have breached their fiduciary duty with regard to properly maintaining reserve accounts and adequately funding of replacement reserves (Smolker 1991). Furthermore property managers may act to minimize their exposure to legal and financial liability by identifying, reducing and/or transferring these risks Carlson (1992). It is apparent that management firms are becoming more contractually liable due to a multitude of risk factors. DATA The data collected are from 59 of the approximately 120 homeowner's associations in the greater Wilmington, North Carolina area. This area includes Wilmington, Carolina Beach, and Wrightsville Beach with a combined population of nearly 120,000. In general, the area consists of a seaside/resort community located on the Mid-Atlantic seaboard. The economy of the area is largely supported by the service industry and dominated by tourism. Data were obtained on over 49 percent (59/120) of the homeowner associations in the area, collected from association members, their directors and/or their respective management firms. Over 80 percent (48/59) of the participants in the study supported their survey responses with annual operating budgets. This financial information provided a more complete analysis of the data. Of the study's 59 sample associations, 35 participants were located in Wilmington, 13 in Carolina Beach and the remaining 11 in Wrightsville Beach. Condominium associations constituted 61 percent (36/59) of all association structures in the sample, while single-family residences(SFR's) represented 36 percent (21/59), with other structures such as patio homes and/or townhouses making up the remaining 3 percent (2/59). Eighty-one percent (48/59) of those sampled were professionally managed homeowner associations. In terms of location, 44 percent (26/59) of the associations were waterfront units, located with either direct exposure to the ocean or on the intra-coastal waterway. In terms of amenities, 58 percent (34/59) possess either a pool, tennis courts or both, while 17 percent (10/59) enjoy a marina, fishing pier, and golf course facility or some combination of the three (See Exhibit 1). Exhibit 1: Descriptive statistics Location of association Wilmington Carolina Beach Wrightsville Beach Total Number of associations 35 13 11 59 Type of property Single family residences Condominiums Other Total Number of properties 36 21 2 59 Amenities Pool/Tennis Golf/Marina/Pier Properties with amenities 34 10 METHODOLOGY AND RESULTS This study employed multiple regression analysis (MRA) and analysis of variance (ANOVA). Regression was used to determine the significant factors that affect association dues. The independent variables driving the dependent variable, association dues, were identified as the following 15 items listed below in Exhibit 2 Exhibit 2 Estimated Expected VARIABLE Coefficient t-statistic sign Constant 67.37 2.60 (+) AGE -0.38 -0.55 (+) COMMON AREA 0.28 1.25 (+) CONDO 4.86 0.31 (-) HOME -29.65 -1.87 (-) WILMington -7.26 -0.44 (+) Wrightsville Beach 41.71 2.60 (+) DOCK 14.82 0.84 (+) PICNIC 21.10 1.37 (+) POOL/TENNIS 8.81 0.76 (+) OCEAN 27.36 2.10 (+) GOLF 17.99 0.70 (+) FEE -2.05 -1.45 (+) MGMT of association 41.56 1.74 (+) NUMBER of units -0.16 -1.16 (-) OTHER Amenities* 33.202 2.77 (+) 1 significant at 1% level. 2 significant at 5% level. 3 significant at 10% level. * other amenities include such things as security, cable television, laundry facilities, etc. Consistent with previous studies, the findings indicated that homeowner dues for professionally managed associations were higher than those of self-managed associations. All other coefficients have the expected sign with the exception of the AGE and FEE variables. It was expected that as the fees charged for the administration of the association increased so would the association's dues. Likewise, it was expected that as the units of an association aged its dues would also increase. Although both of these variables have unexpected signs, neither are statistically significant. As expected the OCEAN, CONDO and WRIGHTSVILLE BEACH variables all have positive coefficients as many of the beach and ocean properties are predominantly resort condominiums, used primarily for vacation/tourism purposes. Thus, in this research, it is suggested that these properties are more expensive to operate and manage due to the transient nature of the occupants of these units. Similarly, the amenity coefficients, POOL/TENNIS, GOLF, DOCK, PICNIC, and OTHER, all have the expected sign indicating that the presence of these amenities causes an association's dues to increase. Additionally, the HOME coefficient has the expected negative coefficient as individual homeowners in single-family residence associations generally do not have as many pooled expenses as do the owners of resort condominiums or townhomes. While the NUMBER coefficient is not significant, it is in the expected direction (negative), suggesting that certain economies of scale occur as the number of units in the association increases. Exhibit 3 presents a listing of the associations by type of property, resort versus residential, and management type.