Practical Capitalism – Part I – The HOA & The Hi-Rise

The way we buy and sell real estate is particularly hurtful to those who own Condominiums. For many Condo sellers, the traditional real estate “pricing” model seems almost, criminal-like. Six percent, really? Selling 1,600 square feet on the 27th floor pays the same as selling a mini-McMansion on 2 acres with a stream? No one would agree those two sales scenarios are similar with equal amounts of human effort, yet we expect both of them to pay the same? Why?

Compared to a suburban seller, hi-rise condominium sellers are getting hosed by the real estate system.

Buyers of hi-rises and detached homes are very different customers, evidenced by the way they search for their future homes. In the suburbs, there are seemingly endless numbers of subdivisions with an equally impressive array of buyer options and home types. This is the wheelhouse of the traditional real estate business model. A Sales Agent’s value to this process is obvious.

Hi-rise buyers have a very finite number of options. There are only so many buildings from which to choose. As a result, buyers tend to shop by building. Floorplans are usually online so Buyers can become very specific: I am looking at the “Charleston”, in the X Building, facing east, 12th floor or higher. This kind of customer engagement usually happens before any discussion with a sales agent. In many instances, hi-rise buyers have selected their choices of A, B and C and are simply waiting till one of those choices becomes available.

Consider the seller of a 2-bedroom, 1,600 square foot condo on the 27st floor. Traditionally, they will pay $27,600 in sales commission to sell their $465K unit. (6% of the sales price) In Atlanta, buyers can choose between tens of thousands of detached suburban homes for $465K. Yet, there probably isn’t anywhere near a hundred, 2-bedroom, upper floor units in that price range available at any one time. Supply and demand 101 screams these two selling scenarios aren’t even close to being equal. The sales agent selling a $465K home in the suburbs, within an ocean of comparative competition, works much differently than the in-town agent who is listing a, “one of the few of its kind”.

Condo sellers who are paying the same commission percentages as their suburban counterparts are being robbed.

Unless something changes, the traditional real estate sales model will needlessly cost in-town home sellers millions of dollars. The in-town Atlanta condo market is poised for fantastic growth over the next decade, in large part, because much of the recent in-town development has been focused toward rentals. Outside of the future midtown landmark, Opus, and its million dollar entry point, the number of Atlanta in-town condominium options won’t exceed buyer demand anytime in the foreseeable future. So, continuing to pay the typical 6% real estate fee for a hi-rise condo, only because there is no alternative, means sellers will continue to be held hostage by a “system” that is actually working against them.

Since the commercialization of the Internet, crystal ball gazers have predicted technology would eventually replace the “Realtor” in much the same way it replaced the travel agent. And for years, many of us in the real estate industry have argued that position wasn’t very practical. That said, if there ever were a sales scenario that could support an alternative sales method, it would be the condominium.

Unfortunately, the traditional real estate industry isn’t going to help, and worse, they will most certainly fight and discredit anyone who attempts to oppose them. They are, after all, the ones benefitting from the current system. If the real estate industry was ever really concerned about condo sales modeling, they would have done something about it decades ago.

Condominiums, and in particular the hi-rise type, have very different HOA requirements; often creating a highly engaged and vocal HOA Democracy. HOAs, like all Democracies, come in many flavors, with each taking on the voice of the Community it serves. For many suburbanites, HOAs mean nothing more than curb appeal: like having neutral colors, no chain-link fencing and every yard, weed-free. For others, HOAs are just the rules and guidelines that were voted on to maintain order. Either way, it’s a safe bet the average homeowner doesn’t spend a lot of time thinking about their HOA.

But, to the hi-rise dweller, an HOA means much more than just a set of rules, it also means a set of building services and amenities that have direct impact on every homeowner’s bottom line. And, it’s these add-on services that often distinguish one building, price-wise, from another. So, yes, within these HOA environments, homeowners actually do spend quite a lot of time thinking about their HOAs.

We live in a world of ever increasingly competitive markets, which virtually guarantees an escalation of all things cost related. For the hi-rise homeowner, this is a huge problem. Buildings will continue to experience the inevitable “feature creep”, as they try to keep up or maintain their place in the market. And, as far as assessing any Associations future cost: most people call those; “hockey stick” graphs. Meaning, if you are a hi-rise condo owner, you aren’t liking the direction your monthly dues are going.

What do condo sellers being taken advantage of by the real estate system have to do with escalating Association dues? They are two very distinct problems. But, solving one of these problems, may actually help solve the other.

In part 2 of our article on Practical Capitalism we will discuss ways HOAs can begin to change and control the real estate activity within their Communities. Strong democratic HOAs can make demands that individuals never could. Can an HOA stop their owners from unnecessarily overpaying sales commissions and create a re-occurring revenue stream for their Community?

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