When Active Adult Communities Go Bad

With prices in some very interesting active adult communities sliced in half from just 2 years ago, it is tempting to buy a retirement home. But as many thoughtful people have pointed out, those bargain prices could have some high costs associated with them.  This article will attempt to point out some of the pitfalls.

The Tideland Condos, of the Palm Coast, Florida is just one example of a community where bargain prices abound. Condos with 2 or 3 bedrooms that were originally priced at $350 - $500k are now offered in the low $100’s according to some reports.  There are plenty of other examples as well, and many of these communities are very tempting - great homes with plenty of amenities in desirable areas. Their prices have probably come down mostly because of timing - they came on the market just as the market collapsed.

But buying a bargain active adult community is not without its perils.  Here are some of the chief problems:

1.  Many existing owners might be underwater on their mortgages. Since they owe more than their unit is worth, many will walk away, leaving foreclosed homes in the development.

2.  Ongoing maintenance costs do not change much, regardless of how many homes are unsold or in bankruptcy. As the number of active owners go down, the common fees per homeowner must necessarily go up.  Because even more homeowners could be driven out by the increase, it is impossible to predict what the charges might become.

3. Foreclosed, abandoned, unsold, and unbuilt homes hurt property values - so resale values go down further.  Some communities will probably become ghost towns, at least temporarily.

4.  The development could go into bankruptcy. This can happen whether it is owned by a developer or by a Home Owners Association (HOA).  This adds more negative fuel to the fire.

5.  Immense legal problems can develop in a bankruptcy or change of ownership. An unfortunate drama like that is now playing out with the Four Seasons at Charlottesville, a community that was recently auctioned off on the Courthouse steps.   Only 83 homes are currently occupied of the 650 that were originally planned.  The new owner believes that the development’s large clubhouse with indoor pool belongs to it, whereas the HOA contends it owns the clubhouse. A legal battle is playing out now for control. Even if the HOA does end up controlling the clubhouse, the reduced number of homeowners means that owners might have to pay as much as $650 per month to maintain those common areas.

6.  Similar problems are occuring in many high-end developments with fancy golf courses and other facilities. Expensive equity country clubs with $100,000 entrance fees might now find themselves either becoming semi-private courses, or they and their extensive cost structures might force their developments into bankruptcy.

7. Communities might not go bankrupt but they could default on loans or loan commitments. This in turn could result in liens being attached to all homes in the development, a serious impediment to resale.

8. A different kind of problem recently came to light at The Villages, the giant active adult community near Ocala, FL.  There a court case seems to be determining that its Community Development Districts (similar to a Home Owners Association) paid too much for the common areas like golf courses it bought from the developer. Now the tax-exempt status of the bonds used to finance the purchase is being challenged by the IRS, which could lead to much higher common fees in the future.

9. Developments can fall behind on taxes, causing more liens and fines.

10.  A more hidden problem usually also occurs when a development is at less than full occupancy. The community’s contingency funds, the money banked over the years to bankroll expensive infrastructure repairs like roofs and roads, are usually stopped or spent. So in future years homeowners could face big and unexpected assessments when those repairs must be made.

11. Another problem tends to occur in active adult communities that are not finished. If the developer runs into financial trouble some of the planned amenities (like the clubhouse, pool, or clubhouse) might be cut or down-scaled. This can lead to more legal troubles and other disappointments.

12. Desperate owners and developers who need cash could lead to yet more problems. Renters can be less than ideal neighbors, and if too many people move in who are less than 55 years of age, the community could lose its age-discrimination protections as a 55+ community.

These problems might discourage you from acting on your impulse to purchase that bargain active adult community. Nevertheless there are plenty of reasons why a purchase now might be a smart move.  In the next installment we will explore the steps you can take to protect yourself in a bargain purchase.

For further reference:
10 Questions to Ask Before You Purchase in an Active Adult Community

Why Not Live in an Award-Winning Community

Special thanks to OldNassau, our member who sugggested this important topic.

What Can You Add to Our List? Please use the Comments section below to put in your 2 cents.

Just what is a 55 plus active adult - and why should I care?

The first part of the definition is easy - there are a lot of people who are 55 years of age or older. By the year 2010 there will be 74 million people who fit that category in the U.S. - nearly 1 in 4 people.

Arguably the term “55 plus active adult” includes just about everybody in this age group-except for those in prison, hospitals, or who live a sedentary lifestyle. But realistically, the term “active adult” is more of a marketing handle than anything else.

By applying the the term “active adult” to products, usually active adult communities, it immediately puts a lot more marketing fizz on the development than say – “passive adult communities”, “inactive adult communities”, “old people communities”, or “senior communities”.  “Active adults” serves a very important function for baby boomer marketers, because it allows them a safe handle for addressing a group that doesn’t want to think of themselves as old! According to a Wikipedia article the term, “active adult retail” is credited to Rick Abelson. We are not certain who first coined the term “active adult community”.  If any alert readers happen to know or have a lead we could follow on that factoid, please use the Comments section below.

Why Should I Care
If you are lucky enough to be an active person – enjoy it!  If you are considering living in an active adult community, consider if the amenities offered are up to your personal standards for activity.  Golf is an active pursuit in our opinion, although there are those who would differ. If you like jogging, tennis, biking, and exercise – but the community you are considering offers shuffleboard and bocce–the developer is appealing to active adults who are probably a lot older and quite a bit less active than you consider yourself – so evaluate your purchase decision in that light.

Retirement Ranger: “Hi Yo Silver-Hairs Away!”

There’s a new retirement calculator in town, and this one is proud to be wearing a brown hat. The Retirement Ranger’s motto says it all: “Hi Yo, silver-hairs, away!” (Thanks to OldNassau for that great motto).

Retirement Ranger is a Free new interactive calculator that delivers an instant, personalized list of best places to retire. Answer 11 questions and you will be emailed an instant, free report. Use your Topretirements user name and password to sign up, or create a new one if you aren’t already registered. You can retake the quiz as often as you would like - it’s free and there is no obligation.

We developed this new quiz as a quick and fun way to tap the huge amounts of data that you and our editors have accumulated in our over 400 city and town reviews.  For example, each Topretirements town has data for Jan. temperature, cost of living, housing prices, population, cultural index, type of environment (college town, mountains, lake, coastal, desert, small town, etc.), and region.  By selecting the criteria that are most important to you, the quiz uses the database to come up with your personalized list of towns and 55+ communities in or near those towns.  There is even an option to send an email to friends to tell them about Retirement Ranger.

A word of caution.  Please resist the temptation to get overly specific the first time you take it.  With only 400+ best places to retire, the more specific you get the higher the chances that will will get no or very few choices. So just pick 1 or 2 very important criteria the first time (select “No Preference” for the rest). Then, if you see too many choices, retake the quiz with fewer “No Preferences”.

To take the quiz you will need a user name and password. If you haven’t already created a user name at Topretirements, just make one up. If you don’t remember your old user name and password, go to our Help page to have them sent to you.  If you wish to create a new user name and password, you must have a different email address that what you originally signed up with.

For more information and tips about the quiz, check out “About this Quiz“.

Villages CDDs Get Proposed IRS Settlement

Update: July 27, 2009.  As promised, the IRS has expanded its audit of the tax-free status of more bonds after failing to reach a settlement with Community Development Districts at The Villages.  The investigation now covers almost $400 million in recreation and other bonds, up from $64 million in the original audit. See the Bond Buyer Story for more.

Original Story: The Villages, the giant active adult community south of Ocala, FL, has received a proposed settlement from the IRS to resolve an investigation of tax-free bonds issued by 2 of its Community Development Districts (CDDs). The Bond Buyer reports that the settlement would mean that the Village Center and Sumter Landing Districts would redeem over $355 million bonds issued in 2003, pay the federal government $2.85 million, and refrain from issuing more tax-exempt bonds. The IRS suggested that if the Districts did not agree to this settlement the Agency might expand its investigation to 7 other bond offerings. Neither the CCDs nor the IRS commented in the article about the IRS proposal.

The Villages is one of 580 Community Development Districts in Florida. These Districts are permitted by Florida law to let homeowners associations issue tax free municipal bonds as a way to finance infrastructure. Topretirements readers may recall in our recent story about The Villages that its complicated ownership structure was a focus of Andrew Blechman in his book about the community, “Leisureville”.  It appears that concern is now playing out with the IRS.

One of the IRS’s main contentions is that The Villages’ Development Districts are too tightly controlled by the developer. Florida law requires that, after an initial period, their boards must be controlled by members of the community.  Another contention is that the CDDs overpayed for the facilities (golf courses, parks, and other facilities) that the bonds were issued to finance.

The story about the Villages’ bond issue originally broke in the Orlando Sentinel. The Sentinel published a follow-up that explores what the impact of the proposed settlement could be on residents in the Active Adult Community. Since they are the ones paying the debt service and principal, it might logically assumed that resident fees (and possibly taxes) will be going up to pay for a higher bonding cost (tax-free bonds usually have lower interest charges), not to mention any penalties to the IRS.  Or, since it appears that it was the developer who profited from its sales of assets to the CDDs, maybe they should pay. Since this is early days in the case, only time will tell. But residents are probably concerned, and many of them angry.

For Further Reference:
The Villages

The Best of the “Best Places to Retire” Lists

CBS Moneywatch.com has just published a thoughtful article on Best Places to Retire Lists. Thoughtful in the sense that it recognizes that there is no one best place to retire, people need different kinds of lists to match their differing objectives and preferences.

Moneywatch limited its review of the lists only to those updated since 2008. That led to its 5 top rated lists - U.S. News, Money, Smart Money, TopRetirements.com, and RetirementLiving.com.  Could we say that Topretirements was pleased to have come out as the most highly rated of the bunch - YES!!!

The Moneywatch.com writer, Richard Eisenberg, liked Topretirements because of the “Zagat-like” reviews and a “wide variety of reasonable criteria” for selecting the best places to retire on the basis of “livability”.  Topretirements was rated best for finding towns that other retirees like.

The website article goes on to review the 5 best rated lists of  “Best Places to Retire”. Topretirements got 4 stars, the lists from U.S. News and Money got 3 stars, Smart Money and Retirement Living.com got 1 star each. Best Places to Retire Lists like the popular ones developed by U.S. News were cited as useful, but often focus on very narrow criteria such as “smartest people”, best for golfers, most affordable, most parks, most Republican, etc.

Eisenberg points out, correctly in our view, that “it is possible to use the lists that are out there to narrow your choices and to discover some plausible options you might not have otherwise considered.”  Check out the website article, it’s useful.

Helpful Links
Moneywatch.com “Best Places to Retire”
Topretirements “25 Best Places to Retire”