One of the reasons I decided to start blogging was because I saw how open the tech community had become – with respect to sharing their ideas and experiences – and I thought that the same thing could and should be done in real estate, as well as in city building more broadly.
But in many ways, the real estate industry is the antithesis of the tech industry. We are slow moving and secretive of our ideas. Now, some of this is driven by fundamental differences in terms of how these two sectors operate. It’s a lot easier to test and iterate on your ideas in tech than it is with actual bricks-and-mortar. But I still think about ways in which we, in real estate, could be pushing the envelope.
As one example of what I’m talking about, take Union Square Ventures in New York. They call themselves a “thesis-driven venture capital firm”, which means they come up with a framework and core set of ideas, and then use those to drive their investment decisions.
You would think that these frameworks and ideas would be pretty sensitive. I mean, they are the core drivers of their business. But their entire website is actually set up around sharing and collaborating – with the public – on these ideas. Here’s a screenshot:
Each topic is something they are “thinking about” and something they want to make an investment in (or already have). Fascinating.
Many of you, I’m sure, would argue that there are risks to doing this. But there are also benefits, some of which are driven by collective intelligence. By sharing their ideas and hypotheses with the public, it helps to evolve their thinking. After all, their investment thesis is not a static thing. It grows over time.
But in addition to this, it also makes it abundantly clear to their customers (entrepreneurs) what they believe in and what they look for. And I am sure this helps them with deal flow. More and more customers aren’t just “buying” a product, they are also “buying” a philosophical underpinning and belief system.
Can you imagine a real estate firm doing something like this? I can. But it’s not happening yet, as far as I know.
I’ve been thinking a lot lately about condominium governance and how things might be improved.
If you own a condominium, you pay a monthly maintenance fee. Let’s say, for example, you own a 833 square foot condo and your maintenance fee is $500 per month. That works out to be $0.60 per square foot.
For a lot of people, this fee probably feels like a bit of a black hole. The money goes out every month and that’s the end of it.
But as I explained here, a portion of that fee goes into the condo’s reserve fund to cover future capital expenditures. This is basically an investment you are making for the future benefit of the building.
As an example, if you’re paying $500 per month, somewhere around 25% could be going towards your condo corporation’s reserve fund. That’s $125 per month. $1,500 per year. $7,500 over a 5 year period. And $15,000 over a 10 year period.
Now this is an investment that you’re obliged to make, but one that you might not be around to directly benefit from if you decide to sell before capital expenditures are made using the money you’ve invested.
Of course, if you’re a savvy buyer, you’re going to scrutinize the reserve fund and the corporation’s overall financials before you buy into a building. And sometimes the unit valuations do get deeply depressed by out of control maintenance fees and/or special assessments. So you could maybe argue (as an owner) that your reserve fund investment ends up getting recaptured in an eventual sale.
But what I wonder is to what extent a properly funded reserve gets accurately reflected in the valuation of the individual units. I suspect not that well. And as far as I know, there isn’t great data on this metric. (If you know of anything, please share it in the comments.)
It’s certainly important information to have and consider. Again, when you buy a condo unit you’re not only buying the unit itself, you’re also buying the future investments (and liabilities) that others have left before you.
So what I really want to know: Why aren’t reserve fund balances and building studies made publicly available? This is not easy information to get today.
But imagine what would happen if the market had full transparency. Imagine if you could see a map of every condo building in your city and sort by age and reserve fund balance. In theory, unit pricing would become more accurate. But even more than that, there would be significant opportunities for collective intelligence.
Now all of a sudden buildings would be able to benchmark themselves against other buildings to see if their reserve fund is sufficient, as well as learn from other buildings with respect to their history of capital expenditures. It would also hold the building’s management more accountable and allow owners to easily see if the contracts in place are competitive with the overall market.
I know that a lot of people get nervous when it comes to sharing information like this. I mean, what would happen if your building is underfunded relative to its peers? Would that pull down property values? It certainly could. But if you’re underfunded and you get stuck with a special assessment in 5 years, then your property values are going to drop regardless.
So I would love to see a lot more condo information made available to the public for free. In my view the benefits outweigh the potential negatives, particularly if this were to be done at scale. Condo corporations are also non-profit entities, so it’s not as if their balance sheets and income statements are filled with sensitive trade secrets.
But what do you think? Would you feel comfortable if your condo’s reserve fund balance was made available online to the public? Do you even know off the top of your head what the balance is for your own building? I would be curious to know.