Return to Transcripts main page

Open House

Homeowners' Associations Can Affect Home Value; Farmland And Rural Areas Could Be Hot Market; Good Furniture Deals

Aired November 26, 2005 - 09:30   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

BETTY NGUYEN, CNN ANCHOR: This just in to CNN out of Baku, Azerbaijan. Police in riot gear beat opposition protesters who gathered in Azerbaijan's capital. They were shouting "Freedom!" and demanding a revote of disputed of parliamentary elections.
Now, some 15,000 opposition activists rallied in Baku to protest the outcome of the November 6 parliamentary elections, which they claimed were rigged. The rally was the latest in a series of opposition protests. And, of course, we are going stay on top of this and bring you the latest, but riots have broken out, and police have taken action as a result of that, in Azerbaijan.

In other news, a dozen are dead, nearly 400 injured following an earthquake in eastern China. The 5.5 magnitude quake rumbled 13 hours ago, and there are reports of significant damage to homes. Rescue crews are on the scene, and providing some relief.

Up next, the latest edition of OPEN HOUSE with Gerri Willis. You may be surprised that some of the hottest real estate markets are a little off the beaten path, but are picking up fast. Stay tuned for that, Plus, the latest breaking news as it happens, right here on CNN.

GERRI WILLIS, CNN ANCHOR: Saturday after Thanksgiving, you may have leftovers like these, or even shopping on your mind. Well, we've got advice you need to hear about your home.

Good morning. I'm Gerri Willis.

No two words seem to fire you up more than "homeowners' associations." Sure, the rules are crazy, but today on OPEN HOUSE, we'll take a look at how they impact the value of your home.

(BEGIN VIDEOTAPE)

WILLIS (voice-over): Elizabeth Martialay is just one among hundreds of people still paying a mortgage, property taxes, and maintenance for a place she can't even live in. She owns a condominium at Castle Beach Club in Miami Beach, maybe the most extreme case of a homeowners' association gone bad.

ELIZABETH MARTIALAY, HOMEOWNER: The board at my building lowered my property value to zero, which is what it's at, at the moment, because of their mismanagement of the building.

WILLIS: The association's board members left support beams to rot, sprinklers to fail, and wiring so faulty it could lead to fires. It's so bad, the city ordered all residents out last April. And a court-appointed receiver estimates it will take $25 million to bring the Castle Beach up to code.

MARTIALAY: These people not only mismanaged, and they had no reserves. There was no capital replacement plan. And they hadn't spoken to engineers about how to keep the building in good shape. It's amazing to me that it's left in the hands of people who don't have experience in running these kind of buildings. You would never appoint one of, randomly, one of your shareholders to run IBM.

WILLIS: Even when problems aren't so extreme, homeowners often have little recourse.

HUMBERTO SANCHEZ, CYBER CITIZEN FOR JUSTICE: If you happen to fall into the hands of wrong board, you're in trouble. It's been determined by courts. You're giving up your constitutional rights, because you're entering what is considered a contract.

WILLIS: In some states, homeowners' associations can even foreclose without going to court. So, experts say, it's important to know what you're getting into.

EVAN MCKENZIE, AUTHOR, "PRIVATOPIA": You have to review the governing documents of the association before you purchase. Make sure that your lifestyle, the things you want to do, are permissible, and that you're comfortable with the standards of property maintenance in the association.

WILLIS: But with the right people making the right decisions, there can be a big upside. Homeowners' associations can raise maintenance standards, resolve disputes among neighbors, and provide pools or tennis courts.

TOM SKIBA, COMMUNITY ASSOCIATIONS INSTITUTE: Rules of communities are there for two purposes. First, to preserve the nature of the community, and second, to protect and enhance property values. And those rules are -- serve the community as a whole.

WILLIS: And for Elizabeth Martialay, there is hope in sight. Earlier this month, a Florida court allowed a new board to take over the association at Castle Beach.

(END VIDEOTAPE)

WILLIS: Could this happen to you? And what should you know about homeowners' associations' impact on home values?

Now, the topic is the focus of a story in this month's "Money" magazine. "Money's" managing editor, Eric Schurenberg, joins us now to sort it all out.

Eric, welcome.

ERIC SCHURENBERG, MANAGING EDITOR, "MONEY" MAGAZINE: It's a pleasure, Gerri. WILLIS: Now, normally, we're talking about one of my investing columns for "Money" magazine. This month, you guys take on an investing issue in the magazine, and it's about homeowners' associations. How do they affect values?

SCHURENBERG: Well, it's a complicated question, actually. You'd think, off of the top of your head, that they would always improve homeowners' value, because anything that improves the upkeep of the neighborhood and the curb appeal would enhance value, you'd think. And that's what homeowners' associations are for.

But you have to offset that against the fact that some buyers just won't buy into a homeowners' association.

WILLIS: Right.

SCHURENBERG: So you take those buyers out of the picture to begin with.

WILLIS: I think what shock me about the article is how many people out there are actually subject to these association rules. Tell us a little bit about the proliferation of these.

SCHURENBERG: OK. Well, I mean, you can love homeowners' associations, you can hate them, but it's increasingly hard to invest in real estate without them, 270,000 common interest communities...

WILLIS: Unbelievable.

SCHURENBERG: ... 22 million housing units, 55 million people living in them.

WILLIS: I think it's such a big deal for people, and particularly if you're looking at retirement or a second home, you're really likely to run into these things. But how do I evaluate the impact on value? For example, you say you've got to read the laws, the rules, know what kind of rules you're subject to. That's a lot of work.

SCHURENBERG: Well, it is, but it's really important. You really always, always, always have to do this.

Now, there are a couple documents you want to pay particular attention to. There's the governing document, which is sort of like the constitution of this community.

WILLIS: What do they call that? CC&R, what is...

SCHURENBERG: Well, the CC&R, which is the rules that you and everyone else in that neighborhood has to live by. And they can be draconian, they can be really invasive, or they can be very wise and upkeep the value of the neighborhood.

WILLIS: Now, tell me, when people are looking at some of these communities, do they typically gauge how much they're going to pay for something on the basis of how good that association is? I mean, is there a benefit to investing in a house in a good association area?

SCHURENBERG: Oh, sure. Oh, sure. I mean, a good association will maintain the value of the neighborhood, it'll make the -- all of the houses look like they go together, and they'll be well maintained, and they'll keep a good spirit.

If, however, the association is not well run, and it runs into financial difficulties, and it's clear that homeowners will be assessed for repairs of the swimming pool, or common areas, or things like that, that can really detract from values.

WILLIS: Now, it's interesting you bring that up, because one of the issues you get to is financial insolvency. The story says that it could be that a lot of these associations could encounter financial problems in the future. Why is that?

SCHURENBERG: Well, it's not clear how many of them have been managed very well. And, you know, they're all sort of reaching in age when big repairs will be necessary. You know, the swimming pools crack, the roofs in the common areas start to need repairs. And not every homeowners' association has reserved enough money to care for that.

WILLIS: Well, let's talk about reserves. How do I know that the association has enough money?

SCHURENBERG: Well, you should always look before you buy into a place like this, the financial statements. And there's a document in there called the Reserve Study Summary.

WILLIS: Ooh, sounds complicated.

SCHURENBERG: Well, it's not, it's not, really. What you want to look for is the amount of money that the homeowners' association is going to have to pay out for big repairs, versus how much they've saved. You want to see a reserve that's at least 70 percent funded.

WILLIS: OK. Any other financial guidelines when I'm evaluating all these documents you could suggest?

SCHURENBERG: Well, I'd veer away a little bit from the financial guidelines too, and also make sure this is a place you want to live. So while you're looking around the homeowners' association, you've pored over the documents, go out and talk to some neighbors who are out in the yard, and see how they like the association, kind of read between the lines of the conversation to see if they're happy to live there, and if they're people you'd like to have as neighbors.

WILLIS: So grill the neighbors, obviously.

SCHURENBERG: That's right.

WILLIS: You've also got to check out the dues and the fines. You want to know how much money you're going to be on the hook for, right? SCHURENBERG: Well, that's right. And you also want to make sure that you're getting fair value for your dues, and that the dues are not higher than for comparable properties in the area, because that can also lower the value of property.

WILLIS: So bottom line, Eric, you're saying you definitely want to investigate all the documents you can get about the association, really comb through them. Should I get a lawyer to help me?

SCHURENBERG: Yes. That's a very good idea. The lawyer can look through any lawsuits that might be filed. You don't want to buy into a homeowners' association where the members are suing each other or suing the association, or vendors are suing. And a lawyer can sort that out for you.

WILLIS: Eric, thanks so much for being with us today.

SCHURENBERG: My pleasure.

WILLIS: Some good news for a change from the federal flood insurance agency. You probably heard last week that the agency said it had run out of money after paying victims of Hurricanes Katrina, Rita, and Wilma.

Fortunately, though, Congress is allowing the agency to borrow an additional $2 billion for a total of $18.5 billion. But there are still questions about whether the money be enough to help all the victims.

Coming up on OPEN HOUSE, missed the real estate boom? Don't worry. There may be another one coming, but probably not where you'd expect. The sticks, they're not just for hicks anymore.

And later, are you shopping for furniture? We'll tell you how to find quality pieces at a decent price.

But first, your tip of the day.

(BEGIN VIDEO CLIP)

WILLIS: Looking for huge discounts on designer furniture? Check out model homes in your area. Sometimes the high-end furniture on display is for sale.

Builders often spend big bucks to furnish homes in hopes of enticing buyers, but once the units sell out, they look to get rid of the furniture and accessories. They may send the furniture to charity, sell it to employees, sell it to their homebuyers, or offer items for sale to the public.

So if you visit a model home and see something you like, ask the salesperson about the builder's policy.

And that's your tip of the day.

(END VIDEO CLIP) (COMMERCIAL BREAK)

WILLIS: We've all heard the talk, it's becoming a buyer's market. Or is it? There's still a place to make money in real estate, and it's not too late to get in. Think boondocks.

(BEGIN VIDEOTAPE)

WILLIS (voice-over): From the scenic farms of Wisconsin, to the wide-open ranges of Texas, to the Iowa cornfields, countryside and farmland may be the next hot thing in real estate.

What's driving the rebound in rural America? Simply put, migration.

KEN JOHNSON, LOYOLA UNIVERSITY-CHICAGO: You have sort of a perfect storm in demography, which could produce a very large growth in these areas.

WILLIS: From 1990 to 2000, the last time the U.S. Census was taken, there was a 10 percent growth in population in so-called non- metropolitan areas. And demographers expect the trend to continue another 20 years, as baby boomers retire and look for land outside their cities.

JOHNSON: This is going to be a big deal in the future.

Only I've talked to a number of large real estate development companies, and they are paying very close attention to these recreational areas, where you've got water, where you've got beautiful scenery, where you've got amenities, golf courses, and other kinds -- skier lodges and other kinds of opportunities. There's a lot of attention being paid to them.

WILLIS: That's meant the most growth in the upper Great Lakes, the Ozarks, the mountain West, and parts of the South and rural Northeast. It's a sharp reversal from the 1980s, when non- metropolitan areas lost population.

But it's not just potential retirement and recreational areas that could trigger the next rural boom. Farms are also more and more appealing to investors.

RENEE HAUGERUD, GALTERE INTERNATIONAL FUND: Farmland is basically going up for three reasons. One, it's undervalued. Two, it provides income. And three, it's being developed. I don't think it's going to take another 20 years to double. In fact, we doubled in farmland in the last two years, and I would say the sweet spot of farmland appreciation will be over the next two to five, maybe seven, years.

WILLIS: And so far, there's no talk of a bubble bursting beyond the city limits.

(END VIDEOTAPE) WILLIS: So which rural markets are the hottest? That's one of the stories covered in the latest issue of "Progressive Farmer" magazine.

Joining us from Birmingham, Alabama, is the editor in chief, Jack Odle.

Jack, welcome.

JACK ODLE, EDITOR IN CHIEF, "PROGRESSIVE FARMER" MAGAZINE: Hi.

WILLIS: Good to see you.

You know, this topic fascinates me, and I know a lot of people out there, they have dreams of buying property out in the country. Maybe they're from that part of the world. I know I am.

But tell me, how -- why are so many people actually doing it, and not just dreaming about it?

ODLE: Well, there's a lot of things going on in that market. I think mostly it's to escape the noise, the pollution, the traffic, the crime rates that you see in the metropolitan areas.

WILLIS: Right. And tell me what they're doing with that property once they buy it. Are they necessarily building a house, or are they using it for hunting, other things?

ODLE: Yes, there's a lot of different reasons. Obviously, building a house, if they want to live there, either as a weekend retreat or full-time. Recreational land, hunting, also being able to ride four-wheelers, just to own a piece of America.

WILLIS: Now the old ATV. Let's talk a little bit about cost, because you can get in at what looks like a bargain-basement cost compared to other places.

ODLE: Yes. That's true. That's true. Prices can range anywhere from, you know, $500 an acre up to $10,000 an acre, depending on where you're purchasing the land.

WILLIS: Well, let's get specific about prices, because in your magazine, you looked at the 10 hottest rural markets, starting with Ohio, which really shocked me, because Ohio, overall, isn't placing anywhere when it comes to national appreciation rates. So tell me, what's going on in Ohio? Where are people buying property?

ODLE: Well, typically, they buy property around the rim of the larger metropolitan areas, whether it be Cincinnati, Columbus, Cleveland, that's -- those areas. And they're close enough to the city to have all the amenities of the city, but they still have the tranquil country life that they're looking for.

WILLIS: You know, Texas is an interesting market. I know that investors are competing, really, with ranchers for property right now. What's going on with prices? ODLE: Well, pretty much the investors are winning that battle with the ranchers. They're willing to bid up the prices, particularly in certain areas of Texas, east Texas, the hill country of Texas. Those areas, prices have really taken off.

WILLIS: And Wisconsin, this was a big surprise to me. This is one of your big picks. Why?

ODLE: Well, again, we're seeing people wanting to live that rural lifestyle. Prices in Wisconsin are going up 5 to 10 percent a year, and the range in prices are in the $3,000 range per acre.

WILLIS: Wow, that it -- You know, I think that sounds like a big deal for a lot of people who live in cities.

Let's talk a little bit about developing this land, though. If you buy what is essentially, you know, an empty piece of property, there are a lot of development costs. What do people need to know, Jack?

ODLE: Well, there's a lot of things. Obviously you would want to have a survey of your property to make sure that you're -- where your property begins and ends and where the fence lines are. You would want to have information on the -- whether you're connected to a rural waterline, or whether you're going need a well for your property. You would want information as well as it relates to an environmental audit to make sure there's no hidden environmental problems like a dump, a chemical dump, or something, on your property.

WILLIS: You know, another consideration -- quickly, we don't have a lot of time -- I know security is a big deal. I talked to a fellow this week who said he had six ATVs stolen from his rural piece of property in Alabama. What do you do?

ODLE: Well, that's a challenge, it really is. Obviously, the best thing to do is to make sure that they're locked up and secured as best you can. If you live on the property, it's-0 you're a lot safer as far as protecting your property. But if it's a weekend retreat, that makes it difficult.

WILLIS: Yes, it sure does.

Jack, quickly. I just want you to tell people the URL for your Web site, because "Progressive Farmer" has a great Web site.

ODLE: Yes, it's ProgressiveFarmer.com. It's pretty simple.

WILLIS: Makes it easy. Jack, thanks so much for being with us.

ODLE: OK, thank you.

WILLIS: Hey, there, couch potato, take a look at that sofa you're sitting on. Is it in good shape, or could your furniture use a quality upgrade? We've got advice on buying the best furniture.

But first, here are the mortgage numbers. (COMMERCIAL BREAK)

WILLIS: Welcome back to OPEN HOUSE.

With the holiday season upon us, you may be looking for a few extra pieces of furniture to make your guests feel comfortable. But among the many choices, how do you find quality?

Joining me now is Jennifer Litwin. She's author of "The Best Furniture-Buying Tips Ever."

You say, start by looking at the legs of this upholstered piece.

JENNIFER LITWIN, "THE BEST FURNITURE-BUYING TIPS EVER": That's right. All -- the underside always gives away the construction of the piece. So make sure that the legs are applied to the frame using hot glue. If you see screws or any open space, that means that there is the chance that the piece will loosen over time.

WILLIS: Is it kiln-dried hardwood we're looking for?

LITWIN: Kiln-dried hardwood.

WILLIS: Explain that to me. What does that mean?

LITWIN: It always put me in a tongue-twist whenever I do that. But it is actually the sturdiest frame that you can buy on any upholstered piece of furniture. And it really is good, because that will allow it to stay strong, but give it a little bit of give.

WILLIS: All right. Now, I know you want to talk a little bit too about how these pieces of furniture are constructed. And you say, what, no staples?

LITWIN: Absolutely. One of the places that manufacturers will cut corners is by putting staples in the back or the underside of the cushion. And that will cause the piece to -- the fabric to move over time and loosen. And you don't want that to happen, especially if you've got little kids jumping on the furniture. You want to know that it's going to stay put. So you want to instead use ...

WILLIS: Absolutely.

LITWIN: ... hot glue.

WILLIS: So hot glue, no staples. We're starting to put a list together here.

All right, Jen, let's talk about this wood furniture. Whether you're looking at a chair or you're looking at an entertainment hutch like this, you say tongue-in-groove construction is essential. What do you mean by that?

LITWIN: Absolutely. Those are the cut-out puzzle-looking pieces that you see, where the front, the facade of the drawer meets the sides. WILLIS: OK.

LITWIN: And that just gives it a little added durability and strength. And look for the ...

WILLIS: Do you want it here and in back. ..

LITWIN: Yes.

WILLIS: ... or just in front?

LITWIN: No, front and back, because the back part is -- you know, can fall apart just as easily as the front part, and you want to make sure it's grounded all the way around.

WILLIS: Makes a lot of sense. What about particle board? I know a lot of people say that's a bad thing. Do you agree?

LITWIN: I think particle board is often bad, and I think the biggest misnomer in this industry is, you think you're buying something like solid cherry wood, only to find out when you bring it home that it was actually a combination of materials. And one of those materials was particle board. You don't want to see particle board, because...

WILLIS: Why?

LITWIN: ... that can make the fabric -- or, I mean, the piece weaken over time.

WILLIS: Because it's not as strong as a solid piece of wood, right?

LITWIN: Right.

WILLIS: OK. You wanted to talk about glides too. Now, what should they be made out of?

LITWIN: I prefer wooden glides. Wooden glides stay still over time and help the piece move in and out, the drawer move in and out more easily. If you have metal, metal can warp over time, and it can get bent, and ...

WILLIS: And that's why you can't get the drawer in and out really easily...

LITWIN: Right.

WILLIS: ... right?

LITWIN: Right.

WILLIS: Let's talk about some bigger issues with furniture. Lot of people, they want to buy furniture because it has a big brand name. Maybe it has a big designer name. Is that always the best way to go? LITWIN: No, absolutely not. Just like with fashion designers, Gerri, furniture designers often have many different product lines, and that's something that people don't realize. They're a little nervous to shop for furniture, so they think that they should shop brand names. And even in the big lifestyle chain stores, you'll find that, you know, they may not have the same product line that they would have in different local retail stores.

WILLIS: Now, I know you have some problems with the big box retailers, like Pottery Barn, some of the others, concern being that you can often get these as a furniture where they aren't replacement parts. Why is that?

LITWIN: Many retailers are selling furniture that's actually been discontinued. It is a huge problem, because when you want to get replacement parts later, you find out, Well, we don't make that piece anymore, so we can't give you the replacement part.

WILLIS: But Jennifer, that's why you have the big sales, the 40 percent off and the 50 percent off.

LITWIN: Right, but very often these pieces are full retail price. The big question to ask the retailer is, Will this piece be available in six months? And if it won't be available in six months, you don't want to buy it.

WILLIS: Stay away.

LITWIN: Stay away.

WILLIS: Jen, thanks for being with us today. I appreciate it.

LITWIN: Thanks, Gerri.

WILLIS: OPEN HOUSE will be right back.

(COMMERCIAL BREAK)

WILLIS: Another word on buying that dream place in the country. Whether you want a mountain retreat or a recreation getaway, just remember, the costs of developing that property can be high, much more than what you'd pay in town. The land, putting in all the water, the septic, the telephone services, plus grading, pulling out the trees, that can run you 25 to 30 percent of the total cost of developing a property. In other words, buyer beware. For more, read my column in "Money" magazine's January issue.

And finally, we talked a lot today about getting in on the ground floor of the next real estate boom. Well, here's one opportunity that's out of this world. A group called the Lunar Registry says it's offering land on the moon. For just $18.95, you can get your own piece of lunar paradise plus a registry certificate, and even satellite photo of the place.

Naturally, the group has a Web site, LunarRegistry.com. But wait, there's more. The group wants to create an independent nation on the moon. So how's that for a real estate opportunity?

Don't forget, we want to hear from you. Send us your comments, your questions, and I'll answer the best ones on our show. You'll find more on today's guests and topics on our Web site, cnnmoney.com/openhouse.

Thanks for watching OPEN HOUSE. We'll see you here next week. The day's top stories are up next on CNN Saturday. Have a great weekend.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com