What You Need to Know about Home Owners Associations

October 16, 2012 — Few topics can generate strong opinions like Home Owner Associations (HOAs). There are people who have a visceral reaction to them, while others see them as a necessary and beneficial part of living together in a community. In today’s update to our original 2009 article, Joe West, one of the most knowledgeable people in the country on HOAs and CEO of Community Associations Network, shares his expertise on the basics everyone should know before they commit to living in any community governed by an HOA. Of particular interest is Joe’s shares latest assessment of how the recent real estate crisis has affected community associations, and how that affects your decision to buy into a community.

The article is the 2nd of a 3 part series of articles on homeowners associations. The first article, “Meet the New Boss, Your HOA”, talked about many of the problems to be of aware of concerning Home Owners Associations. Part 3 focused on “What You Need to Know When the HOA Takes Over from the Developer“.

TR: What’s the first thing we should know about Home Owners Associations?
Joe: The first thing that you need to know is what the association is responsible for and what you, the owner are responsible for. Sometimes the terminology can be confusing. In a condominium association, generally the association takes care of everything from the perimeter walls out, including roofs, siding, roads, lawns, etc. In a Homeowner or Property Owner association, the association generally takes care of the common areas, which may include roads, gates, amenities and so on. They usually don’t take care of the home or structure, itself. However, this will vary from association to association and from state to state. In some states, the media and owners often refer to both types as “HOA’S”, even though it may actually be in a condo. This is why it’s so important to read and understand the documents, sometimes called “CC&R’s” (Covenants, Conditions & Restrictions) or Master Deeds & Bylaws. The generic term “Community Association” covers all of the forms of associations where membership in the association is mandatory. Unfortunately, laws governing the nation’s estimated 270,000 residential and commercial HOAs are confusing and sometimes non-existent. States like California and Florida have extensive laws governing them, but many other states have just a condominium law or a poorly written, often amended HOA law. As we shall see, the absence of clear legal guidance can be a problem.

TR: Joe, what is your number 1 piece of advice for anyone buying into a development with an HOA?
Joe: That one’s easy – Don’t fall in love with the house before you check out the association. You have to be comfortable with a few important things: the rules that you will have to follow, the people governing the organization, and its finances.

TR: Could you give us an example of why that’s important?
Joe: Sure. Especially today, because of the economy, there are some community associations where a significant percentage of the owners are not paying association dues. What that means is that at least in the short term, the remaining residents will have to make up for that by paying higher fees and special assessments. The people who live in condos generally understand that the building has to be maintained and that there will be expenses required to keep it running. But in HOAs, particularly those with predominately single family homes, the new residents don’t realize the scope of the infrastructure that has to be maintained – roads, landscaping, recreational facilities, etc. That requires money, but the benefits aren’t always visible. Similarly new residents are usually not prepared for the amount of HOA control they are now under. After years of living in the suburbs where their home is their castle, many become upset when they realize that exterior colors, fences, decorations, and improvements will be tightly controlled in their new community. One of the key areas that is often overlooked when someone is moving into the association is, how does the board govern? The basic rule of associations’ is that good boards make good associations – bad boards make problems. Make sure you read the minutes of board meetings before you move in (at least a year back) and once you live there, pay attention to what’s going on and who you elect.

TR: To be better prepared, what steps should a new buyer take before entering into a contract to buy a home with a Home Owners Association?
Joe: The first step is to gather the information to help you assess the HOA. Unfortunately that’s not always easy. In many states, the HOA is often prohibited from providing a new buyer with information directly. So anything you get will have to come from the seller. You should ask for the HOA master deed and by-laws (governing documents), recent minutes, and financial statements at a minimum. While some states, like Virginia, have strong disclosure rules protecting buyers, many other states have no rules at all, even though disclosure is in everyone’s best interest.

Secondly, you either have to read and understand these documents yourself, or hire a lawyer, financial planner, or accountant to review them for you.

Third, if the seller unreasonably delays getting you the documents, or won’t provide the information you asked for, be prepared to walk away. There is probably a reason why they won’t, a reason you want to stay away from. At a minimum you can get some of this information by going to the local office where deeds are recorded and ask to see the restrictions and covenants that are attached to the property. Unfortunately, the minutes and financials (last audited financial statement, current year-to-date financial statement and current budget) will probably have to come from the seller.

TR: What are the types of issues that cause the most problems in HOAs and condo associations?
Joe: First, let me say that the vast majority of these associations are well-run. They take care of problems and they maintain their properties. The problems we see among community associations usually come when they are not proactive, instead reacting only after an issue has arisen. There are many problems that can occur in a community, because you are dealing with people and their “castles”, but most of them can be avoided with planning and oversight. More problems are coming up all the time, and associations need to be ready for them. Since the advent of the Internet, a issue in Florida can and will become an issue in New Hampshire at lightning speed. A recent case in Chicago, where a Jewish couple’s mezuzah was prohibited on the exterior condo doorframe (a common area), is a good example. That case led to a discrimination suit because Christmas wreaths were allowed on doors. Thanks to the Internet, it quickly became an issue for communities across the country. Pro-active solution: What can or can’t be placed on a common area needs to be thought out in advance and take into consideration our multi-cultural, multi-religious society.

Another big problem is not being pro-active financially, which means planning ahead and establishing reserve funds. Condo associations generally understand the need to plan for and adequately fund reserves, but often HOA’s ignore or underfund them. If the board never gets around to setting up a reserve for their maintenance or replacement, a big assessment will come out of the blue some day and cause much heartache.

Lastly, lack of transparency is a frequent HOA board problem. Meeting minutes should be quickly and prominently posted. Members of the community have a right to know what is going on and have the ability to provide some type of input. Associations should have newsletters and a web site to provide solid information on a timely and continuing basis.

TR: Joe, many community associations have been through a gut-wrenching few years with so many foreclosures, short sales, and residents not paying their dues and fees. How have associations weathered this storm, and are there are any new lessons that prospective home owners in a HOA/Community Association property should keep in mind?

Joe: Associations are a microcosm of society, and so, have weathered the economic storm the same way society did. Most survived and some hit real hard times. Those that survived did so in a variety of ways, and here, a potential buyer has to be extra cautious. Some associations got through by severely cutting maintenance, management, insurance and other expenses. Some stopped funding, or even dipped into capital repair and replacement reserves. Eventually, they are going to have to pay the piper, with significantly increased assessments, so you will want to take a good look at how they managed their finances over the past four years. If you’re not sure, find someone who understands the ins and outs of association finances and have them go through the reports.

The associations that really got hurt were those just starting new sales when the recession hit. The first few buyers have found themselves stranded and looking at trying to maintain a built-out (or partial) infrastructure, with the developer bankrupt and gone, and no one able or willing to help with the costs that were supposed to be spread among many more owners. This was really tough for those in mid- and high-rises, where the common area costs are generally much higher. Some found themselves without elevators, electricity, security and many of the other things they expected to enjoy when they moved in. Avoid these until you’ve confirmed that a successor-developer has taken over and committed to finishing out the project.

The rules about what to look out for when buying in a community association are the same, but the importance of really examining and understanding them has to be emphasized even more. Don’t buy where you can’t get all of the information, and make sure you know exactly where the association stands financially.”

TR: Thanks Joe, we appreciate your advice.

For Further Reference:
CommunityAssociationsNetwork is the largest free website for information for condo and HOAs. This site thousands of helpful links, newsfeeds that link to breaking news affecting HOAs from 30-40 legal blogs, and a very helpful newsletter.

Part 1: Meet the New Boss, Your HOA
Part 3: What Happens When the Developer Leaves and the HOA Takes Over

Comments? What do you think are the big issues affecting life in a development with an HOA? Have you had actual experience with an HOA, either in helping to run one or as resident governed by an HOA? Share your opinions in the Comments section below.