By ProfessorBaron.com | Zillow – 1
hour 58 minutes ago
When purchasing real estate, you
might be one of the 25 percent of people who purchase a property in a common
interest development, which is more commonly known as a homeowners association
(HOA). And while all properties have issues, HOAs have a unique set of additional
operational, legal and financial issues that a buyer must consider, analyze and
review in conjunction with their purchase.
Because there are many horror
stories associated with HOAs, some people won’t even consider buying into one,
and I understand that. For me, I actually prefer properties that are in HOAs,
but it’s just a personal choice for an individual to consider.
Today we will note a few HOA horror
stories. Keep in mind that most of these stories would never have occurred if
the buyer had just done their proper due diligence by reviewing the HOA
documents, financial statements, reserve studies, demand statements, and
CC&Rs (covenants, conditions and restrictions). Each of these items would
offer insight into “issues.” It is your responsibility as a buyer to perform
the proper due diligence to avoid purchasing into a disaster of a common
interest development community.
Ka-ching:
Special Assessment of $7,500 three days after closing escrow
Did you hear the one about the
couple that didn’t read the condominium board meeting minutes and notes about
the $850,000 construction defect issue that needed to be repaired and would
cost each unit about $7,500 in special assessments? Yup, it was noted
extensively for months before this couple purchased, but didn’t read the stack
of documents related to their purchase that came from escrow. So they didn’t
know about it until the first board meeting, three days after they closed.
Tip: Read the board of director’s meetings minutes to help
uncover potential assessments or other issues.
Surprise!
Buying a rental property that you cannot rent
Many communities are limited to the
number of rental units that can be in the property. Once that threshold is
crossed, no other owners can rent out their units until other units convert
back to personal residences. In this example, a woman I met put down $20,000
cash on a condo, but didn’t read the CC&Rs. She closed escrow on a $100,000
unit that she planned to lease out. Unfortunately, the board blocked her from
doing this because of the rules in the CC&Rs. Unfortunately for her, she
lost the unit to foreclosure about 12 months later.
Tip: Read CC&Rs to understand restrictions such
as this one. A simple request to the board or management company would have
uncovered the problem, and this woman could have terminated her purchase
contract and saved $20,000!
Limited
parking space: Compact cars only!
This horror story deals with a
man who bought a high-rise unit in an older building. His designated parking
space was next to the laundry room door. Due to the proximity to the door, his
unit’s parking space was restricted and he was not allowed to have a car wider
than six feet. Luckily, he drove a smaller car, so it wasn’t an issue. But if
he had an Excursion, it would have been a major problem.
Tip: Read your HOA documents thoroughly. Walk around and observe
everything about the property you are buying.
Speechless:
HOA fees greater than mortgage payment
Another call I received was from an
individual whose HOA fees began to exceed his mortgage payment. He lived in a
restricted income unit that he bought, so the price was low and affordable.
But, a couple of years in, the older building had capital items that needed to
be replaced, such as a roof and elevator. HOA fees skyrocketed and as a result,
his fees went above his mortgage payment. He wanted to know if there was any
government agency that could help him fight the HOA, which of course I
explained to him that it’s a private entity, he’s an owner, and he’s
responsible via HOA fees, to cover a percentage ownership in the building.
Tip: Read and understand the Reserve Study, which could’ve tipped
him off to upcoming to upcoming repairs and replacements.
Pool,
clubhouse, common facilities foreclosed upon
Lastly, this story is about an HOA
where the developer built the residential units on one lot, and the clubhouse,
pool, common areas on another lot. The pool/clubhouse lot had a separate loan
that went into default, and an investor group bought that lot/pool/clubhouse at
foreclosure. As a result, they started selling pool memberships to community
members in the adjacent neighborhoods.
Tip: Read the community governing documents, which would’ve
revealed the recorded map, plat, or plan for the community.
Yes, HOAs can be a huge benefit to real
estate ownership, but they are complicated animals and one must understand the
risks of common interest development ownership. And most important, mitigate
those risks by reading and analyzing all the documents before you close escrow!
Leonard Baron, MBA, is America’s Real
Estate Professor®.