By now I’m sure most investors and homeowners have heard horror stories about buying and/or living in a homeowner’s association (HOA). GEICO even made a commercial on the topic. While the commercial seems humorous, there are far too many stories out there that are akin to the skits in the commercial.
Other horror stories I have heard revolve around being hit with large special assessments or finding out the HOA is involved with a lawsuit, usually due to actions of the Board of Directors and/or its management company.
If you are considering a property within an HOA, upfront homework is a must in order to minimize any after-purchase surprises.
A few items to look for:
· Look at the Covenants, Conditions and Restrictions (C.C.&Rs), as well as published policies, procedures, and bylaws. You look at these documents, so you have a better idea of what the HOA is charged with enforcing and what maintenance issues for which they are responsible. For instance, who takes care of the roofs and building exteriors, including paint, dry rot, termites, and even landscaping. While having the HOA take care of these routine issues, no two HOAs are the same for which they are responsible.
· Ask for their financials. Specifically look at their reserves and the most recent reserve study, which is required to be done a minimum of every three years. How well funded are their reserve accounts? Usually, 70-100% is considered good. Less than 70% will likely lead to future special assessments or large monthly dues increases.
Note: HOA reserves are portions of the monthly dues that are held back in separate accounts for current or future maintenance and/or repairs. This can be anything from roofs, paving, lighting, shared facilities such as pools, saunas, meeting rooms and the like.
· It is very important to see if there are any restrictive usages as a rental. For example, I’ve seen some HOAs restrict the number of rental units (non-owner occupied units). For investors, this is a big concern, because you don’t want to buy something to rent out and find out you can’t. If you are buying for yourself, it could also limit possible buyers down the road when you want to sell (or possibly rent it out) and move on.
· Look at the past year or more of HOA meeting minutes. This could give you some insight into HOA and Board of Directors (BOD) actions and activity, and how they manage and address issues and complaints. Some BOD have been noted to be zealous, overly controlling, onerous, and/or difficult with to deal.
· Ask “Is the HOA currently or in the past five years involved in any lawsuits?” Find out what the lawsuit(s) was over and if the HOA is or had to make a payout and/or settlement actions.
This by no means is an exhaustive checklist to work through. Every purchase is different, but these are areas to start looking at.
To give you an example of doing the homework, in a recent deal I was aware of, the prospective property was a beautifully maintained condominium in an HOA. However, as documents from the HOA arrived and were poured over the HOA was looking at a massive shortfall in their reserves, to the tune of $500,000, to pay for a long overdue roof replacement, tenting for termites, dry rot repairs, and so on. That amount did not include bringing the reserve fund up to acceptable levels. I’m not sure how 30 homeowners will be able to afford what was estimated to be $1500 per month special assessment for the next three years, but this is the kind of red flag you should look for in the HOA records.
Lastly, take a walk through the HOA’s neighborhood. See how everything is maintained. Strike up a friendly conversation with the neighbors. You can get a lot of insights and it can help you feel if this purchase in this HOA is right for you.