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 buyers must consider, analyze and review in conjunction with their purchase.
Because many horror stories are associated with HOAs, some people won’t even consider buying into one, which is understandable. It’s ultimately a personal choice for a buyer to consider.
These are few of those HOA horror stories. Keep in mind that most of these stories would never have occurred if the buyer had just done 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 who 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 they didn’t read the stack of documents related to their purchase that came from escrow. So they didn’t know about the assessment until the first board meeting — three days after they closed.
Tip: Read the board of directors meeting 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 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 6 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
This story involves a buyer whose HOA fees began to exceed his mortgage payment. He lived in a restricted-income unit, 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.
Tip: Read and understand the Reserve Study, which could have tipped him off 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 and 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. You 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!
- HOA Documents: Are They Worth the Money?
- How Much Paperwork to Buy a House?
- Real Estate Investing: Single Family Home vs. Condo
Leonard Baron, MBA, is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a past lecturer at San Diego State University and teaches continuing education to California real estate agents at The Career Compass.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.