Saturday, March 1, 2014

Homeowner Associations

Understanding Homeowner Associations 
For the Home Buyer

You are purchasing a home which is part of a homeowner association.

  • Did you pay attention to the information on the "Residential Property and Owner's Association Disclosure Statement"? 
  • What did you do with that information? 
  • Did you take any actions? 
  • What do you need to know? 
  • What do you need to do? 

The first thing is that your perception of a homeowner association may be drastically flawed. Most people, including many real estate agents, are very confused about this entity. The flaw is that you are convinced it is someone or something other than YOU. Let me start with a simple action for you to follow. Leave wherever you are, go to the bathroom, stand directly in front of the mirror. Look very closely at the image in that mirror. Now, stick out your right hand and shake hands with your homeowner association. IT IS YOU!

Let me make it very clear that all of those obligations for your home, you may have thought you were passing off to others, you are NOT. You are simply passing them off to yourself in another form. None of your obligations change they are only shared with others with similar obligations and concerns for their adjacent homes and amenities which may be part of the overall facility. The cost remains YOUR responsibility. Because you purchased this home you are now obligated to deal with the homeowner association. That includes being involved with the group saving pooled funds for future needs, borrowing if necessary and paying all of the obligations required. You and your group can choose to put enough money in every month to cover the expenses and save for future expenses. Or, you will be obligated to cough up your share of what is needed when due. Or, borrow as a group and increase everyones monthly obligation to cover the cost of paying the money back with interest. No matter how it is handled, now or later, all of the expenses ultimately come from your bank account. Don't even begin to imagine that you are passing anything off to anyone. You are not.

Ten things every home buyer should know!
  1. Do your homework before you make an offer! Don't buy the perfect dream home in the neighborhood from hell. (Didn't do that? Start NOW.) 
  2. Know who is in control. Almost always the association is a non-profit corporation and is governed by a board of directors. This is either the declarant (developer/builder) or elected residents. Only 20% of associations contract with a professional management company for day to day operations.
  3. Know if your association is pre or post transition. The process of transferring control from the developer to the association residents is called 'transition'. The developer has wide latitude to amend the documents and change development standards when in control. 
  4. Ask for and read the governing documents before making an offer. (Didn't do that? Do it NOW!)
  5. Ask for and review the associations financials. - Review the operating budget and make sure the reserves fund is adequate for future capital projects without special assessments.
  6. Know the associations fees (assessments) are required and that the board usually has the authority to impose special assessments.
  7. Know that you have to live by the rules, or in the alternative, gain the support of the community to amend the governing documents and rules.
  8. Know that the board has the power to assess fines, restrict access to services, place liens and foreclosure.
  9. Know that HOA laws vary widely by state and are complicated. Right or wrong, lawsuits are expensive, time consuming and stressful. Better to educate yourself rather than becoming involved in a lawsuit. 
  10. Don't be a whiner if you don't do your homework and purchase in a community with HOA issues. Your alternatives include:
    • Accepting the issues
    • making things better by becoming involved
    • filing a lawsuit, or
    • moving
Want to have a better understanding of what it is, how it happened and how it works? There is more detail below.

This information was extracted from: "Guide to Understanding Homeowner Associations" prepared by HOA-USA. For a complete copy of the document click here. Everything was not included here.

What is a homeowners association? 

A homeowners association is typically a non-profit corporation that is created by a developer when a community is in the planning stages. Membership in the homeowners association is mandatory, and you automatically become a member upon purchasing your home. The association is governed by a board of directors which initially is the developer and his representatives. Control of the association remains with the developer until a specified percentage of homes are sold (usually 2/3 or higher). The developer then transitions control to a new board of directors which are elected by the residents.

Each homeowner association has its own governing documents in the form of restrictive covenants, bylaws, architectural guidelines, rules and regulations. The restrictive covenants, prepared by the developer, are filed on the deed records and are legally binding. The restrictive covenants are intended to define the standards of the community for the purpose of protecting property values.

Many homeowner associations benefit from shared amenities such as pools, tennis courts and clubhouses. Some have marinas, stables and even landing strips for small aircraft. The cost of operating and maintaining the community amenities, as well as other expenses, are paid by the members in the form of assessments. The assessments are mandatory and failure to pay them typically leads to fines, restriction of services, property liens and can ultimately include foreclosure. Associations should also set aside funds for large capital improvements such as: painting or roofing in a townhouse community; repaving of streets and parking areas; or replacement of mailboxes and street signs. When associations do not set aside adequate funds, residents usually have to pay special assessments, which can be in the thousands or even tens of thousands of dollars.

What is wrong with the homeowner association model?

The wrong developer can doom the community to failure before control is ever transitioned to a resident elected board. This can include intentionally keeping the assessments too low in order to sell the homes and granting requests to vary from the covenants.

Unfortunately, many first time homebuyers never receive or read the governing documents. Unkowningly, they break the rules and run afoul of the association. And of course, there will always be some residents who knowingly violate the covenants, break the rules and challenge the board. In today's electronic age, email and social networking can stir up dissension in a community in a flash. At minimum, most residents do not participate in the association and would not consider serving on a committee or the board. Many annual membership meetings fail to reach necessary quorum in order to conduct business!

The volunteers that serve on the board may lack the time and/or the expertise to properly govern the association. Board members are neighbors and sensitive to making tough decisions that are unpopular. It's easier to pass the problems on to the next board.

What is right with the homeowner association model?

Recent surveys show that over 70% of residents are satisfied and happy to live in a community with a homeowner association.

These association members want the protection of restrictive covenants and rules to protect the value of their home and community. They do not want an overgrown weed infested yard to stand out in an otherwise well landscaped community. They do not want boats, utility trailers, RV's and commercial vehicles parked in driveways and streets. They do not want their neighbor to build a fence that blocks a beautiful view; much less a do it yourself home addition that goes on forever.

These association members also want the value of shared amenities. They enjoy the pool, the tennis courts and the club house. They value the rules that set standards for conduct.

These association members understand that a homeowner association is a business. It has expenses that must be paid by assessments. These can include the street lights, the pool maintenance, the landscaping, the management fees, the insurance, the cable in the condo and much more. They understand that the association must be able to collect the assessments, even if it means, fines, restriction of privileges, and even the threat of foreclosure. There is nothing wrong with compassion and exceptions in hardship, but a pattern of allowing homeowners to get away with not paying their assessments will lead to financial stresses and larger issues that affect the entire membership.

These association members are involved in their community. They serve on committees or on the board. They attend the annual meetings. They support the board.

Most of this information came from "Guide to Understanding Homeowner Associations" prepared by HOA-USA. For a complete copy including additional information click here.

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