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, or 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!
Location: Stapleton, Colo.
What the homeowner did: Sarah Cohen's 3-year-old daughter, Emerson, drew on the sidewalk using chalk.
The HOA's response: Chalk art potentially offends, disturbs or interferes with "the peaceful enjoyment" of the community and is not allowed. "The association is trying to go down a path of 'do no harm,' " an attorney representing the HOA said.
Outcome: The issue will be brought to a vote at a future HOA meeting. In the meantime, Cohen plans on continuing to let her daughter draw on the sidewalks. "It's summertime, and God forbid my daughter is drawing flowers, her name and hearts," said Cohen.
What the homeowner did: Nick and Jeni Dreis took home a 6-month-old red kangaroo as a vocational training animal for their 16-year-old daughter, Kala, who has Down’s Syndrome.
The HOA's response: The family should “immediately remove the kangaroo from the property, as it is not a household pet nor can it be maintained for any business purposes.”
Outcome: In the wake of widespread public support for the Dreises, the HOA reversed its position. “The letter should never have been sent,” said Jeff Crilley of the Estates of Legend Ranch Homeowners Association. “[HOA officials] were unaware that the kangaroo was being used for therapy purposes.”
What the homeowner did: Planted perennial flowers in her yard. Kimberly Bois claimed she had the plants in her yard before the condo board even existed and had permission from the developer to plant them.
The HOA's response: Sent the homeowner 13 certified letters demanding she remove the plants, starting with a cease-and-desist order and escalating to thousands of dollars in fines and penalties. "It's not about do you like these flowers or don't you," said the condo association’s attorney, Sandy Roberts. "It's a question of was it authorized and is it permanent."
Outcome: Condo association filed a lawsuit against Bois to pay $4,500 in back fines and $8,000 in attorney’s fees.
What the homeowner did: Barbara Cadranel put a mezuzah on the doorframe of her apartment.
The HOA's response: Threatened to impose a $50-a-day fine until the religious door fixture is removed.
Outcome: The condo association agreed that Cadranel could hang her mezuzah and rescinded all penalties and fees against her. It also said it will allow residents to place mezuzahs and other religious symbols on doorframes without requiring advance approval.
What the homeowner did: Tiffany Veloudis built a playhouse for her 3-year-old son, Cooper, who has cerebral palsy, on the instructions of the toddler’s therapist. It cost the family $5,000 to construct.
The HOA's response: Demanded that the playhouse be removed and ordered the Veloudis family to pay $50 for every day the playhouse remains in their yard.
Outcome: After the story garnered national attention, the association decided the playhouse could stay until a solution could be worked out. State representative Richard Henderson has submitted a bill to enable homeowners to build small structures for therapy purposes with doctor approval, regardless of HOA rules.
What the homeowner did: Jodi and Timothy Burr put up a front yard banner supporting their son, Corey, a lance corporal in the Marines who was serving in Afghanistan at the time.
The HOA's response: Told the family it was breaking the HOA's rule prohibiting all signs from public display.
Outcome: The HOA sued the Burrs when they refused to remove the sign. The Burrs argue that other homeowners have signs in their yards, and that the enforcement of the rule is “selective.” They also are trying to meet with the HOA to discuss possible revisions to the rule.