Homeowner Associations: Another Housing Minefield

The housing crisis keeps finding more ways to bite homeowners in the butt. The Arizona Republic has a couple of good articles on the problems that homeowners are facing with their homeowner associations.

For those of you unfamiliar with the concept, most new subdivisions in the Sunbelt are governed by homeowners' associations, or HOAs. These associations are responsible for the maintenance of the common areas of the subdivision. Often that amounts to no more than a border fence and a small amount of landscaping but in some it includes parks, playgrounds, community centers and swimming pools. Fees for each homeowner can range from a couple of hundred dollars a year to as much as $200 or $300 per month. Many cities now mandate that any new subdivision include a HOA and that it construct parks, bike paths and other recreational facilities thus relieving the municipalities of a burden they used to shoulder.

The problem is that many of the HOAs are now going belly-up. Why? There are actually a couple of reasons.

Typically a builder will retain control of the HOA as he completes the subdivision. The builder is responsible for paying his share of the HOA dues until a certain portion of the homes are completed and sold. Then the builder turns the HOA over to the residents. This is usually accomplished when enough homes have been sold to ensure that the homeowner base is sufficient to cover the budgeted operating expenses of the HOA. That works great so long as the project goes well and the homes get sold. When that doesn’t happen the whole scheme falls apart.

National builders almost always form subsidiary companies to build a subdivision. That gives them an out without imperiling the parent company should things go wrong. If the subdivision is going badly, they just BK the subsidiary and move on. As we all know things went badly, so they folded their tents and took off. Of course, that means no one is paying the builders' share of the HOA dues so all of a sudden the carefully planned budget isn’t worth the paper it's written on.The existing homeowners find themselves stuck with maintenance expenses that far exceed the revenue stream generated by the base of owners.

Now in some cases everything went well. The homes were sold, the HOA was turned over as agreed and the budget worked. Then the world as we know it collapsed and homeowners in the subdivision started losing their homes to foreclosure and others were so strapped that it was all they could do to maintain their monthly mortgage payment. Once again the carefully crafted budget for the HOA is torpedoed by a lack of revenue.

So now, whether it was because the builder ducked out or because the base of homeowners declined, those that are left are looking at hefty and sometimes crippling increases in their HOA dues. In many cases, the subdivision’s common areas aren’t being maintained, which often leads to enforcement orders from the municipality in which they are located. Of course, the way out is to sell the homes and generate new revenue from those residents, but the overhang of potentially large HOA assessments and often the unkempt appearance of the subdivisions discourages new buyers.

As banks take over these projects and attempt to resell them, they are taking some steps to clean up the developments that have gone to seed and in some cases working with the HOAs to get them back on their feet. Sometimes but not always. In the meantime, any buyer needs to be aware of the potential land mines that HOAs can present and do a lot of homework before they buy.

more:

here

and

here

Comments

[billddrummer:]

In Northern NV, many HOAs are filing NODs if the developer defaults on the payments during construction. That led to a spike in NOD filings for October, as the number of NODs rose by 25%--virtually all because of NODs on individual lots covered by HOAs.

This further clouds an already messy situation, as developers are having trouble getting lots finished, not to mention homes built and sold. With spec financing a distant memory, cash flow for builders a fiction, and new home sales crashing (still), next year looks to be as bad, or worse, than this year was, for new homebuilders.

2008 Dec 22 06:13 PM

[kurt walter:]

I know about a local new townhouse development with 150 units. After 2 years the builders still have 70 empty units. Thus far the builders are paying the monthly HOA fee on the 70 empty units. But, how long can they continue to do this? The 80 current owners must be sweating it out. At some point the current owners are going to have to pay almost double the monthly HOA fee to cover expenses for 150 units. Or they will have to make a drastic cut in expenses.

2008 Dec 23 01:31 PM

[notsosmart:]

its important for lawyers to advise their clients before closings of this peril.

2008 Dec 23 04:01 PM

[yk00002:]

HOAs are a nuisance. That is what we have a municipality for. They get into stuff they should never get into. Hundreds of dollars per month means that the HOA is running commercial level facilities. The builders usually like that, it sells the houses, but the new homeowners don't understand the implications. Many HOAs should not exist.

2008 Dec 23 04:38 PM

[billp37:]

Homeowner Associations blog

ahrc.com/new/index.php...

2008 Dec 23 08:04 PM

[mke039:]

HOAs are a blight across the country. Developers and Municipalities get something for nothing. Homeowners are left holding the bag. There is zero disclosure about the potential problems to folks who think they are just buying a home. Worse, lawyers and prop managers have a lobby that fights to maintain the status quo. They even brag about how they fought laws that would allow homeowners to fly the American flag! HOAs are litigation vortexes; money in the bank for these vendors on the payroll of associations. Pulte homes found that people under 50 want nothing to do with them. They will eventually all be vacant wastelands.

2008 Dec 25 08:18 PM