Monday, July 1, 2013

Homeowners' Associations Pt.2

The first post on Homeowners' Associations (HOA) was kind of general. So's this one, likewise intended to get people to--if not like and embrace HOAs--at least understand and respect what they do.

When I was a licensed broker, one of the statements many other brokers made--and placed in their listing advertisements and ticked me off--was the statement. "No HOA fees!" Touting the absence of fees might make the sale easier, therefore paying the broker, but the absence of HOA fees is usually not in the buyers' interest.

It's true that HOA fees tacked on to a house payment impact the ratios lenders use when determining the borrower's mortgage amount: The lower the fees, the bigger the mortgage, and the more house the borrower can buy. And less underwriting hassle!

When we first arrived in Denver, we made an offer on a home that's typical of those proclaiming "No HOA fees!" It was unit one of a two-unit townhome--new, terrific neighborhood, attractive building and lot with an upgraded interior. My first few thoughts were these: What happens if the neighbor lets his landscaping die, or worse, removes it? What if the neighbor paints his trim shocking pink? What if the neighbor develops a roof leak (we shared a common roof) and didn't fix it?

The answer(s)? Not much. The property had a short agreement attached to the deed that neighbors were supposed to fix stuff and keep it repaired, but there was no enforcement mechanism. We withdrew our offer.

An HOA would have solved the problem. It would have contemplated nearly everything that could have gone wrong and created a way to enforce it. It also would (likely) have created a fund for repair and maintenance of the roof.

Larger townhome developments usually go even further and set up funding for window, wall and deck repair and maintenance. It's a great deal for the owners who, in effect, save monthly for future repairs. And when it comes time for rare but costly problems such as construction defect lawsuits and remediation, rowhome owners have a much easier time pursuing their interests than owners with no association.

Condominium owners are in a similar situation, with a huge difference. Unlike individual rowhome owners, condo owners do not own their buildings, but instead own a fractional interest in the building and common area. Read here for the difference between condos and rowhomes--it's night and day.

 However, Condominium Owners Association (COA) boards, because of the nature of common ownership, are more powerful than HOA boards. A suit against an individual condo owner could easily impact the entire association, and actions of the COA board can seriously bind individual owners.

For example, say a COA board borrows money to install a swimming pool, with repayment coming from COA dues, and a significant number of owners don't pay. The lender can sue, and if it wins, the remaining owners will have to pay the deficient amount caused by the non-paying owners. This situation could not happen in a rowhome or single-family detached HOA unless each owner assigned her or his individual rights to the HOA.

People buying rowhomes in a HOA should be careful with their homeowner's insurance providers. Too many insurance agents are not aware of the difference between condominiums and rowhomes and give the rowhome owner a condo policy, which may not be enough in the event of a large claim. An insurance provider needs to correlate the individual owner policy with the HOA's policy to be sure one starts coverage where the other leaves off.