Well over one in five Americans live in a “Community Association” of some kind. That’s nearly 74 million individuals living under the onus of a “Common Interest Development,” otherwise known as a Homeowners Association or Condominium Association.
Anyone who has lived in a community governed by an Association knows there are some pros and many cons.
My realtor asked at our first meeting why every client she had from California was adamant about “No HOA!”
“How many hours do I get to explain?” I replied.
We’ve yet to hold that conversation, but when we do, this is what I would tell her.
The Dark Origins of HOAs and Condo Associations
Community Associations originated as a form of (regrettably) legal housing discrimination back in the 1930s or so. In those days, private organizations could pretty much determine who was admitted without any government oversight or interference. Walking through midtown Manhattan in the 1960s, my mom would matter-of-factly point out “Those apartments are only for WASPs” (White Anglo Saxon Protestants). Another edifice would elicit a comment like “This building is mostly Irish and Italians.” Our own building was mostly Jewish, but for appearance’s sake had a sprinkling of Catholics and Protestants. As repugnant as this situation might appear in 2022, this was a fact of life in many communities in the US until the Federal Fair Housing Act was passed in 1968.
It’s important to know what the earliest Community (and Condo) Associations (and Cooperatives) were like because of some of the unfortunate sentiments that prevailed prior to 1968 live on, just in a different guise.
Community Associations were largely exclusionary prior to the Fair Housing Act and remain so to this day, although the “restrictions” are more subtle and don’t explicitly focus on race, ethnicity, or religion.
Nowadays, Associations focus on attracting the “right” kind of residents in the hope of keeping the “wrong” kind out. The right kind of neighbor might be someone who enjoys playing golf or pickleball, or who likes serious drinking at the Association’s restaurant. And so on. Those buying a home in such a community who deviate from the preferred kind of resident are often shunned and otherwise discouraged from active participation in HOA affairs for the simple reason they might object to how the Community’s precious funds are spent.
Association Politics are Usually Petty and Vicious
The wrong kind of resident might ask why Golf gets 90% of the amenity funding when only a small number of residents play much if at all. (Answer, because the golfers control the Association board and General Manager, making sure they get their way). The pettiness has a truly dark side because an Association can only fund so much, and with a focus on just a few projects and amenities, there’s precious little to go around for other things, like building and infrastructure maintenance. The Surfside, Florida Condo collapse was likely the result of successive boards focusing too much on the wrong stuff and not nearly enough on what really matters (protecting the building from the harmful impact of saltwater, poor construction, differential subsidence of the building site, and other factors). Nearly a hundred lives were lost in that tragedy, a collapse due to incompetence and negligent oversight by successive Boards and Association employees. Other condominiums in that part of Florida are now re-thinking infrastructure maintenance and repair.
Community Associations are Inherently Flawed, and Most are Destined to Fail
The underlying premises of Condo Associations, Apartment Cooperatives, and Homeowner Associations (Common Interest Developments, or CIDs) are flawed because they wrongly assume:
1. The Association’s Board of Directors are disinterested agents whose decisions are made with the CID’s best interests at heart.
Unfortunately, this is rarely the case. It takes a lot of effort to serve on an Association Board. Directors typically have a personal agenda when joining a Board, otherwise, they wouldn’t be willing to serve on it.
2. Directors are qualified to serve on the Association’s Board by dint of their professional background or extensive training by the Association.
Alas, this is usually untrue. Most Directors have little or no relevant background in such areas as accounting, finance, government, or quantitative analysis. Rather, these individuals are often motivated by a desire to demonstrate how much smarter they are than others in the Community and the Association staff.
3. The Association’s staff is extremely well trained and motivated to act in the Community’s best long-term interests.
This may or may not be the case. It depends on whether the Association is “self-managed” with an independent General Manager or run by an Association Management Company. If the former, the GM is usually beholden to the Board for employment and therefore is likely to put individual Directors’ “wants” ahead of the Community’s needs. I once lived in an HOA where the Community’s (often desperate) needs often took a backseat to what certain Directors wanted for themselves and their friends. This parochial focus destroyed the Association’s (and the Community’s) ability to deal with urgent infrastructure issues. Unfortunately, this HOA is currently close to insolvency and likely to enter receivership soon.
Occasionally, a self-managed HOA gets lucky and hires a competent GM, one who tries to do right by the Community. But often that rare breed of professional runs afoul of the self-dealing Board and is fired.
An Association run by an honest, capable HOA-management firm can avoid most of the problems that self-managed HOAs encounter. Such firms hire the GM (who works for the company NOT the Board; the company can be fired by the Board, but this happens less often than in self-managed Associations). Moreover, the better HOA-management firms have trained their GM to a higher standard than those working as “independents.” The GM will train the Association staff (especially the managers), and also train the Association’s Board (or provides educational resources for Directors to learn what they need to know).
How to Choose an HOA
If the house hunter has no other option than property within a community governed by an Association, what are the most important criteria for choosing which one to buy?
First, and foremost, should be the Association’s financial health. A well-funded HOA is usually a “happy” one, while an impoverished one is usually riven with infighting and nasty politics. A well-funded Association is one where the reserve fund is well-endowed and pays for the repair and replacement of critical infrastructure like buildings, roads, and equipment. Do the reserves have sufficient funds to cover any eventuality over the 30-year lifespan of the Community’s infrastructure? A reserve specialist firm can inform the Association as to its financial “liabilities,” and what is required to pay for such responsibilities over the reserve study’s lifecycle. HOA accountants recommend funding the reserves to a level of at least 80%. If the reserves are funded at lower than 50%, “special assessments” (to supplement the regular, annual charge) are very likely. Such extra charges can range from a few hundred dollars to several hundred thousand dollars. I personally know of special assessments at BOTH ends of the spectrum (the more costly ones are often the subject of lawsuits and can on occasion result in tragedy as what happened in Surfside when successive Boards deferred costly but necessary, maintenance due to its high cost.
Besides having well-funded reserves, an Association should be managed by a top-tier management company. The GM should be approachable and have a personality that interacts well with all sorts of folks (for obvious reasons). The staff should be kind and attentive.
The problem with self-managed Associations is the likelihood of a rogue Board operating in collusion with a pliable General Manager and abetted by shifty legal counsel to exploit the Community for their personal gain. Moreover, a self-managed CID makes it much easier for a small group to gain control and induce the Association to further its own interests (e.g., directing most of the discretionary funds to favored amenities, giving lucrative construction contracts to personal friends, and so on).
What Government Can Do
What can be done by governments to protect homeowners?
Because CIDs are (non-profit) corporations, government oversight is lax (or non-existent). If funds have been misappropriated aggrieved members may have to sue the Association, but this strategy is both risky and costly. The Association has legal insurance and deep pockets to defend itself, and rarely loses in court. And while outright vote fraud is rare in governmental elections, it is a common tool used by Boards and GMs to maintain control. The State is unlikely to investigate because the stakes are small (financially) and the Association is a non-profit corporation.
One change that all states should consider is requiring CIDs to be professionally managed by certified companies (who manage more than a single Association). CID management companies have a vested interest in conforming to the law and best practices lest their professional reputation (and revenues) suffer. A Federal law mandating professional management would make this goal even easier to achieve.
What else can be done by local and state governments to improve the HOA situation? Because Homeowner and Condo Associations save county, municipal, and state governments lots of money (expenses like road maintenance, flood mitigation, and security are often paid for by Association members, not local government) these entities should be required to provide formal oversight over how Associations are run (analogous to what the SEC and Federal Department of Justice does for stocks, bonds, and other equities). At present, such oversight is minimal. The primary recourse for aggrieved homeowners right now is to file a lawsuit, an expensive and often ineffective proposition where it’s mainly the lawyers who benefit.
What Homebuyers Can Do
Until such governmental protections are put in place should the serious house hunter do? Avoid buying a property governed by a CID if possible (no assessment, Byzantine politics, or restrictions on the color of your home).
If you have no choice but to buy a home within a homeowner’s association, consult an online resource to obtain detailed information about an Association’s finances and management. Association Insights and Marketplace and Transparency HOA are two such sources of information. Home lenders are beginning to wise up to the risk a poorly managed Association poses to a homeowner. For example, Fannie Mae and Freddie Mac have changed their lending policies to deal with poorly maintained Condominium Associations in response to the Surfside tragedy. Property values in poorly managed Associations could be negatively impacted if lenders discourage buyers from purchasing a home in such communities. This prospect should motivate under-funded HOAs to clean up their act and hire a top-tier management company to guide their path to improvement.
Under the nom-de-plume, Sherlock Homes, I examine residential real estate from the buyer’s perspective (with a forthcoming book about the selling of homes): “House Hunter Confidential,” available on Kindle, discusses some of the issues raised in this article.
Lots of good stuff here, especially
> The underlying premises are flawed because they wrongly assume:
> 2. Directors are qualified to serve on the Association’s Board by dint of their professional background or extensive training by the Association.
> Alas, this is usually untrue. Most Directors have little or no relevant background in such areas as accounting, finance, government, or quantitative analysis.
The Communisty Associations Institute (C.A.I.) - the H.O.A. industry trade and lobbying organization - offers "education" for H.O.A. board members. "Education" which is intended to make it easier for C.A.I. managers, C.A.I. attorneys, and other C.A.I. vendors to use homeowners as their personal A.T.M. machines.
I especially like your suggestion that government - at all levels
> should be required to provide formal oversight over how Associations are run (analogous to what the SEC and Federal Department of Justice does for stocks, bonds, and other equities).
One of the items in my list of policy suggestions - which you can read at https://homeowners.substack.com/p/make-our-neighborhoods-great-again-224 - is
> 7. Explicitly and unambiguously require H.O.A. corporations to regularly produce, file with an appropriate state agency, and make freely available a “prospectus” type document.
The S.E.C. requires publicly traded corporations to do this, so that investors (and potential investors) can make informed decisions about their investments.
There is no reason that investors (and potential investors) in H.O.A.-burdened property should not have easy access to such information so they, too, can make informed decisions about their investment.