Despite a few changes in law in such states as Texas and Arizona, Homeowners Associations are developing an increasingly bad reputation because of the ongoing spate of news stories about homeowners abused by the HOA system. Homeowners wrongly believe that HOAs are created to maintain property values and help homeowners get along with each other. Nothing could be further from the truth.
In city after city, stories are published about homeowners losing their homes or being hit with massive fines for petty violations such as being a few dollars late on monthly dues, or leaving the trash can out an hour after the prescribed deadline. And that’s just the tip of the iceberg. Sometimes a Homeowners Association levies a fine just because a member of the neighborhood does a good deed. That’s what happened to Jim Lane, a resident of the Gilead Ridge Homeowners Association in North Carolina.
Lane says he always enjoyed helping fellow neigbors beautify the neighborhood. He says he noticed the neighborhood park had become untidy and unsightly, so he cleaned it up and planted some flowers there. He should have gotten a commendation from the HOA, right?
No, Lane was slapped with a fine for planting some “unauthorized flowers!’
When he refused to pay, he was hit with a lawsuit, a lien on his house and threats of foreclosure.
Lane’s sad case is not unique either. Cases similar to his are popping up in thousands of Homeowners Associations across the country. The stories are causing many people to have second thoughts about moving into an HOA. Even a Realtor’s claim that an HOA might be “one of the good gones” has to be viewed with suspicion. All it takes is a single election of a “problem board member” to completely change the flavor of a neighborhood, making property values decline instead of remain stable.
Ward Lucas
Author of
Neighbors At War: The Creepy Case Against Your Homeowners Association
As I have repeatedly said, the problem with H.O.A.s — what the industry calls “community associations” — goes way beyond the stories of petty authoritarianism the apologists claim are “isolated incidents.”
As H.O.A. attorney Tyler Berding recently pointed out on Evan McKenzie’s blog:
Community associations are dying financially. Their business model is fundamentally flawed and many will eventually become obsolete and fail…Community associations are a financial disaster in normal times, and when hidden or unexpected damage or expenses arise, most associations lack the financial reserves to meet the demand…The average association does not have half the financial reserves it needs to properly maintain the expected issues—and they have zero funding for the unexpected.
And when they do fail, the homeowners will be personally responsible for the debts and liabilities of the H.O.A. corporation, because the assets of an H.O.A. corporation are the obligations of the owners to pay the debts and liabilities of the H.O.A. corporation. This is secured by the right of the H.O.A. corporation to foreclose upon a homeowner. As a corporation, an H.O.A. is a defective product. Far from protecting property values, the mere existence of an H.O.A. places a homeowner’s most valuable personal asset at risk.
Even before the current housing crisis, H.O.A. foreclosure was a growing business, because the industry professionals — the property management companies and collections attorneys — make enormous profits from the practice. “HOA management companies are adding customers and employees despite the economic downturn. It has become such a lucrative industry that new businesses are popping up specializing in buying HOA debt.” The current economy has only accelerated the process.
60 million Americans are governed by some type of community association: that’s 1/5 of the U.S. population. The industry collects $30 billion to $50 billion a year from homeowners, with very little oversight or accountability. Given the perverse incentives and moral hazards inherent in the system — the other flaw of the business model that Mr. Berding does not talk about — it is reasonable to expect that the industry professionals are going to squeeze as much as possible from individual American homeowners before this house-of-cards collapses.
While there has been much awareness of the mortgage crisis over the past several years, the fundamentally flawed business model of H.O.A.s — which will lead to another tsunami of people losing their homes — has been largely ignored by the media and our policy makers.