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HOAs and Owner Involvement: An Oxymoron? (part 3 of 3)

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Guest blog by Deborah Goonan

Exploring Solutions and Empowering HOA Residents

CAI proposes the following in Community Association Living:

“… the board has an obligation to listen to the owners’ concerns and to take those concerns into consideration in making its decisions. Formal means for obtaining owner input include the:

  • Resident/owner forum at board meetings
  • Participation of owners on committees
  • Annual membership meeting

Other means of owner input include owner surveys and letters and suggestions from owners. Just as a board has the responsibility to encourage owner input via these means, owners have the responsibility to use them to make their views known.”

Sounds good in theory, right? Put the onus on the owners to speak up and be heard!

But, suppose the Board does not care to listen, and resists serving the interest of HOA residents?

The truth is, the person who comes forward with ideas or suggestions is often ignored or rebuked by the Board. That has been my personal experience, and one frequently recounted by many other HOA residents. How often have we experienced or heard accounts of the following?

  • Owners sit through 2-hour long meetings, only to be told that there is “no more time” for comments at the end of the meeting.
  • Owners are told to sit down and “shut up.” Some meetings even result in physical altercations, or police or security escorting owners out of the meeting.
  • Meetings are adjourned prematurely to prevent input.
  • The Board avoids meetings altogether. If there are no open meetings, how can there be owner participation?
  • Meetings are not openly announced, or are held in secret.

Bottom line: HOA governance structure must be legally modified to comply with Federal and State democratic processes. Additionally, States must enforce these processes by allowing members to legally challenge non-compliant governance without having to file a civil suit and pay out of their own pockets, while also paying for the HOA to defend its actions.

Unless fundamental Constitutional rights are incorporated into their governance structures, HOAs will continue to operate as closely held corporations and/or de facto oligarchies.

(Link to CAI’s publication, Community Association Living)

 

 

HOAs and Owner Involvement: An Oxymoron? (part 2 of 3)

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guest blog by Deborah Goonan

Debunking the myth that owners can actually change their HOAs

CAI’s educational booklet makes the assumption that owners elect their Board. In reality, the Developer appoints the Board – or at least one or more members of the Board – for several years, or even decades during construction. When the developer still controls the Board and possesses weighted voting rights, isn’t owner participation essentially a moot point?

Have HOA proponents, and CAI in particular, ever considered that a homeowner, having had no opportunity to elect the Board or amend documents during many years of developer control, is unlikely to ever make a successful transition to widespread participation in voting? And by the time it is no longer developer-appointed, what if the Board is still controlled by a small minority of investors or developer affiliates, who hold the majority of voting rights? This situation is far more common than CAI industry professionals would lead us to believe.

Vote the bums out!

As for CAI’s oft-prescribed solution to dissatisfaction – electing a new Board – is it really that simple? Not really. Post-turnover election procedures are based upon written provisions of the governing documents, possibly subject to limited statutory guidelines. The fact is, HOA governing documents are not reviewed and approved for compliance with constitutional voting procedures. Therefore voting systems are generally built upon the following components:

–Inequitable allocation of voting rights (votes allocated by number of units owned or proportional share of ownership)

–Voting processes that often involve proxies and/or representative voting systems that disenfranchise residents

–Typically, tenants cannot vote

–Members can have their voting rights revoked as a result of an alleged violation or dispute, or for being delinquent on assessments. (If you were told you could not vote at the polls as a result of being delinquent on your property taxes, would you accept that?)

Although laws in some states address a few of these issues individually, no statute addresses all of them, most notably equitable allocation of voting rights. Some states mandate ballot election for Board members, but not for amending governing documents.

Quite often, loopholes allow existing HOAs to avoid compliance with applicable statutes, with the qualifying phrase “unless otherwise stated in the governing documents” inserted before election and voting provisions. And because there is no national standard, the relative fairness of elections and voting varies considerably from state to state and from one Association to another. Obviously, more realistic solutions are needed.

See Part 3: Exploring Solutions

Link to CAI’s publication, Community Association Living

HOAs & Owner Involvement: An Oxymoron? (part 1 of 3)

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guest blog by Deborah Goonan

Let’s get real!

One of the most common laments of HOA industry professionals is this: “Owners are apathetic. No matter what we do, we cannot get them involved in governance of the community.”

I have previously blogged, tongue-in-cheek, about the tendency of Boards to cultivate apathy. Today I will explore the issue in more depth.

Is it realistic to expect widespread participation?

Historically, few people actively participate in city, town, or county government, so what makes anyone believe that there would be a higher participation rate in HOAs?

Consider that HOAs (and especially condo associations) are marketed as carefree, low-maintenance lifestyles, often including amenities that owners do not have to personally maintain. HOA homes are not explicitly disclosed as what they are: shares in real estate investment, almost always part of a corporate entity. And, even if we could enlighten buyers and owners about the need to protect their investments in their HOAs, how many would take active roles? After all, most people with retirement accounts tend to put their money into funds managed by financial professionals – few actively monitor their funds.

Does HOA governance structure encourage or discourage participation of residents?

Some critics of HOA governance have suggested that Boards should allow residents to actively participate at meetings, with the ability to present ideas, make motions, and vote on resolutions directly affecting them.

But I doubt we will see such change, because CAI – and most governing documents written by attorneys for developers – promotes policies that give the Board broad authority to act on behalf of the association.

Refer to page 30 of Community Association Living: (Emphasis added in bold)

“Board members and committee members are volunteer leaders who meet regularly to discuss pertinent details about running their community. A board meeting at a community association is comparable to a town council meeting of a municipality. The basic authority in a community association lies with the owners. However, the owners elect a board of directors to act on their behalf. Usually the governing documents delegate almost all of the association’s decision-making powers to a board. This leaves the owners with very few direct powers. Typically, owners have only the voting power to:

  • Elect and remove directors
  • Amend any of the governing documents, except board resolutions

Occasionally, owners will approve the annual budget for their association. But all other decisions are usually left to the board. As a result, if owners are unsatisfied with a board decision, they usually do not have the direct authority to “veto” or “undo” its action. Under such conditions, their only remedy is to elect a new board to represent them.”

Clearly, the status quo discourages active participation of owners, exacerbating apathy. See Part 2: Reality Check

 

What Happens When Government Fails to Ensure Quality Construction in HOAs?

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guest blog by Deborah Goonan

Does your HOA have problems with shoddy construction or defects in common areas such as roads, storm water drainage, street lighting? Did your developer fail to deliver what was promised at the time of sale?

If so, you’re not alone. Check out the video reports linked below. Hidden Lake Estates HOA in Sherwood, Arkansas, has issues with poor drainage, causing owners’ yards to flood every time it rains. At Stone Hill Estates HOA in Durham, North Carolina, the Developer has left roads, sidewalks and storm water drainage systems unfinished for several years.

Owners from both HOAs have appealed to city leaders to help resolve these issues. In both cases, the Cities initially balked at getting involved. However, one council member from Sherwood has called for an investigation into storm flooding at Hidden Lake, and a judge in Durham recently ruled that the City help pay for unfinished work at Stone Hill. Protracted battles will likely continue. These are just two examples, but this is becoming a common problem all over the country.

Who’s responsible, and who should pay?

During the building boom of the last decade, plenty of planned developments and condominiums were hastily approved and built to keep up with growing buyer demand. Additional contractors were hired, and some of them lacked sufficient skills. When the dust settled, problems began to appear.

It’s clear that architects, design engineers, and developers ultimately bear responsibility for the quality of their work and that done by their construction crews, but the obvious unasked question is:

What is government’s role in development of HOAs and prevention of poor construction?

Local development and planning commissions have responsibility for issuance of construction permits, establishment of building codes, inspection of work at various phases in the project, and issuance of occupancy permits upon successful completion.  In many cases, additional state and local agencies, such as the Department of Environmental Protection also play a role in ensuring development meets health and safety standards.

As taxpayers, we expect our local government agencies to ensure that our homes and major infrastructure of our communities are built to a standard of safety and reasonably sound quality. Unfortunately, as evidenced by thousands of construction defect claims in the past decade, local planners and inspectors quite often fail to do due diligence before, during, and following construction.

Why? Perhaps it is because city or county staff does not have to maintain HOA infrastructure or Condominium buildings. Therefore they are not overly concerned about quality of design and construction, and ease of maintenance.

Worse than that, sometimes our local elected officials undermine quality control policies.

Take the Lakewood City Council of Colorado, for example. (see link) The Council wants to enact an ordinance that would make it easier for Developers to avoid litigation of construction defect claims with HOAs. If passed, the ordinance would reduce rights that currently exist under state law, making it more difficult for HOAs to sue.

Supporters of the City ordinance claim that current state law makes it too easy for owners to sue Developers, drives up the cost of insurance, and makes it unfeasible to construct additional entry-level condominiums for millennial buyers.

So let me get this straight: Lakewood City Council wants to make it easier for developers to avoid liability for shoddy construction, in order for the Mayor and Council to entice Developers to build more Condos (with HOAs). No doubt, the city government’s goal is to increase its tax revenue base, with minimal impact to the city budget. But at what cost to taxpayers and consumers?

In all fairness to Lakewood City, local government politicians in cities and towns all across the nation have adopted a similarly misguided stance.

Dare I say, depending on the politics of local government, committees that vote to approve new construction projects can have cozy family or business ties to real estate developers and to investors?

Attorneys representing all sides of ensuing controversies – developers, engineers, construction companies, HOAs, owner groups in HOAs – are the only clear winners when local government fails to prevent shoddy or unsafe construction in the first place.  Owners of HOA properties often find themselves stuck with unresolved problems, damages to personal property, uncooperative Boards, special assessments to cover fees for attorneys, and possibly even higher property taxes.

In HOAs, owner financial responsibility for common areas often leads to common headaches.

(link to video of defective drainage in Sherwood, AR HOA)
(link to video of unfinished development, Stone Hill HOA, Durham)
(link to article on proposed Lakewood, CO ordinance)

The Rental Restriction Quandary in Residential HOAs

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guest blog by Deborah Goonan

One of the most controversial battles in residential HOAs and Condos centers on rental restrictions. This blog analyzes the arguments for and against rental restrictions in HOAs, and why the ratio of tenants to owners in Associations has become a hot button issue.

The argument against rental restrictions

Like many Americans, I have owned homes in HOA-free neighborhoods, and I lived in these homes as my primary residence. However, when employment opportunities took my family to another state in the midst of the recent real estate bust, we found ourselves unable to sell our home of 14 years. Fortunately, we were able to lease the home to another family for about a year and half, until the market improved, when we were able to sell. I don’t know what we would have done if we had been forced to keep the house vacant due to rental restrictions that are often imposed by HOAs.

A vacant house or condominium presents financial challenges – hiring someone to maintain the yard and periodically check on the property; winterizing in cold climates; keeping the house cool and mold-free in warm, humid climates; prevention of vandalism and squatting; and increased property insurance rates.  Renting the home covers most if not all of the carrying costs, allows owners to deduct some of their expenses from income taxes, and, if the tenant is properly vetted, keeps the property relatively well maintained.

But what if your HOA restricts rentals in your community to just 5% of homes? One woman in a Pennsylvania HOA is now challenging her Board because, as explained in the story linked below, the Board of Freedom Woods HOA, a community of 275 homes, has enacted that rather draconian rental restriction without a vote of its membership. The Association attorney claims the Board has the authority to enact these restrictions under the “business judgment rule,” however now that the HOA has been challenged, he is also recommending an amendment of the Declaration. (CC&Rs)

Aside from the issue that the Board may have overstepped its boundaries by unilaterally creating rental restrictions, when a formal amendment is most likely required, there are larger considerations.

What about the property rights of individuals to rent their homes? In HOAs, that right is simply not guaranteed. It is very common for HOA and condo associations to cap the percentage of units rented to 20-30%, but, as this example illustrates, the restrictions can lead to enforcement of any arbitrary ratio decided by the Association, including an outright ban.

Why would owners want to discourage rentals in HOAs?

The flip side of the argument in favor of restricting rentals is that when the number of rentals exceeds a certain ratio (currently not more than 50% for FHA), many buyers cannot qualify for financing, thereby reducing the marketability of homes. And then there are the somewhat debatable arguments that too many rental properties result in a less stable neighborhood with a transient population, and that properties tend to be less well maintained by renters than owners. All of these factors are believe to drive property values lower.

Additionally, let’s consider why HOA and especially Condo and Townhouse communities tend to evolve toward a relatively high percentage of rentals, when compared to HOA-free neighborhoods.

During the recent economic downturn, many owners became reluctant landlords. But very few non-HOA neighborhoods changed from primarily resident-owners to tenants with absentee investor-landlords. For the most part, people who rented their single-family homes were those that had no other viable economic alternative.

On the other hand, a significant number of HOA buyers never intend to live in their units. It is common for investors to purchase multiple properties within the same community, particularly in locations that are in high demand, gaining voting rights for each unit. In short, they acquire a significant share of the corporate HOA, in order to obtain greater control over the community. The more they can affect the direction of the Board (often serving on the Board) the more control they have over variables that affect their profit potential.

Typically, investors buy units at low prices, hoping to sell later at a profit, and generating rental income during the holding period. Sometimes they buy early in the process to take advantage of price incentives. Often they will purchase in a depressed market, or in transitional communities – where owners are moving to newer homes or more desirable locations. HOAs or Condos that occupy valuable land are particularly attractive to investors or developers. Once they purchase several units, investors can entice or pressure existing owners to sell to them, sometimes at a low price. Over time, a few investors can acquire a majority of units, perhaps even enough to stage a hostile takeover by voting to dissolve the Association. After dissolution, investors are free to redevelop and convert to different, more profitable residential or commercial uses.

Of course, that is exactly what we see happening in HOAs, and especially condominiums. Notably, in the state of Florida, investors can vote for dissolution with an 80% voting interest. So it is little wonder that HOA owners fear the increased presence of tenants in their communities.

A new kind of block busting?

Investor influx and takeovers are rarely seen in HOA-free neighborhoods, where owners cannot accumulate multiple votes within the voting jurisdiction. There is no corporate Board, and votes at the municipal and county level are allocated one per resident rather than based upon shares of property owned. In other words, there is no inherent advantage to acquiring and holding onto multiple homes within a defined geographic neighborhood.

A review of history prior to passage of the Fair Housing Act in 1968 calls to mind the once-profitable practice of block busting. Although economic circumstances and owner fears are somewhat different nowadays, it certainly appears that real estate investors and developers have seized upon a similarly profitable but onerous process in HOAs.

The controversial decision in your HOA

No matter which side of the issue you favor, if you are part of the voting minority, you must abide by whatever the majority decides. If most of the owners are full-time residents, the Board may easily convince them to restrict rentals, with the consequence of limiting owner rights in the future.

But keep in mind that sometimes a minority of individual owners is the voting “majority.” If a few individuals just so happen to own multiple properties, they control the vote. And if most of the properties they own happen to be rentals, then they will most likely favor lax restrictions that could lead owners to migrating out of the HOA, and making the community vulnerable to decline and investor takeover.

Definitely a quandary.