Buying a Home Owners Association

[Jon Robinson]

I was recently going through a list of pre foreclosures and have found several that are in one particular HOA, after further research I found that this particular HOA's fees are pretty high ($500 a month) and I am guessing that if the homeowners are not paying their mortgage, there is a good chance that they are not paying the HOA fee as well. This is an older development (built in '75) and properties that have been updated are currently trading at around $171/Sf. For this area that is a pretty good price even with the high HOA fees. I think there is a good opportunity for value add to this property, so my question is since most HOA's, for the most part also NPO's is it possible to "buy" a HOA, or would the transaction have to be a land purchase and would I have to create a new HOA? How does one go about purchasing a property like this one? Any insight would be greatly appreciated. Thanks

[Wayne Brooks]

No, you can not “buy an hoa”....you can only buy the individual properties...but, why do you think you’d want to?

[Jon Robinson]

@Wayne Brooks, well for one I think that it is not being properly managed, as mentioned there are several foreclosures on the properties within the HOA. The fees are pretty high imo for such a small association only about 70 properties. From my research the fees go towards hot air heat (from what I read about the property is the association pays for oil), water, snow, trash and grounds maintenance. So they should be getting up to $35k a month just from fees, but if residents are not paying their mortgages I find it hard to believe that they are paying the $500 a month association fee. It is my guess they are probably taking a loss each year trying to maintain this property. I was just wondering if there was a way to "buy" a property that is fun like this. I know in some cases because the homeowners don't actually own the land that their property is on, that maybe the land could be sold and a new HOA created to manage it. In the case of a condo building like a high rise, the actual building could be sold I am assuming or am I wrong with this?

[Bill Brandt]

An Hoa isn’t supposed to make any money. 

They’re supposed to collect exactly what they think they’ll spend in the next 12 months plus make up any reserve shortages. 

Even if you got the Hoa for free and they were owed $500k. They would only be owed that because they owe it to others, or to their own reserves. If they suddenly found themselves with larger than expected/required/needed reserves they would then lower the monthly charges. They don’t get to keep any extra money. 

Add that to the fact that it’s “managed” by the property owners you wouldn’t become the manager, the president or even a board memeber. Imagine you did something to make them mad and they voted that the new monthly fee would be $1/mo until the problems with “your Hoa” were fixed. I guess you could just keep borrowing more and more money to pay for the maintenance of their properties since that’s your only job. 

[Jon Robinson]

@Bill Brandt, if that were the case why then do developers form HOAs. The goal is to preserve the value of your property, as the owner you still own either the building or land that was developed and the HOA is responsible for maintaining that. Properties can over time, be it deferred maintenance or neighborhood decline, become a not so desirable investment for someone, at that point can they not sell their land or building to someone else? That is my question. While I understand that a HOA is technically not supposed to earn income, those who manage the collection of the fees and how they are allocated must earn income, otherwise why would they do it. As well the "owner" of that building or land would also want to see a return on their investment. As you mentioned if the fees collected are not covering the expenses of the property, then the "owner" would have to balance the deficit. At some point, be it an individual owner or a trust or whatever entity that owns the land or building, may want to move on from that investment. How can that be transferred to a new owner?

[Bill Brandt]

The Hoa doesn’t care or benefit if the property values go up or down. They don’t own anything they can sell. Their goal isn’t to preserve values, it’s to pay for the neighborhood setup and keep the area looking good until they’ve sold everything, maybe a year. After that they couldn’t care less  

In Nevada and MN, the two states I have experience with:

In NV They don't manage them, they pay a professional management team because they don't want to get sued for anything. (Can you ban flags? Solar panels? Satellite dishes? What changes can you make without a public meeting or proper notices? Etc etc etc…) these are huge companies that only do HOA management, kind of like a property manager.

In NV they are formed because if you want to build out a neighborhood Las Vegas says go for it. While you’re at it, you build the streets, the street lights, the sewer lines, the required community green spaces, and you take care of them for the rest of all time. So they put a lien against every house they build (sometimes $10-$20k) and a monthly fee for the maintenance. 

In MN the Hoa actually owns the lakefront of my property because they want to ensure equal access and avoid any environmental Fines.  They charge $440/month!  about $250 of it is property taxes, $100 for insurance, and $90 towards reserves/expenses.  (Snow/lawn care/minor repairs, not roofs/siding/roads, those are assessments.no management fees as owners are required to serve on the board as required)

[Jon Robinson]

@Bill Brandt, thank you for your answer, however I am still a bit confused or maybe I am just not using the correct terminology.  So to make it clearer, the property that I am interested in is listed under one address, so for example 123 Main St.  However there are 70 individual owners of the dwellings at that address.  Of the 70 one is listed as the owner of the 6+ acres and common areas that those dwellings sit on.  So with that being said why wouldn't they care if the value of that property is sustained?  By the same token why wouldn't the owner of a high rise condo be concerned with the value of the building, or a developer who is still on record as the owner of a parcel of land being concerned with the value of their property.  To put it in more of a perspective for you Trump Towers in New York is owned by Donald Trump and the Trump Organization.  It wouldn't make sense to me for someone to own land or a building and not care if the value were being either maintained or increased.  

[Bill Brandt]

MAYBE it’s a land lease type situation where the building owners are leasing the land (like is common in Hawaii.) but assuming it isn’t. Obviously that land and common area has expenses (ranging from insurance and taxes to maintenance) and yet can’t bulldoze the building on their property. They also, I assume can’t raise the monthly fee 10x tomorrow. MAYBE it’s a co-op like what they use for buildings in new york? (Where each condo owner actually only owns a portion of the company that owns the building and land.) MAYBE it’s just a legal requirement that someone own each parcel so the government knows who to tax and the lawyers know who to sue?

I don't know how accurate an example it is. But imagine I sold you the backyard of my property that obviously you can't do anything with. But I agree to pay all the expenses to maintain it. Maybe $50/mo for insurance/taxes/maintenance. Do you think you could sell that property to someone else if they knew they couldn't do anything with it and it has an entitlement saying they have to take care of it for $50/mo? This is pretty much what my MN HOA is. They have title to the land but they can literally do nothing with it while having to pay all the expenses. (Which we owners have to approve before the money is spent< but then have to eventually pay for.)

Maybe you want to list a city where this HOA is located and you'll get a better answer from someone in that area that knows how they work. Many are very unique by area. (Like the NY and Hawaii examples.)

Ps. In a related story, this is probably close to what happened in the Miami building collapse. The "HOA" that owned the building, parking lot and swimming pool wanted to fix the problem and the condo owners didn't want to pay for it. Hence nothing/not enough was done.

[Jason Bott]

@Jon Robinson I had a client who had bought up large % of the units in a few HOA's (Miami and IL). This was a few years ago so my #'s are not exact, but Miami was about 50 units, and he bought 40 from the developer. He then had control of the board of the HOA and could always out vote the other owners. He didn't own the HOA, but had control of it.

[James Hamling]

@Jon Robinson There is layers of things your obviously not aware of in all for this and that's leading to all these assumptions and very inaccurate beliefs. 

First item, a builder/developer sets out a HOA for the builder/developers profit, which what values do after it's sold means 0, I know because I have been a part of creating HOA's as a builder/developer myself. A primary driver is uniformity of community, the next in most cases is connected with our development funding and approval at a regulatory level. next is market factors, for example a certain area that HOA's are the norm or the expected for a certain price point. At no point is it ever a factor what home values will do __ years after the fact.

Next item to know is there is several different constructs for Common Interest Communities, and while most just use the blanket term of "HOA" to define the organizing body, the legal construct varies wildly. For example, most picture a construct where each property is individually defined, with separate land and structure being owned by individual owners, that than there is a Home Owners Association to govern, comprised of a board who has been elected into positions of governing, and most often who hire a property management firm to complete the day to day operational duties. But than add in that sometimes each individual property is not separate, sometimes they are 1 whole property that individual home owners own a % of the community as a whole, or there is at times some shared ownership of certain community areas and individual ownership of others. And on and on and on. And in the vast majority of cases, yes those board positions on the HOA are UN-paid positions, the people do it because it's where they live, because they care about it. In some cases, they are paid positions, in others a stipend is issued, again the construct varies considerably but I have never known of any instance where anyone does it because it's such a great income earner, they never are, because the residents goal is to pay as little as possible to get as much as possible, a situation naturally antigen to profits as you speak.

A key part it seems your missing is the underlying fundamental foundation of a HOA, which makes no sense to say "buying" a HOA, there is no "thing" to buy, a HOA is not a thing, it is a organization. To say you want to buy an HOA is like saying you want to buy a wedding ceremony, or to buy someone's birthday party, an HOA is not a possession.

First step is to get familiar with the governing laws in your area for formation, operation, management and dissolution of such entities. I am willing to bet that will end it there.