HOA issues - sell or hold?

Question

I'm a newbie investor and purchased my first property, a townhome in Tempe, Arizona last year. I looked into the HOA when purchasing the property and they had what seemed to be plenty of $$ in reserves however now we're getting notice that they're severally underfunded and need about $10k per property in order to replace the siding on each property. On top of that, because they're underfunded they've been increasing their violations and we've received at least one every other month for minor things. They're getting ready for a vote for a 20% monthly increase and stated that future increases and/or an assessment would be necessary. If approved, the monthly HOA fees would be at $280 per month which is significantly higher than other complexes and only increase from there. I'm contemplating selling before the potential increase that would take effect in January 2024. We're getting a good amount in rent so I hesitate selling but I'm thinking it might be better to get out while we can and purchase in a non-HOA community before it starts affecting my property value. Any thoughts?

Matt Greer · Answer

I'm an agent in the area and I've seen this in a few communities in the area. There are going to be a few speed bumps if you sell. First one being if the community is FHA approved once the lender sees that the HOA reserves are low they can demand a 10% down payment which I've seen kill a few deals instantly. The other issue is that you will have to disclose the proposed assessment since you've received notice and it will be a term that needs to be negotiated which you might have to cover as part of the transaction depending on how negotiations go. Failure to disclose could result in a decent lawsuit.

I'd weigh out the best and worst scenarios for selling and holding and then determine the most likely course of events and move forward.

Chris Seveney · Answer

@Avery Lee

1. It’s already going to impact your value as any new purchaser is going to most likely recognize the price increase

2. Regarding selling the next question is can your money be put to better use? Realize the costs of a transaction is going to be 6-10% which even after paying fees and commissions could you take what’s left and have it provide better returns. Only you can answer that.

Hope this helps

Jacob St. Martin · Answer

Hello Avery! This is a tricky question, I think it will depend on the numbers. If you bought it last year, it is possible that you would lose money on the sale (especially after closing costs). After the hike in the HOA fee and accounting for the shady fees that the HOA is slapping on to make some money, are you still cash flowing well? Additionally, is this an area/market you have faith in and is likely to appreciate? If it is a strong market and you are cash flowing it might be worth it to hold, especially if selling would lose you a bunch of money. However, if you are no longer cash flowing it is probably not an asset you want to hold on to. Take the one time hit on the sale rather than the recurring hit when the HOA continues to raise their fee and slap on other fees. I hope this is helpful!

Avery Lee · Answer

Thank you! This gives me more to think about.

Account Closed · Answer

First, I would contact the agent who helped you buy this place and ask them what kind of due diligence they did on the HOA. It was literally their job to guide your transaction…and at the very least that should have included contacting the HOA. Second, I would never use that agent again. These things don’t just come up out of nowhere, especially not to the tune of $10k. Somebody likely knew. If you can prove that that seller knew and did not disclose it then you yourself can start a law suit. if you acted as your own agent…you learned a very hard lesson in hiring experienced professionals. Take that and run with it.

Travis Bohling · Answer

Hi @Avery Lee,

HOAs, such a fun topic unearthing their benefits and downsides. The best HOAs have responsible and reasonable boards that hire great hoa management companies.

Another option to consider: Be the squeaky wheel - get vocal with the current board, review the full financials to understand the issues, run for the board on the next election cycle, once on the board, press the management company on service issues or find a new manager.

On the plus side, it sounds like your getting new siding which should help the overall appearance of the community and long-term values.

Mason Weiss · Answer

Hey @Avery Lee, this is a tough situation but I would sell and try to do it rather quickly. One thing that nobody has noted is that property values could drop if several owners attempt to sell because of this HOA. You don't want to be on the wrong side of that tide.

Dave Skow · Answer

@Avery Lee-  I  wuld definitely  look to sell and the thins you mention sound like the  beginning of  continued  issues with the  HOA and property ....the issue you will have when you sell is that most buyers  will  also  shy  away for the  same reasons  ....as a seller - any pending  assesments  have to be  disclosed to any interested  bbuyers ....for the right price a buyer will likely  be OK with the place though ...good luck

Jeffrey Daniels · Answer

Congrats on getting your first door, @Avery Lee - that's a hurdle not everyone clears. You've probably heard to not "throw good money after bad", but deciding which is which isn't obvious. Many investors are strictly anti-HOA, and I agree that HOA's can be poorly managed - still, no matter - HOA's do create value for a community. In this case, it sounds like the HOA expense covers exterior maintenance and the $10,000 to install new siding is, without knowing details - I'm guessing a once in 20 yr expense. This should also immediately improve the curb appeal of the community, which may lead to higher resale values and make it more appealing to tenants. If the HOA fee is being increased, it's more than likely to improve the financials and condition of the entire community. Expenses for landscaping, pool maintainence - it's all going up. Some communities are actually in a state of decay with owners refusing to accept that buildings need to be maintained - this happens with single-family no-HOA homes as well, just that expense lands entirely upon you, instead of a community.

So if you're considering dumping it... You've owned it a year, and appreciation has probably been flat, while mortgage rates have increased. You probably paid transaction fees for loan origination, title insurance, HOA transfers, and if you had an agent represent you - you paid them too. If you go to sell now, you're going to trigger another set of transaction fees, and you're going to be negotiating with either buyers at 7% financing, or cash expecting a discounted deal. Either way, you'll want to disclose the special assessement, and the upcoming increase - and if I was representing the buyer I would leverage that circumstance to the fullest. As the Seller, you may be chalking up a substantial one-time loss in order to avoid a less than expected ROI over the long-term.

A townhouse in Tempe? Chances are, you're going to do well on a 5+ yr plan. Driving down Rio Salado - the commercial development along the lake is nuts. Also Tempe being land-locked, having ASU, and Intel, and everything else going on in Phoenix... Overall, I remain bullish on Maricopa County. Hold, and buy good deals if you can find them.

HOA issues - sell or hold?

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