I invest in townhouses and condos that are in HOAs. I also sit on the boards of directors for these HOAs. I talk about this a little bit when I was a guest on the BiggerPockets Podcast (link below, if you're interested).
My question is for my fellow landlords who also invest in HOAs.... Statistically speaking, you're not voting. you don't participate in any of the community governance.
Why is that? Are you lazy? You don't care about what happens in the community? You feel like it doesn't matter?
Here are the repercussions of your inaction:
1. Your HOA can't get a quorum of voters at the annual meeting. In order to officially vote for board members and other major issues, such as changes to the governing documents, a minimum number of homeowners have to be present at the meeting in person or by proxy for anything to get done.
2. Your HOA has provisions in its governing documents for placing a board in the event the homeowners don't reach a quorum. The existing board can and will place other members on the board at their whim.
3. Your HOA may have an awful board member. They are disruptive, push through items that are good for them and their cronies (and nobody else), misappropriate funds, etc. I know of an HOA where a hail storm destroyed all the air conditioner units in the complex. The air conditioner units were the responsibility of the homeowners to get repaired/replaced. The board voted to have their units (and their units only) replaced by the HOA so that they did not have to make insurance claims or come out of pocket. When the homeowners found out, they were rightfully upset, but could do nothing to remove the board members from their positions or reverse the decision. Those board members continued to remain in their positions until they chose to resign several years later and 2 of them actually still remain on that board.
4. One board opted to fire the management company and "self manage". The board president then used HOA funds to remodel his home to accommodate a home office, buy luxury furniture for the office and have the HOA pay for it all. Again, because the homeowners couldn't get a quorum, there was nothing they could do except sue the President as individuals. Because the HOA carries insurance against board members being sued, the President was represented for free/at the homeowners' expense while half a dozen homeowners decided it was worth it for them to share the burden to sue the HOA and the President. The homeowners were eventually successful in removing the President from office, but they were unable to recoup the funds spent on the home office, nor any legal fees for themselves. Three years later, the sitting board appointed the ex-president back onto the board.
5. Many HOA governing documents were written in the 70s, 80s and 90s and are now so far out of date that they become useless. But the board can't get the documents updated because homeowners won't show up to meetings in person or by proxy.
Shenanigans like this happen on HOA boards all the time. Homeowners are notified of these kinds of things through meeting minutes, mail notifications, budget publication, email, newsletters, etc.
I know a lot of you simply don't invest in HOAs because of all these shenanigans. But statistically, I know that there are plenty of you do.
As a board officer, I'm aware of who shows up to meetings and who doesn't. Who sends in a proxy and who doesn't. And statistically speaking, it's the investors that are choosing not to participate in the governing of the community, but are the first ones to pitch a fit when the board does something like limit rental units, or enact draconian measures such as final lease approval or whatever. Suddenly, it's an issue!!!
But if you didn't care enough to help choose your board members or help them govern the community, why are you surprised when they make rules that go against your interests?
So help me understand - why aren't you checking in on your investments? The HOA board has a huge impact on your property value. Why aren't you participating in regulating the board and/or helping them make sure property values remain high?
Here's my current challenge with this and why I am so frustrated.
As president of a board, the community I'm invested in has a problem with the condo balconies. Many of them are in very poor shape with rotting timbers, twisted support beams, etc. They require a complete tear down because of the way they were originally designed and installed, but also because prior board members decided not to keep up with a regular paint schedule of the balconies to protect the wood, so the paint eventually chipped away and water did its damage.
The lowest bid we have to repair these is $3 million. The board is permitted to get a loan to pay for this and does not need homeowner approval to get the loan.
HOWEVER! There is a provision in the governing documents that states that any project that is more than 10% of the annual budget MUST have homeowner approval. In order to get homeowner approval, we have to have a quorum of 2/3 of homeowners vote on the topic. Of that quorum, we then have to have 51% approve or disapprove the plan.
At our last three homeowner meetings, we've had a dismal 12% of people show up in person or by proxy. Of that number that showed up, 80% were owner occupants. Investors were so poorly represented as to be pretty much non existent. The odds that we'll ever be able to repair the balconies is pretty slim. So we'll watch them fall off the buildings or the city will condemn them eventually and there goes the property values.
And when that happens, I can guarantee you that suddenly everybody will show up with pitchforks and torches and demand to know how this could possibly have happened and why is the board so inept as to allow it to happen.
All because, when the investor receives their notifications, they're trashing them - throwing away the envelope, trashing the email, not logging into the website to read meeting minutes or look at financials. I don't even know what you all are doing with your notifications, but you certainly aren't doing the easiest thing you could possibly do. Pull out the proxy, name somebody to represent you, sent it in. It's literally that easy if you don't want to attend the meeting in person.
But when shenanigans happen, it's on you. Blame the board all you want, but at the end of the day, it's all on you.
Indeed, it is a whole different dimension to investing when you get into HOA's. It adds a layer of complexity and investors should understand it and participate.
I was rather like Linda in my first decade or so with 4 condos at one time--getting on the board! I was on 3 boards at one point...
The quality of the board and participation really does add value. At minimum folks should turn in the proxies. That is the floor. The ceiling is much higher--like put in some time on the board... I find it gives you credibility to have served.
As a real estate investor, you are actually super valuable on boards (first convince them you are not villian but have similar interests). Almost guaranteed, no one will know about Capex. Start to show them a schedule or idea and they will be impressed...
I have seen some situations work better than others... At its worst, one board member had his tires slashed. At its best, owners (and landlords!) have a clean-up and barbecue and sing Kumbaya....
One other point I advise investors or condo buyers to probe is fuzzy but important: organizational culture. Some HOA's really are dysfunctional and as an investor you are problem solver (fixing the running toilet, the loose doorknob, and solving the late rent issue) but these human relations problems on boards can be another matter altogether.
Sometimes you just can't get stuff through...It is not like owning your own duplex where you are the boss, leader, and supreme ruler (with your spouse or partner if you have one)....
I struggled with one board in like early 2000's hoping to get some of like 1/4- 1/2 million into some higher returning investments until we needed it (with plenty of operating cash) but the best I could get them to go for was CD's. Today, run the SP 500 returns and I see had they gone index funds, it would be millions and they'd be set, more than enough for all the new decks, windows, doors, and more... so you shoot for the stars and maybe get the moon or a couple of percentage points in a ladder CD...
One thing boards can try is some incentive (a couple have done one month free dues for meeting attendance, which can boost it big time!). Or even get your name in the box for a month of free dues just for doing the proxy.
Also, don't forget if you are an active board member you get a front row seat on the costs, contractors, and issues running a 50, 100, or more unit complex. So it is not altruism. I would be more likely to buy a large apartment (if the price were right) based on past board membership.
Thanks for the mention Steve! I am even pondering a follow up book on condos (maybe even reporting from the inside on a board). I sold some condos but still have one (where I was once President).
I am glad to see this top. Many of the HOA's face, as outlined above, enormous property and people challenges yet in major cities 1 in 3 or 4 home sales is a condo or co-op...
Best of Luck!
Excellent insights, @Michael Boyer . I think you give some great reasons why people should definitely be checking in on their properties that are in HOAs.
What about the rest of you? If you participate in your HOA, why do you do so and what are you getting out of it?
If you ARE NOT participating, why not?