Someone talk me off the ledge

General Landlording & Rental Properties
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Someone talk me off the ledge

Jasmine B.
Investor · Phoenix, AZ · Member since 2016 · 46 posts · 17 votes

What reservations, if any, would you have if a property management company is the service provider for an HOA & in the HOA CC&R's the same prop mgmt company has exclusive rights to leasing a community of Multifamily properties?

Meaning if I owned a $1M 6-plex, I have NO flexibility to manage it myself or hire another company if they drop the ball one too many times. The HOA Declaration says that I must use the assigned property mgmt company exlcusively.

To paint the picture more clearly, the Prop Mgmt company could just decide to increase the monthly HOA fee from $160/mo to $200/mo. They could also decide instead of 8%/mo to manage the rentals, they want to charge 10%/mo. If the other Owners aren't engaged or involved in the HOA meetings (which most people choose not to be) this one company can have a field day. They could be mediocre at managing tenants and owners would have no recourse? Someone talk me off of the ledge.

Thoughts, feedback? Would you buy a property in the community?

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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
5y

@Jasmine B. you have legitimate concerns. Sometimes the reason a development chooses to hire an exclusive company is to streamline operations. One company managing rental properties, so if there are issues, there is one company in charge. There can also be advantages in leasing, because perspective tenants looking at the complex would be able to see all available units working with one company. 

I generally do not like buying properties when an HOA is involved, because you loose too much control. Rules can change or extra costs can be assessed. If you are on the board, you have some control. I wouldn't want to spend that much money and be playing under someone else's rules.

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  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y

    @Jasmine B. you have legitimate concerns. Sometimes the reason a development chooses to hire an exclusive company is to streamline operations. One company managing rental properties, so if there are issues, there is one company in charge. There can also be advantages in leasing, because perspective tenants looking at the complex would be able to see all available units working with one company. 

    I generally do not like buying properties when an HOA is involved, because you loose too much control. Rules can change or extra costs can be assessed. If you are on the board, you have some control. I wouldn't want to spend that much money and be playing under someone else's rules.

    1Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    5y

    I wouldn't purchase a property that mandates working with a particular company.

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  • Jasmine B.
    OP
    Investor · Phoenix, AZ · Member since 2016 · 46 posts · 17 votes
    5y

    @Joe Splitrock Thanks for the responding. That's a good point on streamlining. I'm not against HOA's, I'm just not a fan of of the CC&R stating that we don't have immediate recourse if the prop mgmt company fails to perform. I thought about joining the board but it doesn't seem promising for the hassle. Appreciate your perspective.

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  • Jasmine B.
    OP
    Investor · Phoenix, AZ · Member since 2016 · 46 posts · 17 votes
    5y
    Originally posted by @Nathan Gesner:

    I wouldn't purchase a property that mandates working with a particular company.

    Thanks Nathan! My thoughts exactly. 

    0Reply
  • Dennis Wayne
    Member since 2020 · 339 posts · 356 votes
    5y

    @Jasmine Bailey

    If there’s an hoa involved then don’t do it ! It’s that simple

    0Reply
  • Jasmine B.
    OP
    Investor · Phoenix, AZ · Member since 2016 · 46 posts · 17 votes
    5y

    @Dennis Wayne so you’re against HOAs entirely? No matter the numbers?

    Even if you purchase a deal with $40K in equity and it’s cash flowing $390/mo?

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  • Nabiyah Yehuda
    New to Real Estate · Palm Beach Gardens, FL · Member since 2019 · 21 posts · 4 votes
    5y

    Question: What do you think about going to work to learn at a management property company? I am wondering if that will help me. I would like to eventually have my own management company. #newbie 

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  • Mary Aviles
    Rental Property Investor · Tinley Park, IL · Member since 2016 · 39 posts · 53 votes
    5y

    I have owned a townhouse with an HOA for 7 years, and I wouldn't completely say no to other properties in an HOA. However, you have to be aware of special risks.

    First, the HOA can raise dues at any time by any amount. Mine have gone up several hundred dollars over the years. So the $390/month profit you have now could go down significantly in future years.

    Second, the HOA can levy a special assessment at any time. This can range from a few hundred dollars to several thousand dollars. I almost got hit with a $10,000 assessment. What would something like that do to your $390/month profit?

    Third, you run the risk that the HOA can at any time stop allowing rentals. So when your current lease expires, you must sell. And if you think this doesn't happen often, think again.

    Personally, I think your cash flow is too small to weather the financial ups and downs of an HOA. My property works because my cash flow is pretty significant, so I've been able to absorb the rising costs. And second, I joined the HOA board, so I can have a little more control.

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  • Jasmine B.
    OP
    Investor · Phoenix, AZ · Member since 2016 · 46 posts · 17 votes
    5y
    Originally posted by @Nabiyah Yehuda:

    Question: What do you think about going to work to learn at a management property company? I am wondering if that will help me. I would like to eventually have my own management company. #newbie 

    I think that’s a good way to learn the operations if you work for a reputable one that is doing everything really well. I like the idea of learning from experts first hand and the getting experience of you have the time and capacity. There’s always books & YouTube! 

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  • Jasmine B.
    OP
    Investor · Phoenix, AZ · Member since 2016 · 46 posts · 17 votes
    5y
    Originally posted by @Mary Aviles:

    I have owned a townhouse with an HOA for 7 years, and I wouldn't completely say no to other properties in an HOA. However, you have to be aware of special risks.

    First, the HOA can raise dues at any time by any amount. Mine have gone up several hundred dollars over the years. So the $390/month profit you have now could go down significantly in future years.

    Second, the HOA can levy a special assessment at any time. This can range from a few hundred dollars to several thousand dollars. I almost got hit with a $10,000 assessment. What would something like that do to your $390/month profit?

    Third, you run the risk that the HOA can at any time stop allowing rentals. So when your current lease expires, you must sell. And if you think this doesn't happen often, think again.

    Personally, I think your cash flow is too small to weather the financial ups and downs of an HOA. My property works because my cash flow is pretty significant, so I've been able to absorb the rising costs. And second, I joined the HOA board, so I can have a little more control.

    Thanks Mary for this insightful response. The unique part about this community is that the buildings are individually owned by investors & house hackers so I highly doubt the HOA will decide to make them un-rentable.

    I have strongly considered joining the HOA board to stay abreast and make my voice known. If I decide to purchase, I would most definitely be involved. Are you local and attend in person? I'm in a different state so I wonder how that would operate.

    I’m curious what the $10K charge was for? I’ve seen ~$500 special assessments but none in the thousands of dollars range. 

    The HOA fee right now is $30/door each month & covers the common areas upkeep & lawn only so exteriors and the roof of the buildings would be up to me to build into my CapEx forecast. Im wondering if because the mandatory property mgmt company is also the service provider for the HOA, if I will be able to make an impact on the Board.

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  • Nabiyah Yehuda
    New to Real Estate · Palm Beach Gardens, FL · Member since 2019 · 21 posts · 4 votes
    5y

    @Jasmine B. thanks...I appreciate that. I love Youtube University....lol

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  • Mary Aviles
    Rental Property Investor · Tinley Park, IL · Member since 2016 · 39 posts · 53 votes
    5y

    @Jasmine Bailey

    My $10k special assessment was for roof replacement. Your association sounds unique because it's not responsible for exterior elements, such as roofs and windows, which are the big ticket items subject to special assessments. So you should be ok.

    You should also be ok with the fact that the HOA won't ban rentals. But there have been cases in which HOAs have had a high percentage of rentals, and they banned them anyway.

    The key with your situation and all real estate investing is that you SHOULD be ok, but you need to be positioned and be ready in case you're NOT ok. If things don't work out, and you have to sell, will you at least break even and be able to extricate yourself from the situation quickly?

    From your posts, I get the feeling you've already made up your mind to move forward, and you're looking for reassurance and one last check. If you're aware of the risks and prepared if things go wrong, then go for it.

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  • Jasmine B.
    OP
    Investor · Phoenix, AZ · Member since 2016 · 46 posts · 17 votes
    5y

    @Mary Aviles

    Thanks Mary! I’m prepared for the calculated risk. Great advice! When I wrote this post originally, I was going to walk away from the deal. But after doing more due diligence based on your perspective I’m leaning towards going through with it. Best of luck to you on your real estate journey!

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  • Alecia LovelessPro Member
    Member since 2019 · 3k+ posts · 2k+ votes
    5y

    @Jasmine Bailey The condo development in my small town has an HOA that replaced all the roofs with an affordable loan that they had budgeted for at a reasonable assessment fee of $85 a month to the owners over 10 years. The next winter, I'm in northern New Hampshire, the roofs were found to all be faulty and failed.

    The roofer filed bankruptcy and had no insurance and the HOA had to re-roof the whole development. Now the owners have an $800 a month payment for 15 years plus the $85 payment remains for the rest of the 10 years which is equal to most of their mortgage payments.

    The condos still sell to out of staters but no one local can afford them now. And the HOA also passed a no rental clause once the out of state owners got on the board hobbling the remaining local owners from being able to rent their basement apartments and support the high property taxes.

    I would avoid the HOA.

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  • Mary Aviles
    Rental Property Investor · Tinley Park, IL · Member since 2016 · 39 posts · 53 votes
    5y

    Thanks @Alecia Loveless for proving my point. There are tons and tons of investors with similar stories, in which a good investment turned into a nightmare, or they were losing money. Can something terrible happen in a property you own without an HOA? Yes, but the point is that with an HOA you literally don't have any control, so you're not able to mitigate or remediate the problems and the financial loss. This is why most serious/professional investors will not own any properties with an HOA, and those that do, probably wouldn't do so again.

    @Jasmine B. It sounds like you've done research and due diligence, and you feel comfortable, and if you do, good luck.  Again, just be careful, and make sure you have enough reserves, an exit plan, and the mental fortitude to persevere if something goes bad. There comes a point in real estate investing where you have to stop analyzing and either move forward with the present deal or move on to the next deal. Good luck!

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