HOA Properties - should you generally avoid?

Question

Hi all, I realize this is a broad question but I just wanted to get some general input. Do smart investors generally avoid HOA properties? WSJ had a article over the weekend about how HOA foreclosures are on the rise. Thanks!

Richard F. · Answer

COA/HOA properties should not be considered unless you have an actual, clear, understanding of the specific governing documents for the project you are interested in, and a very thorough understanding of the Financial documents, including most importantly the Reserve Funding Plan. Many states do not even require a Reserve Plan, although most project By-Laws do suggest it in some manner.

Failure to understand any of these documents can cost you many thousands of dollars in the next fiscal year of the project, or several years down the road. Board members frequently do not fulfill their fiduciary duty to properly plan the finances to accomplish their mandate to maintain, protect, and preserve ALL common elements. Board members, in many cases, can change the rules with regard to allowing, or limiting, rentals within the project. Many Board members believe "their job" is to "keep the monthly fees low", and defer maintenance items as they age, or hire low quality contractors that often do not solve problems.

There are SOME good, well run projects out there, but if you don't read and understand the critical docs and reports, you cannot tell one from another until it is too late. And never, ever, compare the monthly fee of one project, to a "similar" project in the area, or any "average" number, as that is a completely useless exercise. Every project is different, with different Boards, different amenities, different configurations and construction types, different definitions of "common areas" and "owner responsibilities". There simply is NO comparison.

Janice Carter · Answer

@David Choi From my experience as a real estate broker and property manager, I have observed that the subdivisions with the most neglected homes are usually those without an HOA or where the HOA exists but doesn't enforce its bylaws. Many of those neglected properties are also investor-owned. For that reason, I would rather own a rental in an HOA-governed community that has a cap on investment properties and I would also want to confirm that the HOA is actively enforcing its bylaws, not just collecting dues. Like anything else, it comes down to evaluating the specific HOA rather than avoiding them altogether.

David Choi · Answer

Thank you for all the helpful input! You are all confirming my concerns about HOA properties/condos.

Jim Johnson · Answer

I wouldn't avoid HOA properties across the board. We've managed both HOA and non-HOA properties, and there are well-run associations just as there are poorly managed ones.

What matters more is doing your due diligence. I'd want to review the financials, reserve study, meeting minutes, pending special assessments, and the association's enforcement history before making a decision. A healthy HOA can actually help protect property values, while a poorly managed one can create unexpected costs and operational headaches.

Theresa Harris · Answer

There are pros and cons of HOA- and for HOA are you including condos? Neighoubrhoods with a HOA (ie single family home, person fully owns their own property) are one thing.  condos (strata properties) are another.  Condos may cost less to buy, but the condo fees are quite high and eat up a lot of money each month.  Single family homes may cost a bit more, but you have your own property and the monthly costs (proportionately) will be less.   When I was looking for my last rental, I looked at a condo and single family home.  The single family was about $60K more (both were in the same area, similar age and comparable in terms of rent), but after running the numbers, the condo cost more because of the condo fees each month.  Plus with condos, rules can change, fees can increase, etc.

HOA Properties - should you generally avoid?

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