Newbie - HOA what to watch for - sticky thread

9 Replies

Hi

I am looking to buy my 1st investment property. Due to higher prices + cash flow I am looking to buy a townhouse in San Francisco south bay. The newer ones come with high HOA fees.

I was wondering if there is a sticky thread telling newbies what to look out for. I have the basics ie HOA should allow renters in the complex, have enough reserves, what all is covered in HOA. Thats all I know.

As a side topic, I realize the HOA fees eat into my cash flow directly but why are they considered so bad. I mean even if you have SFH you need to pay gardener, have paint every decade or so, roof replaces some time. In fact I would assume that complex can negotiate a better price than an individual just doing SFH. Is there some overhead in HOA or corrupt HOA in which some people are over-charging.

Thanks!

One of the problems is that the rules of today are not the rules of tomorrow. I live in a Single family home neighborhood for 15 years since the subdivision was built. Last year out of the blue the HOA decided they wanted to limit rentals and made rules up to do so. Also they impose new fees and fines to landlords who don't comply. And not small fines- giant ones.... like $1000 a month fines.

Also, while I kind of like someone approving paint color etc, it does make it an extra burden and slowdown.  For me, I had a leaking roof and I had to wait on approval for shingles.  On my fence color, I waited so long I eventually gave up and just did it.

Never have I had higher blood pressure and lost more sleep than dealing with a local HOA here (won't name the hoa here, but DM me if you really care to know). More brain damage than anybody could ever imagine, and as I type this I'm starting to break out in hives just thinking about it -so thanks for doing this to me. But now that I'm going to spend the rest of the night crying in a corner thinking about this...

The best advice I could give is for you to go and sit down face to face with the HOA administration (president, board, everybody you can wrangle up) and tell them exactly what you're doing / plan to do with your property. Give it to them in writing, If possible you should record the meeting either video or audio - and get signed copies of them receiving whatever plans you're making. Also, read the HOA guidelines BEFORE you purchase. I know it's painful, but the pain of getting in a battle with the HOA is greater than knowing the HOA rules. Get EVERYTHING in writing. EVERYTHING. Did I mention get EVERYTHING in writing???

My horror story was with an hoa that is known nationally as one of the worst run HOA's in the country. Anybody reading this in UT will probably know the community (lots of guys spend time in prison after the '07 equity stripping scams in this 'hood)

Let me also say that I've had some very pain-free dealings with HOA's - it just really depends on how big of a turd the HOA is.

Don't be scared off because of my emotional min-rant, but for sure you need to do a bunch of DD before you buy

Blair Poelman, Broker in Utah (#9299425)

Thanks guys.

Then why would anyone buy investment property which has HOA associated with it (that pretty much rules out all condos and townhomes).

I bought a condo in Davis, Ca, intending to stay forever. I sold it 2 years later and swore I'd never, ever, ever, ever......live with a HOA again.

The fees went up a large percentage, because a Sacramento lobbyist (by profession) who was an owner, decided he wanted garage doors on the open carports, which had been open carports for over 20 years.  So, he got on the board (very easy to do because only control freaks or people with an agenda want to be on the board) and began lobbying the board to vote for new garage doors to be installed, and to increase the fees to go along with them.

Then there was the garden/plant nazi who harassed everyone on a regular basis, and when I finally decided to sell and get the hell out of there, I put a nice dark bark chip covering around the shrubs out front of my condo.  I came outside one day to see her scooping up my expensive bark, and she told  me the bark was too thick around the base of the shrubs, which would somehow damage the shrubs.  Um, I was a master gardener, and she was full of it.  She actually planned to take my expensive bark!  I made her put it around some of my other shrubs.  Thank GOD it sold quickly.

The biggest problem with HOAs is that any owner can get on the board, and none of them have to have any experience whatsoever managing an enormous amount of funds, or managing properties or contractors, etc.  And as someone else said, they can just change the rules.  

They can also foreclose on your property if you owe HOA fees.

And if you really think about the cost to upkeep a place, would it really cost you that much money if you were hiring people yourself? They normally hire a professional HOA manager, who collects a fee each month, and probably kickbacks on all of the contractors he suggests to do all of the work, etc., he/she says needs to be done. And who agrees with him and okay's it? The board of owners who want to go home because the meeting is going on too long, so they just say okay to everything.

I decided I'd never buy a property again where future monthly costs were an unknown.  Monthly costs you have no control over and decided upon by people who can take away your property if you can't pay them.

They're just a nightmare - in my humble, yet long-winded, opinion :-)

If you're looking for an investment property to rent out in the general Bay Area, why don't you look a little farther out like Fairfield?  Just buy on the right side of town.  I have friends with two properties there and it's nice.  There are people who work in SF and the East Bay now who will commute that far.  They rented to a young couple, one of whom got a job for the school district in Vacaville.  

One of the benefits of buying in CA, is that your property taxes will not rise by much at all as long as you keep it.  It's something like 1.5%/year, I think - based on the original purchase price no matter how long you own it or how much it ends up being worth - they can't reassess value (due to Prop 13).

Good luck!

Llike I said, I've had some HOA deals that were pain-free. In fact some of the best properties of my career were in Las Vegas in gated HOA neighborhoods. It all comes down to doing your research.

Some HOA's are fine and easy to deal with. Some are NOT cool at all.

Don't be scared. Just add the extra steps into your DD process to check out the HOA guidelines, have that meeting, and get everything in writing, and if you need to, be prepared to stick to the HOA's guidelines.

As a side-note, HOA's can be very powerful. They can lien, penalize, and ultimately foreclose on a property. Check the guidelines and know your state's rules when it comes to HOA liens.

Blair Poelman, Broker in Utah (#9299425)

Blair 

I always review the Hoa bylaws. however, I can't go to their meeting - by that time the home might have already sold.

also, like shawn mentions if the hoa people change they can change the bylaws. 

So then there is I guess no way to predict what can happen. 

is that right? 

I don't believe there is a sticky topic for this as of this writing; if there were it would be at the top of the HOA forum here and it would have been readily found.

Watch out for hidden things such like land leases, bossy board members who aren't paying association fees, sketchy management companies, etc.  

We have a condo in Clearwater, FL (1 of a 16 unit building) - since the purchase in 2005, the HOA fees have gone up from the initial $180 to now $420. When purchasing, we did not realize that a big portion of the association fee is the landlease, which is set to increase every 5 years based on a price index. So it's set to keep rising, and the market rent is only about $750. Also, the bylaws initially stated that units can't be rented without board's approval, but everyone rented them out out anyways. Most of the units used to be owner occupied but now only one is, the rest are all rented out. Many of the owners are out of state and don't really have much interest in their units or who lives there, so they end up renting to people who cause issues and so it's harder for others to find good tenants. So one of the main problems is that you don't have very much control over what happens to the community your unit is in.

Another problem is cost of repairs. I'm on the board (got on there reluctantly because I didn't want our whole association to go down the drain) and when dealing with contractors for various repairs, it seems they automatically bid higher because it's an HOA and they know that owners don't have much control over negotiating prices (unless the management company does) and since the work has to be done anyways, the association will pay what is necessary in order to get things done. In essence, there is no efficiency because ultimately, no one is really responsible because everyone is responsible, and because everyone is responsible no one really puts much effort into controlling things like costs, and in the end, everyone pays more than they potentially would if things were managed on an individual level. So it's kind of like socialism - everything belongs to everyone and no one really cares about anything because they are only a small part owner and assume all the other owners should care more.

And all this is with having a management company - one was doing shady things and we barely got rid of them, then self managed for a while, then got another management company who seems to be doing better but is still not interested in keeping costs down.  Their understanding is that since so many owners own the units, they should be ready to "pay their fair share."

And then come the special assessments for a lot of deferred maintenance.  We had to replace all of the entry doors with fire-rated doors.  Now we have to replace a roof, take care of potential foundation issues, etc.  And we have no money in the association because the owners have not yet all paid for the special assessments levied for the door installation.  So now some of the owners are having liens being put on their units, other units have already been foreclosed on and because they aren't selling due to the high association fees, the association is renting them out.

I've been having thoughts of buying out the other owners so that I can take control of the whole building and have better control over the type of tenants that are there and manage the costs.  I know the building can cashflow, even with the Land Lease, but it's almost impossible with the way it's currently organized.

I know there are good HOAs out there and many people who don't have these issues, but the problem is that you don't know whether you will end up in a similar situation and often-times you don't have much control over it.  I remember @Joshua Dorkin beating on HOAs many times on the podcast and I agree with him on many aspects.

At the same time, if you asked whether I would ever consider buying another HOA property - I probably would consider it (I never let one bad experience turn me away from something) but I would be way more careful and buy only if it's a very good deal, that way I'm covered from many angles if anything unexpected happens.

One last thing to mention and consider is this - if you take the monthly HOA payment and instead applied it towards a mortgage payment, how much bigger of a loan can you get? Often times you realize that you might as well $50K or $100k more for a house and the difference in your mortgage will be that HOA amount, except now you have a house and can probably rent it for more than you would a condo. (I know those numbers are very different in the Bay Area, but it's the principle that you should look at - every situation will be different)

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