Determining the Quality of an HOA

14 Replies

We live in AZ; have rentals in CA. Both of our SoCal rentals (one condo, one SFR) are in HOA areas. In two years, we've never had any problems with them. We bought them as newbies, and all we looked at were the fees, the amenities, and what was and was not covered.

Now we plan to buy a rental property in Avondale, AZ, and all the SFRs of similar quality are in HOAs.  After reading the problems people have had, I need a heads-up on how to find out how good they are.  I've sought help from people living in HOAs in the City-Data Forum but have yet to receive a reply.  We're particularly interested in Garden Lakes.

Thanks.

Consider the boards and management companies separately. Few homeowners pay attention to the HOAs, so boards may be dominated by zealots or by people who are not inclined to question the management. The boards officially are in charge, but often the management companies dominate the association's affairs and the boards rubber-stamp things.

Find out how much the associations and particularly the management companies charge when a home is sold. In my neighborhood, the association charges $300, for nothing at all, and the management company charges an additional $490. Nearby, where I have a rental property, the management company charges at least $500 and won't even say what the charge is.

The management companies charge these transfer fees for about 10 minutes of clerical work -- to prepare a bill and send a zip file of standard documents to a title company.

Also, ask when an association last had a reserve study made and to what extent the reserves are underfunded.

Reserve fund, any assessments or foreseen assessments, cc&rs, - including any rental restrictions. Good luck!
Originally posted by @Bob H. :

Consider the boards and management companies separately. Few homeowners pay attention to the HOAs, so boards may be dominated by zealots or by people who are not inclined to question the management. The boards officially are in charge, but often the management companies dominate the association's affairs and the boards rubber-stamp things.

Find out how much the associations and particularly the management companies charge when a home is sold. In my neighborhood, the association charges $300, for nothing at all, and the management company charges an additional $490. Nearby, where I have a rental property, the management company charges at least $500 and won't even say what the charge is.

The management companies charge these transfer fees for about 10 minutes of clerical work -- to prepare a bill and send a zip file of standard documents to a title company.

Also, ask when an association last had a reserve study made and to what extent the reserves are underfunded.

 $500 does sound like a lot but the high cost is due to the liability being undertaken by the management company, not the work that it takes to create the resale package.  If a buyer buys a property based on legal info contained on the resale cert that ends up not being accurate, the management company can be sued over it.  And it only takes a small oversight to complete misrepresent the financial and/or legal status of a unit.

The reserve study is probably most important.  I would also look at how increases have been implemented.  Then you would want to see the minutes of the last several meetings.  A red flag would be a lot of petty matters brought up over and over.  Does the board handle items quickly and consistently?  And be sure to read and agree with the bylaws.  Do not buy with the intention of ignoring or changing them.

Originally posted by @Marc M. :

 $500 does sound like a lot but the high cost is due to the liability being undertaken by the management company, not the work that it takes to create the resale package.  If a buyer buys a property based on legal info contained on the resale cert that ends up not being accurate, the management company can be sued over it.  And it only takes a small oversight to complete misrepresent the financial and/or legal status of a unit.

Yeah, they always throw in that liability excuse. They never have an actual example to cite, though, and the minuscule risk doesn't justify the gouging. A store doesn't charge you an extra $500 because you might trip and fall and break your neck and become paralyzed when you walk through the door.

The management companies are going to buy liability insurance for all their business anyway. Also, their contracts with the associations will have a bunch of "hold harmless" language that places all the liability on the associations.

A lot of good advice from the folks above.

As with everyone else I am in agreement the Reserve Funds, Special Assessments, and mismanagement of association funds is the biggest financial risks.

Next is the additional fees, app fees, move in/out fees, access card fees, background check fees, pet fees.  I have one association that takes 1 month to approve or deny a renter so it is challenging.  

If you are a good judge of character a face to face meeting with the management company to ask some basic questions as well as a drive through to check the maintenance standards of the community will help you make the final determination.

Originally posted by @Jolie Winkler :
Reserve fund, any assessments or foreseen assessments, cc&rs, - including any rental restrictions. Good luck!

Hello everyone! I'm new here and this is my first post on BP. I couldn't ignore this one haha. 

As the Treasurer of an Owner Managed HOA (12 unit condominium), I co-sign the above tremendously. I reluctantly took on the role due to mismanagement of funds and I'm the only owner in the building with the skill (and willingness) to take over the task.

The former Treasurer had good intentions, but no skill for the role and that lead to so many special assessments that could have easily been avoided if the reserve fund wasn't treated like a joke. We have gone 3 years with special assessments and the way its looking that will continue. Thats another story. Tip: A Self Managed HOA that has no real estate experience and is managing the building = drama.

Back to topic :)

A healthy HOA should be able to tell you the status of the reserve account and whether or not the current monthly assessments consider projections for the next 10 years. I say 10 years, but that really depends on your goals with the location. Either way a healthy HOA shouldn't hesitate at all to back up the above. Depending on the HOA's relationship with management (we also manage the building....) they should be able to tell you what they have done to validate these projections. Asking about a date for the professional Capital Reserve Study will be what I ask for if I purchase again.

If the HOA is very healthy, they should be able to answer these questions quickly. A responsive HOA is a good sign. These are things I've learned in my experience and will never purchase a unit again without evaluating the HOA just as well as I evaluate the property.

Sorry that this is long, but I hope someone finds it useful. 

You already have a ton of good advice here. The meeting minute notes is a good one. Its perfect to identify how quickly things get done like @Bob Bowling said. 

If the HOA is owner managed, I would also ask how long they've held their board titles. This one may or may not indicate anything, but our secretary held their position for less than one year and quit. A healthy and durable HOA should be able to work together, especially if they are acting as the manager of the building.

Make sure they can get things done. A lot of our special assessments is a result of the prior board not being able to get things done. For example, ignoring roof leak complaints for years so they could focus on selling units they purchased via auction. Ended up being a $25k repair and the roof leak issue still isn't fixed so there are new owners who will be hit with special assessments within 12 months of living in the building. 

Does anyone here know how an HOA can go about getting financing for major repairs? Sorry if this is off topic.

Not sure how things operate in Arizona, but I'm sure the process is similar for most HOAs. Here's my process on determining the health of a HOA.

1.) Work with a great realtor who has experience purchasing condos/townhomes, particularly for investment purposes.  This way, when he or she reaches out to listing agents, he can ask the right questions (i.e. rental cap? pending litigation? building mgmt having struggles? ratio of owner occupied vs. rental units? special assessments?).

2.) The realtor should then send you listings for units that only meet your needs.

3.) Once you make an offer, you should receive the "Resale Certificate" which is a packet of docs that include Board Minutes, Budget, etc.  In the Minutes, I look for any areas of contention among members and other issues (i.e. thefts, etc.) occurring in the building.  In the Budget, I look for how well finances are being handled.  If there is a surplus, then that's a major plus.

Hope this helps.  

Originally posted by @Bob H. :
Originally posted by @Marc M.:

 $500 does sound like a lot but the high cost is due to the liability being undertaken by the management company, not the work that it takes to create the resale package.  If a buyer buys a property based on legal info contained on the resale cert that ends up not being accurate, the management company can be sued over it.  And it only takes a small oversight to complete misrepresent the financial and/or legal status of a unit.

Yeah, they always throw in that liability excuse. They never have an actual example to cite, though, and the minuscule risk doesn't justify the gouging. A store doesn't charge you an extra $500 because you might trip and fall and break your neck and become paralyzed when you walk through the door.

The management companies are going to buy liability insurance for all their business anyway. Also, their contracts with the associations will have a bunch of "hold harmless" language that places all the liability on the associations.

 Everybody want to CYA, even management companies.  Hold harmless clauses and insurance don't prevent a lawsuit, they are simply layers of protection.  Your comparison has nothing to do with the topic at hand; a management company creates a resale certificate for a third party which, inherently, creates a liability.  It's simply economics: this liability doesn't become worth it for the $5 in paper it costs to print out a resale package.  It does become worth it at a certain fee, whatever that may be, though I do agree that $500 is higher than I've ever heard one costing before.  

Let's say you want me to climb a tall ladder to clean the gutters.  To me, it's not worth the risk of falling for $10. Now if you offered me $500, I'd probably be willing to accept the risk.  It's really that simple.  And yes, people do get sued over mistakes in resale packages.

Originally posted by @Ashley G. :

You already have a ton of good advice here. The meeting minute notes is a good one. Its perfect to identify how quickly things get done like @Bob Bowling said. 

If the HOA is owner managed, I would also ask how long they've held their board titles. This one may or may not indicate anything, but our secretary held their position for less than one year and quit. A healthy and durable HOA should be able to work together, especially if they are acting as the manager of the building.

Make sure they can get things done. A lot of our special assessments is a result of the prior board not being able to get things done. For example, ignoring roof leak complaints for years so they could focus on selling units they purchased via auction. Ended up being a $25k repair and the roof leak issue still isn't fixed so there are new owners who will be hit with special assessments within 12 months of living in the building. 

Does anyone here know how an HOA can go about getting financing for major repairs? Sorry if this is off topic.

 If you have healthy reserves and a satisfactory (it's bank dependent) delinquency rate, you should have no problem qualifying for a loan.  Your best bet is a local institution that does lots of work with condos/HOAs since they'll be familiar with the process.  Your cash flow is typically the only collateral they'll loan against unless you're a coop since the units are owned in fee simple, hence why the reserve amount and delinquency rate matter.  I would also check out Morgan Stanley, they have some great options for capital repair loans that a couple of my clients are in the process of investigating.

Originally posted by @Ana Marie B. :

Not sure how things operate in Arizona, but I'm sure the process is similar for most HOAs. Here's my process on determining the health of a HOA.

1.) Work with a great realtor who has experience purchasing condos/townhomes, particularly for investment purposes.  This way, when he or she reaches out to listing agents, he can ask the right questions (i.e. rental cap? pending litigation? building mgmt having struggles? ratio of owner occupied vs. rental units? special assessments?).

2.) The realtor should then send you listings for units that only meet your needs.

3.) Once you make an offer, you should receive the "Resale Certificate" which is a packet of docs that include Board Minutes, Budget, etc.  In the Minutes, I look for any areas of contention among members and other issues (i.e. thefts, etc.) occurring in the building.  In the Budget, I look for how well finances are being handled.  If there is a surplus, then that's a major plus.

Hope this helps.  

 Just to add to the above, comparing the income statement to the budget can tell you very quickly if the association is financially on track YTD.  If there are any large overages, depending on the category, that may be a red flag you want to ask about.  For instance, everyone predicted that last winter would be a mild one.  In my area, March crushed us so many associations went way above their budgeted amount.  That's a reasonable overage but if you see that in any of the repair or contract categories, you want to figure out why.

Also, compare the amount being contributed to reserves against the reserve study, which should be updated every 5-7 years.  There should be at least 100% of funding based on the amount in the reserve study and I always advise clients to contribute more if they can because unexpected problems always arise.

Thank you all for this terrific advice.  I'm taking notes.

Our offer in Crystal Gardens (Garden Lakes lite) was accepted yesterday. It's a 3/2 lakefront property (more like man-made channel-- no boats, fishing, or swimming), and the minute you open the front door, you see right through the house to the water. We offered all-cash (as did the other potential buyer), but a very quick close, so now we've got to go through the HOA investigation, have the inspections, and hopefully close escrow within 2 or 3 weeks.

@Marc M.

Mark, unfortunately our reserve account is not healthy at all. Its not even 5 figures and won't be for another 10 months unless I take advantage of my position as treasurer and increase assessments - which per the bylaws is my responsibility to do. 

I took up the treasury position out of frustration with a lot of things and I'm preparing myself to deliver some really tough love to other units. They voted me in and some owners are hoping that the board will save money. Welp! We will, but it won't be in the form of an assessment reduction. They will get more money out of the sale. The way things are going the HOA will be bankrupt if we don't increase assessments and a bankruptcy will decrease the market value of units.

All very very good advice has been given on this post and I appreciate it. 

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