Investor buying enough units to control HOA. Worry or not?

14 Replies

I own three condos in an 18 unit building that I rent out. Mostly investors owned units in building. A few owner occupied. New investor just bought nine of them and his agent already called to see if I would sell. I really don’t want to because they cash flow well and have been low worries. If he buys one more unit he would control the votes on the HOA. Could he simply propose jacking the HOA dues so high to force the rest of us to sell to him? I’m curious if anyone has ever faced this. I should add that the bi-laws are very weak as they were drawn up in 1973 by a terrible lawyer.

@Ron Fletcher I'd reach out to @Andrew Syrios as they bought almost the majority of a dev in Kansas City. He can probably answer this for you. I don't think ethically legally they can "price you out". 

Yes, I would worry.   Either you sell at a higher price and give him the controlling unit or somebody else sells and you're left holding the bag.

This guy wants the whole building to take it private and convert to apartments.

Somebody else will stand in his way and prevent that, but their life will be miserable.  Concede the territory and take your money elsewhere.

If you like the hassle free money these properties have been so far, you're not prepared for the intense (and losing) fight ahead of you.

Your cheese is moving.  Go find new cheese.

HOA board members have fiduciary duties. and if they jack the rates for you they MUST jack them for themselves.. the money goes into the HOA not their pocket.. I am thinking your worrying about nothing..

when I create HOA's for my new communities I never turn them over to the owners until I am done building 100% of my project out.. last thing you want to do is answer to a bunch of homeowners :) then they set up their committees and they make sure everyone keeps the property in good condition etc etc. although these PM's that take over HOA's those rascals can be really tough to deal with .. I am dealing with that on my Summerlin place..

Take the gentleman out to lunch and ASK him.  You never know, this might turn out to be a winner for both of you.  At least you know he will not be banning rentals.

@Bettina F. Funny you should say that. The HOA President wanted to ban rentals a few months back so I bought his unit to get him out
Originally posted by @Ryan Dossey :

@Ron Fletcher I'd reach out to @Andrew Syrios as they bought almost the majority of a dev in Kansas City. He can probably answer this for you. I don't think ethically legally they can "price you out". 

He could try to do something like that, but I would be surprised if he did. I'm not an attorney, but I'm basically positive that kind of thing is considered illegal if he's just trying to jack up the HOA fees to get others to sell at a discount.

I don't think it's jacking up the HOA dues that is the issue.

It really depends on what this guy's play is.  If he wants the building to demo and redevelop, then he can choose to let his units stay vacant (or put some tenants in - this scenario works either way) and then let the building deteriorate until the other units are undesirable for rentals and devalued for purchases.  

If he just wants the whole building for rentals as is then he can still make life miserable for you and your tenants.  Arbitrary rules with harsh enforcement on your units, no enforcement on his own, for example.  Your tenants have dogs?  Suddenly there is a No Dogs rule.  Your tenants have work vehicles?  Suddenly there is a no commercial vehicles rule.  Parking is a free for all?  Suddenly there are harsh parking rules with expensive requirements to comply.  Is this illegal?  You betcha - arbitrary enforcement of rules can bring him to court and get a judge to approve motions to compel.  But that's expensive, unless you want to represent yourself in court - in which case it's time consuming.

He really wants your tenants out?  Suddenly the tree shading their windows is cut down, there are leaf blowers going at 7 am on the weekends, water shut offs 'for maintenance', etc.

The issue here is that whatever his play is (and it doesn't matter what it is), you are along for the ride because your only remedy is lawsuits if he's not playing ball.  Your only option would really be to partner with him, but I'm not sure why he would share.

If your post had indicated that you are a fighter, that you tend to look at things "for the principle of the matter" and that you don't like being pushed around, I'd advise that you buckle up, get your checkbook out and hire a great lawyer.  In the end, all your profits will go to the lawyer and you still may not have the end result you want.

But your post indicates that you like the hands off approach that these units have brought you so far and that you really enjoy being passive in your investments (who doesn't???).  If you are going to fight this guy, it's likely to be a full time job.

There is easier money to be made elsewhere.  I'd go find that.

I owned a timeshare unit in a development with many unsold units.  The developer could not give them away.  So, they were sold by the county through a tax sale.  A new company that is owned by a real estate developer bought a bunch of them, giving the developer majority on all votes.  Within 2 years they controlled the board.  

Now this timeshare development was never developed fully, only maybe 20 percent because the original developer went belly up. ..there were too many timeshares in this area for the market.

The developer who bought the unsold timeshares at the tax auction donated the weeks for a tax right off.  What he wanted was the land and someone else supporting him developing the rest of the undeveloped land.  THAT land now was common ground for the timeshare association.  But the County had already approved the permits for the original developer and they were still valid.

So, sure enough at the annual meeting--the only one that timeshare owners might, at least a few, attend and that an agenda is sent out for, they announced that they awarded a contract to their own development company to fully develop the timeshares.

Yep, they were going to build more timeshares at our owners expense, and we would then all share in the profit (or losses, which is what it was going to be) but his company was going to build at double the cost per square foot for a high level home in that area, and these were rural timeshares, not high level.  So, well, his company was making bank!

Oh, and we were getting a $20k assessment per week of the timeshare for each of the next 3 years as they built out the units, but a rebate when they sold completed units--like they were going to sell them!  Way more timeshares in this area than the market could fill!

What saved us was a financial report showing we were way low on percent of units that paid their maintenance dues.  We figured out, with the help of the PM, that the developer did not pay for their annual maintenance fees on any of their units.  

SOOOOOOOOO, according to the bylaws, if someone has not paid dues the can not vote for any of their units votes.  So, we had an immediate recall of their board members, an emergency vote, and we only ran enough non-developers to fill the spaces so our vote would not be split.  

Developer thought they were smart, but they were not.  They paid fees for one unit, thinking they could vote as they paid, but they could not.  They had to be paid up on all units to vote.  And they had too many units to pay for all of the maintenance fees for all of them.  Plus they could not vote for a period of time after being behind in the fees.

The timeshare PM had an attorney that did foreclosures on units behind in their maintenance fees.  Generally his limited time was on units that were years past due, but he was prioritized to foreclose on the lowest priced maintenance fees of the developers units with unpaid maintenance fees, moving on to the higher prices ones last.  (Every unit is a vote, no matter the annual maintenance price.)  Goal was to make them pay for the most expensive ones, to break him as fast as possible.  We worked with the County as the taxes were not paid either.  With the same owner information the attorney cranked the cases out fast.

In the end they had about ten units left, which they eventually sold.  The units do sell for about $100-$300 on the resale market, just not at the $50k new level.  

It was a fun year, and the new board candidates are now watched much more for what their interests are.

OP you really need to talk with the guy and find out what his game plan is.  Maybe you will like it and want to join him.  Maybe you need to get out.  But you will not know until you ask him, what do you like about this place, what do you want to change, what are your long term goals?

@Ron Fletcher I work with investors in Chicago that invest in properties this way, but I should preface that our procedures are governed by Illinois laws and Chicago laws so youf area may be different and you should consult with local counsel.

When we purchase a large chunk of units in a condo building, the investor has targeted the property as a takeover possibility with short term rental profits. I can't imagine the investor would want to put any restrictions on rentals as they will want to rent out their units to generate income. The deal was attractive because your building has 18 units and they were able to purchase 9 to start. Walking in the door, the investor already has 50% of the vote and unless all the other unit owners show up for the meetings, has majority rule for any vote. If there is any deferred maintenance on the building, the investor can push to do the work and force the other unit owners to do a special assessment. The investor likely has the cash to pay his or her portion of the special and is forcing the hand of the other owners to sell. 

The investors magic number is 14. In Illinois, we have a rule that allows a vote of at least 75% of the ownership in a condo building to force the sale of the entire building. We've had a few smart condo owners in Chicago realize their building is worth more as a deconverted apartment building than individual condos and vote to sell to an investor for far more than their individual units were worth. The rest of subject to the method of an investor taking a majority interest and chipping away at the rest. Once your investors hits 14 units, he or she can vote to force the other 4 to sell. That's obviously assuming the investor can get 5 more units, but expect them to begin having conversations and testing the waters.

Originally posted by @Bob Floss II :

@Ron Fletcher I work with investors in Chicago that invest in properties this way, but I should preface that our procedures are governed by Illinois laws and Chicago laws so youf area may be different and you should consult with local counsel.

When we purchase a large chunk of units in a condo building, the investor has targeted the property as a takeover possibility with short term rental profits. I can't imagine the investor would want to put any restrictions on rentals as they will want to rent out their units to generate income. The deal was attractive because your building has 18 units and they were able to purchase 9 to start. Walking in the door, the investor already has 50% of the vote and unless all the other unit owners show up for the meetings, has majority rule for any vote. If there is any deferred maintenance on the building, the investor can push to do the work and force the other unit owners to do a special assessment. The investor likely has the cash to pay his or her portion of the special and is forcing the hand of the other owners to sell. 

The investors magic number is 14. In Illinois, we have a rule that allows a vote of at least 75% of the ownership in a condo building to force the sale of the entire building. We've had a few smart condo owners in Chicago realize their building is worth more as a deconverted apartment building than individual condos and vote to sell to an investor for far more than their individual units were worth. The rest of subject to the method of an investor taking a majority interest and chipping away at the rest. Once your investors hits 14 units, he or she can vote to force the other 4 to sell. That's obviously assuming the investor can get 5 more units, but expect them to begin having conversations and testing the waters.

wow learn something every day.. would not have thought you could force someone to sell..  

@Ron Fletcher it sounds like you have 6 more units to buy, quickly!

When the HOA votes do you get three votes, one for each unit or 1 vote as a member. Check the by-laws to determine if they say each unit gets a vote or each owner gets a vote? If it is each unit it may be time to place them on the market at slightly above going rate and then go shopping. The other choice is to buy more units yourself.

He who controls the HOA controls everything . Me I would make him a deal and sell all three .

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