I am always intrigued by investors who buy a property in a homeowners association (HOA). They buy a property because it was priced right, looked to be in a great area, and had the potential for profit. Unfortunately, some of the investors I have come across did not understand HOAs, did not read the rules, or did not think the HOA would enforce the rules. They were interested in their own profit, at the expense of the other investors.
I own multiple properties in an HOA. As a matter of fact, 20 of my 24 properties are in the same HOA. The property is comprised of 120 units, of which I own 20. The property looks like it should be owned by a single entity, but instead there are ~30 different investor/owners. Only three of the properties are owner-occupied out of the 120 units. I am the majority property owner in the complex.
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Pros and Cons of an HOA
There are pros and cons to this investor situation. All these properties are located close to each other. I can walk to all of them once I park close to any one of them. I have a set of rules that I must follow. If the HOA needs a major improvement or a budget increase, I pay 16%+ of it. If the neighborhood goes bad, all my investment is at stake.
This property was just over 20 years old when I purchased my first 4-plex, in a class A neighborhood. Most of the properties had already cycled through two or three owners by this time. Virtually all of the previous owners had already gone into foreclosure; this was well before it was fashionable for investors to be foreclosed on. The place was a dump and vacancies were rampant. The property’s prime years for making money were squandered by “investors” who did not understand HOAs, rental property, and tenant selection.
Get on the HOA Board
Once I purchased property in the HOA, I offered my help with anything the HOA Board of Directors needed. I did not want to be on the Board. At a meeting I was unable to attend, I was appointed Secretary, and was on the Board. (Note to self: Never volunteer any services prior to a meeting you cannot attend.)
After attending several meetings and purchasing additional property in the complex, I began to understand the rules. I came from a point where I did not know the difference between the Declaration and the Bylaws to a point where I could recite many of the clauses. Knowledge is power. As I came to understand the rules, I also came to understand that many owners were violating them.
With many unpaid volunteer organizations, if you show up to about three meetings, you have a hard time not getting elected to a higher position. I was soon elected President due to my diligence in the meetings and calling out for different investors to abide by the rules. At that point, we had a simple tenant screening rule: “No felons and no sex offenders.” As simple as that rule was, we had many investors who could not abide by it. So the battles began.
Abide By the HOA Rules
One of my first actions as President was to foreclose on an investor who refused to abide by any tenant screening rules. He has an outstanding assessment balance, somewhere around $7,000 across two 4-plexes, and I convinced the HOA Board to foreclose on his two properties. Our logic was simple: Whatever the legal expenses were, they would be less than the cost of letting the investor bring in subpar tenants. If we received the property due to the foreclosure, we would have a property encumbered by a mortgage. We were never going to make any mortgage payments. We were going to rent the property out if we could — and delay any bank initiated foreclosure once that started.
At some point, in the middle of our foreclosure, one of the investor’s tenants was involved in a large neighborhood fight involving 10 to 15+ people. It was large scale brawl where several people were arrested and multiple police cars were present. If you do not think that this impacts rents for everyone else, your head is in the sand. We sent a letter to the investor’s tenants that the Association was going to evict them if they did not leave voluntarily. Since they were on some sort of housing assistance, the housing support company agreed to move them out if we did not evict them. This too was a great thing, as we were not 100% sure we could even legally evict them. That dried up a guaranteed source of the investor’s income and helped the foreclosure against him.
Once we started the foreclosure, I contacted the bank and made sure they knew about the foreclosure. I told them that we were not going to make any payments and were going to delay any of their efforts once we received the property. From what I could gather, the owner was already late or behind on several payments, and the bank was getting tired of continually trying to work with him. Once our foreclosure was initiated, the bank knew they were going to lose additional money if they did not get started, so the bank began to foreclose on their own. This was a great thing, as we saved additional legal expenses by letting the bank proceed.
Make Rules to Protect Property Values
There is no rule more important to our HOA that our minimum tenant standards. A single bad tenant can reduce rents across the complex by a significant amount. What would the value of your own home do if a level 3 sex offender moved in next door? Or if there was a murder (or two) on your block? Or a notorious crime figure moved into an apartment complex?
We have had other investors attempt to skirt the tenant screening rules as well, although 90%+ of them comply. A rule violation that is not corrected immediately gets a simple letter from an attorney. That letter will cost an investor ~$250, immediately becomes a lien, and is foreclosed on if not paid in 30 days. If we have to submit the $250 for collection, it can get to several thousand pretty quickly. One owner recently paid almost $6,000 in legal expenses to protest a fine that was only $1,000 initially. Once she saw her property advertised in the public notices for the Sheriff’s sale, she knew we were serious and the foreclosure train had already left the station. She promptly paid our legal expenses that were incurred due to her actions.
As a result of our aggressive rule enforcement, I would guess our rents are up over $100 per unit across 120 units. That is an increase in revenue of over $144,000 per year for the entire complex. The investors have come to like the taste of the increased rents and less work of better tenants. It took time and effort — and was worth every cent.
Do you have property in an HOA? What has your experience been?
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