Author Topic: Do your homework if buying a rental with HOA  (Read 6301 times)

meadpointofview

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Do your homework if buying a rental with HOA
« on: May 22, 2013, 03:13:47 PM »
I bought a 4 bedroom rental town-home in a desirable Denver suburb near mass transit station at the height of the real estate bubble ($145k).  The property is now worth ($90k), I have had the same renter for 9 years (thankfully), so I have had someone else pay on a loan ($100k payoff) for the first 9 years of the note.  But I am still upside down and not cash flowing.

The reason I am posting today is to advise people to do their homework on the financial stability of the HOA before making any emotional decision to invest in real estate.

The HOA I was now a part of was not funding the reserves to cover the exterior of the buildings (yes roofs), much less new pavement (we own the streets), or anything else the HOA was responsible for (water/sewer, 50 yr old landscaping, etc.).  Not to mention that the current HOA dues was barely enough to cover the operating expenses of the community because "shared water". 

So in order to protect my investment I had to join the board and work to raise the HOA dues (which sucks) every year to start funding our reserves and covering bad debt and delinquencies (about $50k annually).

So learn from my naivete - if buying a rental in an HOA:
1.)  Get a income statement and balance sheet from HOA before placing an offer.
2.)  Understand community expenses like water / sewer etc.


Johnny Aloha

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Re: Do your homework if buying a rental with HOA
« Reply #1 on: May 22, 2013, 07:09:43 PM »
Great advice.  Personally, I avoid condos/townhouses just because of the HOAs and lack on control.  However, other people don't mind and consider it part of deferred maintenance, no different than a house.

Hotstreak

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Re: Do your homework if buying a rental with HOA
« Reply #2 on: May 22, 2013, 10:49:53 PM »
HOA Horror story..

A smaller community, 20 units, trusted one lady and had her in charge of the HOA.  She'd been doing it for years and years with no issue, and nobody thought twice about re-electing her.  Well, she passed away, and two new board members took over.  Turns out the original lady had been stealing money from HOA accounts for personal use (no oversight)!  Their reserves were completely gone, she didn't have records of who paid their dues, she let the insurance on the building lapse, etc., and she died with little to no estate for them to try and collect from.

Everyone who lives there had to pitch in quite a bit of money to get the insurance going again, and their dues were raised significantly to build reserves and take care of neglected maintenance.  And NONE OF THE RESIDENTS HAD ANY IDEA!  Shit, if there was a fire.. I can't fathom how the residents would have come up with the money for repairs.

tryan

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Re: Do your homework if buying a rental with HOA
« Reply #3 on: May 23, 2013, 06:06:24 AM »
I tell buyers to sit thru a HOA meeting BEFORE you buy .   Listen to the issues you're about in inherit.

My lake house is in a HOA due to private: roads, beach, and water.  My first meeting was at the tail end of the subdivision dispute with one member (he had 25 acres and was looking at 1 acre lots ... 25 homes).

HOA spent 35 grand fighting it only to learn it has no right to limit him.

Would not have changed our minds to buy and build ... but a real eye opener.

kikichewie

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Re: Do your homework if buying a rental with HOA
« Reply #4 on: May 23, 2013, 06:36:48 AM »
When we bought our condo, the HOA fees were $275. When we sold in 2008 four years later, they were $685.  We also had an assessment during that time for about $5000, none of which old have been apparent before we bought. 

When we sold, we disclosed that another assessment had been discussed, and quotes had been requested for painting the building.  Sure enough, they got another assessment over $10,000 within six months of buying the place.  (And it was actually maintained pretty well with not a lot of delinquencies or vacancies!). Luckily we had proof of very clear disclosure, because they did call the realtor and complain.

I hate HOAs for this reason, and I'll never do it again except as a renter.  You have zero control, whether you're on the board or not.  And never hope to upgrade any of the common areas either.  The votes never pass!

tryan

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Re: Do your homework if buying a rental with HOA
« Reply #5 on: May 23, 2013, 08:20:39 AM »
Reminds me of a friend's condo in Old Orchard ME ... his HOA just approved a 24K "special assessment"  PER OWNER!

They are hurricane proofing the exterior ... shatter proof glass in all windows, new siding ...

He voted for the improvements ... they have the cash.  But he recalled senior after senior speaking against the upgrade.  Saying they didn't pay 24k for thier unit um-teen years ago.  Now they're on a fixed income and forced to sell.

Really sad.

SwordGuy

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Re: Do your homework if buying a rental with HOA
« Reply #6 on: May 23, 2013, 09:39:29 AM »
I made a decision decades ago NEVER, EVER to live under the control of an HOA. 

I would rather have my neighbor paint his house in puce and lime-green paisley and put his car on blocks in the yard than deal with an HOA.

salmp01

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Re: Do your homework if buying a rental with HOA
« Reply #7 on: May 27, 2013, 04:35:12 PM »
I own several condos and town homes and they are all in an HOA.  Many HOAs had big financial problems when large numbers of the units went into foreclosure and the owners stopped paying dues.  When this happened banks wouldn't finance these properties which caused these to sell for very low prices.  As a result of this, I purchased several of these over the past 3-4 years.   Some of these HOAs are run very well and others are not all that well run.  I agree that it's very important to look at the financials before purchasing a property in an HOA.  I have not had any major issues with any of the properties that are in an HOA and I will continue to buy as deals appear (although it does appear that the really good deals may be gone for a while).

Villanelle

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Re: Do your homework if buying a rental with HOA
« Reply #8 on: May 29, 2013, 02:50:24 PM »
This advice is equally relevant for non-rental properties as well. 

Kayano_55

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Re: Do your homework if buying a rental with HOA
« Reply #9 on: June 02, 2013, 12:22:23 PM »
Also, beware of lawsuits with HOAs. . .typically around the 10 year mark of a property the HOA will sue the builder (due to statute of limitations) for any issues (small or large) which can also impact the value of homes and affect normal buyers from buying (many banks will not provide financing for properties in litigation).  You also will run the risk of a special assessment if the HOA loses the lawsuit.  This means zero ability to refi and zero ability to sell to normal buyers - you'll need to find an all cash investor to bypass the banks. 

frugalcoconut

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Re: Do your homework if buying a rental with HOA
« Reply #10 on: June 05, 2013, 08:26:24 PM »
I never wanted to deal with an HOA either but I also didn't want to deal with outside maintenance issues so I guess the HOA won out (for now).

I also want to add though ... make sure you always fully understand the rules and regulations and bylaws of the HOA.  For example, my HOA recently adopted a clause where you have to own your townhouse for a year before you're allowed to rent it out.  Not exactly friendly toward investors...

mustacheme

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Re: Do your homework if buying a rental with HOA
« Reply #11 on: June 23, 2013, 09:23:40 AM »
It is very important to take a very close look at the HOA before buying.

A friend and I purchased condos within a year of each other. Her HOA had not been storing up reasonable reserves and all the units were hit with a massive assessment when extensive mold and rot problems were discovered in the buildings. Since the market had gone down and the HOA was financially unstable she was unable to qualify for a loan to cover the assessment (as were many of her neighbors). She ultimately walked away from her condo destroying her credit in the process.

The association for my condo has been very well ran for the most part. The reserves are kept at a good level, and we are a large enough HOA to maintain the services of a professional management company. That said, I have still heard some very scary things brought up in the time I've been here. The HOA received a large settlement due to a lawsuit against the builders. There were rot and structural issues of balconies. Some needed to be addressed immediately, others will cause problems in the future and need to be fixed. The money from that suit came in while I happened to be on the board. There were several people in the community who were pushing hard to have the funds from the lawsuit distributed to unit owner's rather than placed in reserves. I and other board members successfully fought that idea, but it would have been a very real possibility if the makeup of the board had been even 1 or 2 people different.

I feel lucky that I've had an overall positive experience with my condo's HOA. However, given a choice I would never purchase in an HOA again. If I did find myself needing to live in another condo I would do significant research on the HOA. I would definitely sit through meetings, ask for all of the bylaws and rules outside the bylaws, and definitely ask for the financial information on the board. I would never consider purchasing into an HOA that did not have a professional management agency. Ultimately you are putting a huge financial trust in the HOA and in whoever is elected to the board.

There are also more issues around renting out a unit with an HOA. HOA's often (and I believe should) limit the number of rentals at any given time. Also, owners are financially liable for any fines or penalties that the renters might incur.