HOAs

Homeowner’s Associations are such a mixed-bag when it comes to real estate development.  When a buyer hears HOA it can sometimes communicate a superior product, with lush maintained lawns, sparkling pools surrounded by towel draped chaise lounges, and shiny new fitness equipment always empty and available to help you change your life for the better. 

photo credit to http://www.cnn.com

HOA may also communicate lengthy Board meetings full of contentious issues, know-it-all Board presidents who like to impose their will on unsuspecting neighbors, and lawn police.

photo credit to http://www.rebelcircus.com

One of the first questions I hear out of many real estate shoppers when informed the property they’re looking at is part of an HOA is, “How much are the dues?”

Many of the real estate projects I’ve worked on through the years have included HOAs.  The appeal to developers is they can put in that fancy entrance gate and signage, they can include a park with bocce courts and firepits, and they can add the pool/fitness room/men’s and women’s locker/spas and not have to pay for them forever.  The facilities are very attractive in the sales process and many buyers are truly attracted to an amenitized community that will have certain standards enforced on new construction within the community.

photo credit to http://www.mlentrygates.com

Developers build the amenities, hope to recover the costs with increased sales revenue, and know they can turn the facilities over to HOAs to maintain and manage in the future.  In theory, it’s wonderful.  In reality it can be, too.

But when things go south with the HOA it can tear a community apart and be hunting grounds for construction defect attorneys.

One risk a developer takes with constructing and operating HOA amenities is that sales pace could slow dramatically and leave the developer paying tens or hundreds of thousands in dollars in annual dues for units that have yet to sell.  In California, developers are required to provide financial instruments that guarantee the viability of the HOA until the point when enough units have sold to buyers that the expense of the HOA is not concentrated with the developer.

Another problem HOAs create for developers is they provide a gathering place for buyers to complain about problems with their units.  Developers and builders generally offer warranties on their products and successful developers stand by their product and take pride in what they do because they want to continue doing it.  It’s relatively easy to deal with one buyer and their complaint(s).  When a group of buyers convene in the HOA and share complaints they tend to feed off each other.  Suddenly, an innocent design or construction mistake can transform into the belief that the builder and seller conspired to construct a low-quality product and commit fraud upon their customers.

Next add a construction defect attorney to the mix, who gets paid a percentage of whatever he or she can recover from the developer and their insurance company.  There exists an entire industry based on hijacking HOAs and convincing them to enter lawsuits that cost millions and take years and tear apart many relationships.  There may be ultimately be siding repaired or windows replaced but when the motivation becomes the largest possible legal victory instead of fixing simple construction problems, much is lost along the way.    

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Author: edmorgan1

I am an accounting and finance professional focused in the real estate development sector in the North Lake Tahoe and Reno area. I have managed the accounting and financing of large master-planned communities in high end resort areas with complex arrangements for large public companies and for private asset managers. I am experienced in GAAP financial reporting, business plans, cash forecasting, variance reporting, audits, treasury management and tax. I have helped companies grow and downsize during the real estate cycle and have a proven ability to manage diverse teams through real estate matters. In my current role I am managing a 900 unit master planned community through a change in ownership and am seeking new residential development opportunities in Northern Nevada.