How to Spot a Bad HOA
What’s the difference between a good, mediocre, and downright bad homeowner association? It’s not entirely a matter of opinion. There are specific items to look at and questions to ask that can tell your buyers whether they’re buying into an HOA that will only give them headaches. This information is particularly important in condominiums, where the HOA usually is responsible for maintaining the exterior of the buildings. If they aren’t careful, your buyers could face paying a big special assessment for years of neglected capital improvements after they close. The bill they’re typically stuck with could be anywhere from $1,000 to $30,000. (In some cases, they've gone over $100,000!) Help your buyers perform due diligence before closing by assisting them in identifying issues to minimize the element of surprise. While this isn’t intended to be legal advice and there may be other items to look at other than those mentioned in this article, this should give you ideas for how to advocate for your buyers when dealing with HOAs.
Look at the Community as a Whole
Is it run-down? Don’t solely focus on the one property your buyer is purchasing. When the HOA is responsible for maintaining the buildings, check out neighboring units and common spaces along with the home your buyer is purchasing. Here are some telltale signs of an HOA that isn’t on top of its responsibilities:
- Are the fences rusting?
- Are the building signs in disrepair?
- Does the asphalt look like gravel?
- Are the pool and other amenities clean and in good working order?
- What is the age and condition of the roofs?
- Do the buildings need to be painted?
- Are there staircases and balconies in poor shape that the HOA is responsible for maintaining?
- When were the buildings last treated for termites? Have they been neglected, with a higher risk of unknown termite damage throughout the community?
- Are there problems with siding?
- Are there grading issues causing flooding?
- What is the condition of the gutters, fascia, and other fixtures?
Look at the Reserve Study
First of all, make sure you and your buyers know what this is. A reserve study details an HOA’s long-term funding plan, showing, most important, how much it currently has to offset maintenance costs. It’s the most important tool to determine the financial health of the HOA.
- What is the percent funded? Zero percent to 30 percent means it’s at high risk of a special assessment; 31 percent to 70 percent is a medium risk; 71 percent to 100 percent is low risk.
- How much does the reserve study recommend the HOA saves each year, and how much is the HOA actually saving?
- Has the HOA been following the reserve study and making capital improvements?
- How much money can you foresee being needed compared to what the HOA has saved?
Proactively Ask Questions
Encourage your buyer to call and ask the HOA or HOA management company questions. You may need to make it a condition of the purchase contract that the seller will provide the answers if the HOA management company won’t answer you or your buyer. Keep these questions in mind:
- Have there been any special assessments before? Get the details and ask if there is discussion about having another one.
- Have there been any lawsuits or are any expected? Check court records.
- How many insurance claims has the HOA had?
- If roofs are an HOA responsibility, are there plans to transfer the burden to the owner? How many roof repairs have there been in the last couple years?
- Are there plans to change the HOA’s covenants, conditions, and restrictions?
- Have there been any repairs from extensive water or termite damage in the last couple years?
Your buyer must review the HOA’s covenants, rules, meeting minutes, violation policy, collection policy, and other aspects. Make your buyers a checklist to help them do their due diligence. Help them become an educated buyer on HOA living.
Ignorance isn’t bliss for your clients — or you — when it comes to HOAs. Agents and sellers could potentially avoid lawsuits by making buyers aware of all issues before they close on a property in an HOA. Remember, approximately 70 percent of HOAs are underfunded and in poor condition due to lack of maintenance. These are not HOAs “protecting our property values.”
This problem is not going away by keeping our eyes closed. The first step in improving HOAs is having real estate professionals who will educate buyers on how an HOA should operate. Buyers need to be involved and concerned with the HOA business that they are becoming a part of before closing — and they need to stay involved after closing.