Lessons from the Pros

Real Estate

Properties with Homeowner Associations – What to Watch Out For

A homeowner association (HOA) is usually a not-for-profit organization established by a community board which governs by a set of rules established by that HOA. These rules are CC&Rs (covenants, conditions and restrictions).  The HOA determines the rules and the budget for the shared property.

Free WorkshopA homeowner association’s primary job is to establish the CC&Rs. The CC&Rs establish monthly dues for all homeowners and can restrict the rights of the owner and how they use their own property or the jointly owned property.  For example, a HOA may have rules on who can occupy the property on a permanent basis, what colors can be used on the exterior of the unit, what time the common areas can used and so on. Homeowner associations are established to hopefully protect the rights of all in the community.

Another big issue that affects the investor is the fairness of the HOA to prohibit or restrict an owner from renting out their property.  Should this be an issue of the rules set by each individual HOA or of the law?  Well, there are many states where these issues are currently being argued on both the legislative level and in the courts.

There is disputing that a HOA has the right when it is formed to adopt rules restricting the ability of its members to rent out their units.  In fact, there are retail buyers that will look for complexes that have restricted rental rules.  These owners want to be assured that they are living with other owners.  Investors would look for the opposite.  Associations are changing the rules after they were formed; and that is the real issue.

Here is a case study that will demonstrate what I’m talking about:

A Townhouse is purchased as a personal residence.  The CC&Rs had no rule regarding the ability of an owner to rent out his/her property or properties.  Over the years, a few more units are acquired for the purpose of renting them.  They might even be purchased in an LLC.

Then members of the association become concerned that the number of rental units is too high and some of the renters are becoming a problem.  An election is held and the proposed rules are adopted.  According to these new rules, no more than a certain number of units in the development may be rented at any one time.  No owner is allowed to own more than two rental units. Leases are subject to approval of the HOA. No lease may be longer than one year.  Existing leases are honored, but, at the termination of the lease, if the owner has more than the allowed number of rentals they cannot continue to re-rent that unit.

The issue here is that the right to lease one’s property is a fundamental property right.  In a brief filed by CAR (California Association of Realtors) it stated, “This fundamental right should not lightly be taken away from those who acquire real estate with those rights intact… Any attempt by the homeowner association to take away the fundamental right to lease one’s property without adequately accommodating existing owners’ investment should be considered unreasonable…”

The CC&Rs and the HOA were established to create a pleasant living situation for all residents.

Its main job is to provide things like gardening, outside repairs, pool upkeep, other maintenance issues, collection of membership dues and managing common areas. HOAs should not be totalitarian in their control.

To avoid these kinds of issues as an owner/investor, at a minimum, you should attend all association meetings and, even better, run for a position on the board.

Also, make sure that your tenant knows what the HOA rules are and that they are responsible if rules are broken and you are assessed a fine.  Make sure in the lease that the fine can be then assessed to your tenant.

Condominiums and Townhouses can be very good rentals that attract good tenants but you must be aware of these things.

Great Fortune,

Diana Hill

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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