5 Real-Life HOA ‘Horror Stories’

Scared-woman-peering-through-blinds-1acdf1-300x199When purchasing real estate, you might be one of the 25 percent of people who purchase a property in a common interest development, which is more commonly known as a homeowners association (HOA). And while all properties have issues, HOAs have a unique set of additional operational, legal and financial issues that buyers must consider, analyze and review in conjunction with their purchase.

Because many horror stories are associated with HOAs, some people won’t even consider buying into one, which is understandable. It’s ultimately a personal choice for a buyer to consider.

These are few of those HOA horror stories. Keep in mind that most of these stories would never have occurred if the buyer had just done proper due diligence by reviewing the HOA documents, financial statements, reserve studies, demand statements and CC&Rs (covenants, conditions and restrictions). Each of these items would offer insight into “issues.” It is your responsibility as a buyer to perform the proper due diligence to avoid purchasing into a disaster of a common interest development community.

Ka-ching: Special assessment of $7,500 three days after closing escrow

Did you hear the one about the couple who didn’t read the condominium board meeting minutes and notes about the $850,000 construction defect issue that needed to be repaired and would cost each unit about $7,500 in special assessments? Yup, it was noted extensively for months before this couple purchased, but they didn’t read the stack of documents related to their purchase that came from escrow. So they didn’t know about the assessment until the first board meeting — three days after they closed.

Tip: Read the board of directors meeting minutes to help uncover potential assessments or other issues.

Surprise! Buying a rental property that you cannot rent

Many communities are limited to the number of rental units that can be in the property. Once that threshold is crossed, no other owners can rent out their units until other units convert back to personal residences. In this example, a woman put down $20,000 cash on a condo but didn’t read the CC&Rs. She closed escrow on a $100,000 unit that she planned to lease out. Unfortunately, the board blocked her from doing this because of the rules in the CC&Rs. Unfortunately for her, she lost the unit to foreclosure about 12 months later.

Tip: Read CC&Rs to understand restrictions such as this one. A simple request to the board or management company would have uncovered the problem, and this woman could have terminated her purchase contract and saved $20,000!

Limited parking space: Compact cars only!

This horror story deals with a man who bought a high-rise unit in an older building. His designated parking space was next to the laundry room door. Due to the proximity to the door, his unit’s parking space was restricted, and he was not allowed to have a car wider than 6 feet. Luckily, he drove a smaller car, so it wasn’t an issue. But if he had an Excursion, it would have been a major problem.

Tip: Read your HOA documents thoroughly. Walk around and observe everything about the property you are buying.

Speechless: HOA fees greater than mortgage payment

This story involves a buyer whose HOA fees began to exceed his mortgage payment. He lived in a restricted-income unit, so the price was low and affordable. But, a couple of years in, the older building had capital items that needed to be replaced, such as a roof and elevator. HOA fees skyrocketed, and as a result, his fees went above his mortgage payment.

Tip: Read and understand the Reserve Study, which could have tipped him off to upcoming repairs and replacements.

Pool, clubhouse, common facilities foreclosed upon

Lastly, this story is about an HOA where the developer built the residential units on one lot and the clubhouse, pool and common areas on another lot. The pool/clubhouse lot had a separate loan that went into default, and an investor group bought that lot/pool/clubhouse at foreclosure. As a result, they started selling pool memberships to community members in the adjacent neighborhoods.

Tip: Read the community governing documents, which would’ve revealed the recorded map, plat,or plan for the community.

Yes, HOAs can be a huge benefit to real estate ownership, but they are complicated animals. You must understand the risks of common interest development ownership, and most important, mitigate those risks by reading and analyzing all the documents before you close escrow!

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Buying Investment Properties? Why You Should Consider California

Green California Road Sign with Dramatic Clouds and Sky.California can be a great state to park your long-term real estate investment dollars. Not only has the Golden State provided outsized wealth growth for real estate owners over the past 40 years, but going forward it has some unique characteristics that make it quite appealing to an investment property owner.

Now this isn’t to say that you can just blindly buy any old property in the state and build wealth. But if you do your homework you can find properties that make smart sense. Here’s why:

Proposition 13: Property tax limits

Back in the late 1970s Californians were tired of ever increasing property tax levies, so they passed a initiative that limited property taxes and property tax increases. When you buy any property in California, your regular property taxes are 1 percent of your purchase price. So on a $100,000 property you would pay $1,000 per year in regular property taxes (there may be additional county bond levies or Mello-Roos taxes). That original $1,000 amount can only increase a maximum of 2 percent per year, and it’s averaged about 1.5 percent since Prop 13 was passed. This is contrary to how the vast majority of states’ property taxes work. Most states’ taxes go up each year corresponding to increases in property values, so if your value soars, so do your taxes. But not in California, and that’s a big plus for real estate owners in the state.

Scarcity of valuable land

In most desirable metropolitan areas of the state, very little land is available for development within a reasonable distance from the main employment centers. For example, in San Diego, only a few big parcels are left within an hour drive of the city, and they are all under development. Fewer than 25,000 lots remain before all the land in the county is pretty much built out. So this restricted supply means prices for “dirt” and existing homes should increase over the long term. The major California cities or counties — San Francisco, Los Angeles and Orange County — are all in the same boat. Because of the scarcity of land, the prospects are good for value increases over time.

Difficulty of development, permitting, building

In addition to a lack of available land, it’s really tough to develop in California. It could be a group fighting the developer and demanding lower density of units on the parcel; a land owner wanting a fortune for his or her property; a city’s exorbitant impact and building permit fees; or the sky-high cost of construction materials and labor. These all hamper affordable housing, profitable development and increasing the housing stock. And again, this will restrict supply and most likely increase values of the current stock of property.

Population increases            

If you watch TV, read the paper or surf the Internet, you are probably aware that the population of the U.S. is projected to increase during the next 50 years. And people seem to want to live in the coastal areas. So with the population expanding over future decades, and the desirable weather in the Golden State, it’s likely that California property prices will swell.

Those are the fundamentals, but again, you still need to make a smart purchase decision. Investors should target moderately priced properties that have positive cash flows, then manage their properties well and do their best to maximize profits and minimize hassles. If you do, the chances are good that your investment in some of the best dirt in the nation will help your retirement picture.

Final note of caution: California has high sales, income and use taxes, all of which should be factored into your overall financial decisions.

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