A couple of weeks ago I ran a post, Do You Ever REALLY Own Your Home, in which I challenged the assumption that you actually enjoy true ownership, in the traditional sense. I cited limited property use restrictions, heavy economic use restrictions, the potential for legal attachment, and increasingly burdensome property taxes as factors eroding true homeownership. Today I want to focus a factor that puts even more extreme limits on home ownership – homeowners associations, or HOAs. And more specifically, why you should avoid buying in HOA neighborhoods.
In the interest of full disclosure, I’ve lived in both HOA neighborhoods and non-HOA neighborhoods – as well as condos – so I have some perspective on what’s really going on – and why HOAs aren’t as benign as most people think.
What is an HOA Neighborhood?
An HOA neighborhood is something like a community within a community. You live in a city or town – a municipality – but if you also live in an HOA neighborhood, you also live in another distinct legal entity. And just as the municipality has rules, so does the HOA.
There are various types of HOA neighborhoods, and each vary in terms of the amenities they provide and their control over your status as a homeowner.
Voluntary HOAs – These are something more like traditional neighborhood associations in that they’re informal, have no legal standing and are generally organized to deal with a specific issue confronting the neighborhood. That issue could be something like organizing to block certain outside developments or circumstances that are considered harmful to the neighborhood, or just to get some seasonal parties going. They typically have small dues, but you aren’t required to pay them or even to join the HOA.
Mandatory HOAs – If you buy a house in a mandatory HOA neighborhood, you are required to join the HOA by virtue of the fact that you will be a homeowner in that neighborhood. There is no provision for you to opt out – once you close on the sale, you’re in. There are generally substantial neighborhood amenities, commonly a pool, tennis courts, a club house, playgrounds and a formal entryway into the neighborhood. You will be required to pay an HOA fee, on an annual, semi-annual, quarterly, or monthly basis. There are covenants and restrictions, that you will be required to sign at closing, that will include bylaws that mostly tell you what you can’t do with your property.
Condominium HOAs – This kind of HOA is much like the mandatory HOA, except that it provides more substantial amenities. When you buy a condo, you own only the interior of the home. The exterior, from the walls and ceiling outward, are common property. That means they’re owned by the HOA. As a result, condo HOAs can be even more restrictive than those that cover detached homes. However, condo HOAs also bear greater responsibility. Since the physical structures are owned by the HOA, it is the HOA that must pay to make exterior repairs and improvements, including replacing the roof, pavement, landscaping, windows and siding as needed. They also pay the hazard (exterior) home insurance on the property, and often certain utilities, such as trash removal. Fees are usually monthly and a lot higher than with detached housing. But the HOA will also provide certain services, such as landscaping and snow removal. It’s the perfect arrangement for people who don’t want to concern themselves with exterior maintenance of any kind.
Non-mandatory HOAs really can’t hurt you in any way, and condominiums are a different animal entirely in which you share ownership of the home with the HOA, who provides very specific and substantial services. As well, with condos most people recognize that property use is both restricted and totally necessary due to the communal nature of the arrangement.
What I’m going to focus on from here on are mandatory HOAs in non-condominium neighborhoods. They won’t replace your roof or maintain your yard, but they have a labyrinth of rules and restrictions that can seriously challenge the assumption that you actually own your home and are free to do with it as you please.
Even worse, mandatory HOAs can negatively affect your economic situation. We’ll get to that in some detail in a bit.
What Makes HOA Neighborhoods Such a Threat?
I’m convinced that most people who buy into mandatory HOA neighborhoods have no idea what they’re stepping into – until they run afoul of the association board.
If you don’t already get it, the primary purpose of HOAs is to maintain and improve property values in the neighborhood. Before you go thinking that’s a good thing, imagine that your house is controlled by a stock broker, who’s only objective is to increase the value of your property.
While that may be a good thing on the day you sell the house, how it plays out between now and then will be another matter entirely. The problem is that how we live our lives is usually not consistent with what is necessary to maintain and increase property values.
In order to carry out the business of increasing property values, the HOA enacts and enforces a series of rules designed to ensure that neighborhood standards of conformity are met. You’ve probably noticed that HOA neighborhoods tend to have dozens or hundreds of substantially identical homes. This is by design. Conformity is easier to enforce in similar homes. Customization of any kind becomes easier to spot.
The HOA will limit what color you can paint your house, how many people can live in it, how many – and what type of – vehicles you can park in the driveway, how often you need to paint the exterior, where you place your garbage dumpsters, and the condition of your landscaping. They can also prevent you from adding on to the house, or maintaining out-buildings, like tool sheds or a tree house for your kids. And that’s just the general stuff.
Once you’ve been prohibited from doing something with your property, or made to do something you don’t want to, you begin to get a clearer picture of what’s really going on.
To add insult to injury, should you be found to be in violation the HOA has the legal right to impose legally enforceable fines on you, that are automatically attached to your property.
Some Real Life Examples of What an HOA Can Do
In case you think that I’m exaggerating about this in any way, here are some real-life HOA horror stories:
HOA Horror Story #1. My wife and I discovered that our friends on the board of our HOA were not our friends at all when we had the exterior of our house repainted. We had the house painted gray with pink shutters, like you might find on a New England cottage. We got a lot of compliments from our neighbors. Then the notice came from our HOA. The gray was fine, but our pink shutters were too…pink. We had to drab them down, or face a battery of consequences, including accelerating fines, that the notice apprised us were the associations legal right to pursue. All color schemes that departed from the original that came with your house required pre-approval by the board. So much for freedom of choice.
HOA Horror Story #2. One of my best friends (who moved into the same neighborhood after we moved out) got a notice from the HOA telling him he needed to put curtains on the second floor windows of his house. The reason: “neighbors” (an HOA’s favorite subterfuge) complained that they could see the furniture in his bedroom windows. I still can’t make sense out of that one, but it was similar to the notice that we received for the offensive paint job on our shutters.
HOA Horror Story #3. A mortgage client of mine received notice from his HOA that he and his wife needed to store their three-year-old daughter’s toys out of sight, rather than letting them sit in the backyard. I’m not sure exactly what the crime was here, but they were forced to comply.
HOA Horror Story #4. A distraught friend of mine called me one day telling me that she had just received notice from her HOA informing her of a recently passed rule requiring all vehicles to be garaged between the hours of midnight and six a.m. No overnight parking of vehicles either in driveways or on streets would be permitted. Since all houses in the neighborhood had no more than a two car garage, this was a fundamental issue for anyone with kids who also have cars. I’m not sure what they were going for with this one either, but I thought that it would create a security risk, since the entire neighborhood would look abandoned overnight. She sold and moved out shortly after.
Update: Read Are HOAs Cults Behind Smiling Faces? for a first hand report of a full-fledged HOA horror story.
HOA Economic Use Limitations
Since this is a personal finance blog, I want to focus more closely on the effect that HOAs have in regard to your ability to earn a living. We’re not even going to get into the fact that HOA dues will be required even if you’re unemployed and don’t have the money to make the payment, but I digress.
Conformity is the rule in HOA neighborhoods. The preference in a typical HOA neighborhood is to have people work in white-collar positions, or if they’re self-employed, to work in “clean businesses”. That mostly restricts you to businesses that involve nothing more than your computer and telephone. The more that you depart from this ideal, the greater the potential to face a confrontation with the HOA – a confrontation you’re destined to lose.
If you work in one of those two preferred capacities, you probably are not the least bit concerned that the association might limit other activities. You might even be happy about it. But what would happen if you lost your job or your clean business were to fail? What if you need to pursue economic and financial options that didn’t fit neatly within those parameters? These days, you should never be too certain that can’t happen to you – it can happen to anyone.
And if it happens to you, you’ll find yourself economically constrained by the very restrictions you once enthusiastically supported.
This is just my opinion, and I’ll be the first to admit that I can’t substantiate this with hard evidence, but I believe that the preference in a typical HOA would be for you to move out of the neighborhood. After all, struggling homeowners aren’t good for property values. Part of how HOAs protect and advance property values is by keeping out the “riff-raff” (I was actually told that by the president of a condo HOA we were considering moving to). They’re always on the look-out for even a hint of it. If you start to resemble anything close to that riff-raff, you may come into their crosshairs.
Here are some of the economic/financial activities that a typical HOA will prevent you from engaging in:
- Renting a room to a boarder to earn extra money to help pay your mortgage.
- Growing food in your backyard (flowers fine, tomatoes – no good!).
- Parking a commercial vehicle on or near your property.
- Storing major tools or inventory in your house.
- Meeting customers or clients at your house.
- Constructing out-buildings or erecting equipment used in connection with a business.
A lot of people today are being forced to retool into lines of work they never imagined. Living in an HOA neighborhood won’t help you do that if you decide that you want to start a cleaning business, a home remodeling business, a sales operation, a landscaping business, or if you want to become a truck driver.
HOA neighborhoods are conducive to people in a very narrow career range. It’s important to understand the implications of this if you are facing a decision to buy a house in an HOA neighborhood. Should you hit on hard times, or decide to enter a career or business that is not consistent with the covenants and restrictions, the HOA can legally get in the way of your operation.
Your Recourse: Practically non-existent!
An attorney friend of mine here in Georgia told me that once you buy into an HOA neighborhood you have no choice but to go along with their rules. Not just the ones that exist when you move in, but any subsequent rules that are passed. In Georgia at least, and I suspect in many other states as well, HOAs have legal preference before the courts, not the least of which because you sign in on agreement with the covenants and restrictions at the time of closing (you have no choice, other than to not buy the house), signaling your willingness to comply. According to this attorney, legal challenges against HOAs typically don’t end well.
The unkindest cut is that they can impose a series of fines for non-compliance. These fines will increase in size the longer you fail to comply. They can then place a lien on your house, forcing you to pay out of the sale of the house. Presumably, they can block the sale if there isn’t enough equity to cover the fines, but my guess is that they’ll be happy to see you go and won’t let the unpaid fines stand in your way. But that won’t stop them from obtaining an unsecured judgment against you after the fact.
While you may think that you can somehow insulate yourself from hostile action by your HOA by being a good neighbor, don’t count on it. Most of the HOA issues I’m familiar with were brought against people who were otherwise good and compliant neighbors.
HOAs and The People Factor
HOAs represent a level of government, one close enough to the ground to be manipulated by its participants. Not all of those participants have good intentions.
I’ll be accused of painting with a broad brush, but HOA boards are often collection points for the worst kinds of people who could be in charge. While I readily acknowledge that there are a lot of people serving on HOA boards who have the purest of intentions, there are plenty of the other kind. I’ve known some people who joined boards but got run off by the games.
Some examples of the kinds of people who are drawn to become HOA board members:
- People who have political aspirations, and see an HOA board membership as a springboard.
- People who are looking for an extracurricular activity – particularly one of rank and responsibility – to add to their business resume.
- People who thrive on popularity and being the center of attention.
- People who have an ax to grind with a neighbor, and join the board so that they can do something about it.
- People who want to set the rules but not obey them. (Our HOA had a restriction on unleashed pets, but the HOA treasurer let his dog run the neighborhood freely early every morning.)
- Control freaks – people with an abiding need to be in charge.
- People who like being part of “the clique”, which the HOA board often is.
Unfortunately, many or most of these personalities tend to be of like-mind, which makes disputing the board’s actions mostly a waste of time. A popular radio personality here in Atlanta once ranted about HOAs, saying they’re elitist at the core, and I have to agree. As I said earlier, the primary goal is to increase property values, which doesn’t leave much room for neighborly interaction. It can be surprising and shocking how “official” they can be when carrying out board agenda. It’s as if they aren’t even your neighbors, but more like precinct overseers.
Here’s another complication to ponder about HOAs, but this one has nothing to do with the board – HOAs are made to order for resident complaining neighbors. Every neighborhood has at least one – that person who believes that it’s their duty to make sure that everyone in the neighborhood “behaves”.
It could also be someone who has a specific bone to pick with you, and decides to turn you into the board whenever possible. That person usually makes a part-time career of studying and understanding the covenants and restrictions, so that he or she can pull them out against an unsatisfactory neighbor at any time. They won’t bring their concerns to you – they’ll go to the board, where they can complain anonymously. And like it or not, the board will usually side with whoever’s doing the complaining.
In a strange, twisted way, HOAs can feed neurotic behavior.
Swimming against the tide
Most people assume the best when it comes to HOAs – that is, until they have a conflict with the board. Only then do they realize the true extent of what they’ve signed themselves up for. By then, it’s usually too late. It’s then that you come to realize that HOA neighborhoods are not democracies.
I realize that most people have a favorable view of HOA neighborhoods, not the least of which because rising property values are considered the Holy Grail of homeownership in America. But if any of the issues I’ve listed above will be a concern to you, or if you’re at least a bit of a nonconformist, or if you have any career aspirations beyond the white-collar corporate cubicle, you might do well to avoid HOA neighborhoods if you possibly can.
And you usually can.
Have you had any negative experiences in an HOA neighborhood?