Because You Are Buying More Than a Home: Part I

Mt. Hood“Because You Are Buying More Than a Home!” What does this tag-line really mean? What “more” are you buying when you purchase a home in a homeowners association?

When a buyer purchases a home in a homeowners association (HOA) they are not only purchasing a piece of real property, they are also involuntarily enrolled as a member or “investor” in a non-profit corporation which is known by various names including, homeowners association; property owners association or the somewhat nondescript owners association. In the case of condominiums or other attached housing schemes it may also be referred to as the “association of units owners” or “unit owners association.”

Regardless of the name, the organization functions in essentially the same manner and in the vast majority of cases it is organized under the corporation laws of the state where the property is located. There are a few exceptions to this rule but they are so few and far between that we will not consider them in our discussion. The legal entity is a form of non-profit corporation known as a “mutual benefit with members” association. The number of members can range from two, in the case of a duplex that is platted and sold as a condominium, into the thousands such as you find with large master-planned communities, some of which may have in excess of ten thousand members.

In addition to becoming a member of this non-profit corporation when you purchase a home in an HOA, the property you are purchasing is also encumbered by a set of rules, regulations and restrictions on its use that are known as the Covenants, Conditions and Restrictions or CC&Rs for short. The CC&Rs are codified in a legal document called the Declaration, which is recorded with the deed to the property. By virtue of the legal “attachment” of the Declaration to the deed, the CC&Rs are said to “run with the land,” which means they pass from one owner to the next each time the property changes hands.

The CC&Rs are typically written by a real estate attorney who is hired by the developer of the property. In legal parlance the entity that records the CC&Rs with the deed is known as the “Declarant.” In most instances the Declarant is also the entity that incorporates the HOA. The obligation to abide by the CC&Rs is a mandatory requirement of ownership and among the mandatory requirements of ownership is that the property owner is conscripted to membership in the HOA which is created by virtue of the CC&Rs. Courts throughout the country have been very consistent in upholding the sanctity of CC&Rs. As such it is foolish to assume that the CC&Rs can be ignored or that the “rules don’t apply to you.” Non-compliance with the CC&Rs could result in fines being levied by the HOA and in extreme cases the HOA may resort to civil litigation to enforce the CC&Rs.

As a member of the HOA each property owner is also obligated to contribute to the financial support of the organization by paying assessments or dues. Depending on how the HOA is organized these dues may be paid monthly, quarterly, semi-annually or annually. In the case of most condominiums and attached housing schemes the dues are paid monthly. Whereas many HOAs that involve single-family homes in a planned community setting may require payment of dues on an annual basis, similar to the way the county tax assessor levies property taxes. In addition to any regular dues the members of an HOA are responsible for an allocated share of the organization’s debts and future spending obligations.

To compel owners to pay HOA dues and fees the HOA is authorized by law to lien the property of an owner who is delinquent in paying their dues or any other levies that have been approved by a vote of the board of directors or in certain instances, the entire HOA membership. In this respect  the HOA dues and fees are similar to property taxes in that non-payment can result in the loss of one’s property through the foreclosure process. The laws of each state vary with respect to the rights and obligations of homeowners and how lien laws are enforced, but suffice it to say there have been cases where a property owner has lost their property through the foreclosure process as a result of non-payment of HOA dues other authorized levies.

The obligation to support the HOA financially may also result in the property owner having a “special assessment’ levied against their property. A special assessment is a levy by the HOA which is in addition to the regular monthly or annual dues that the owners are already paying. The HOA may levy a special assessment for any number of reasons. Among the most common reasons for a special assessment is to raise money to pay for major maintenance, repair and replacement of various common area improvements. Special assessments may require the approval of the general membership but not in all cases. If the HOA is unable to raise money through the special assessment process it can lead to deferred maintenance of common area improvements, which in turn can have an adverse impact on the value of the homes within the community.

The HOA is governed by a board of directors. In this respect the management structure of the HOA is similar to the way a for-profit corporation is organized with one important difference. Whereas, with a for-profit corporation the management structure almost always results in senior and middle level management personnel that are directly employed by the corporation, in the typical HOA setting the management component is generally provided by an outside vendor which is  a separate and distinct profit-making entity.

In future installments of this series we will examine the implications of this confluence of the board of directors and third-party management services which have been combined to create a form of private residential governance under which some 60 millions Americans now find themselves living.