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RESIDENTIAL REAL ESTATE |
REAL ESTATE TOPICS: HOMEOWNER ASSOCIATIONS - the Good, the Bad, and the Ugly
Perhaps the ultimate two-edged sword, the homeowner association (HOA) can provide protection of homeowner interests and property values and/or impose restrictions on the freedoms you would otherwise have as a property owner and nearly stigmatize property. In many HOA controlled communities there is peace and harmony among the residents due in part, perhaps, because of the HOA. In other communities the HOA has become a nightmare for all concerned.
Therefore, in communities that have an HOA, it is very important that potential home buyers give full and careful consideration to this powerful organization and their Covenants, Conditions & Restrictions (CC&Rs). CC&Rs are legally binding documents that are typically written and established by the developer of a planned community and recorded against all of the properties in the community.
Please understand that if the property you are buying is controlled by an HOA, you cannot just ignore them and hope they go away. You are absolutely and legally obligated to follow their rules and be governed by them. At closing you will sign papers that bind you to the recorded deed restrictions including any CC&Rs in effect at that time – and of course, to pay all appropriate dues, fees, fines, penalties and assessments as they come due. If legitimate charges are not paid, it is likely they will become a lien against your property and will be paid out of your proceeds upon the ultimate sale and transfer of your home.
Initially, the developer, or their designee, is going to be the sole director of the association until a certain percentage or number of homes are sold as defined by the Bylaws. During the initial development when the homes are being sold by the developer/builder or their agent, a public report, which will include the CC&Rs, is generally required to be provided. Once the community is populated with enough residents, control of the HOA is turned over to them. Sometimes this is a carefully planned and executed turnover, sometimes it amounts to the developer leaving a pile of unsorted paperwork in a cardboard box on somebody’s doorstep in the middle of the night. Residents should make sure to hold the developer accountable for funds collected during their reign. In any event, it is now up to the homeowners to organize themselves and elect a Board of Directors and implement the CC&Rs. Sometimes this can be facilitated by the hiring of a property management company that specializes in homeowner association management. Regardless of whether the HOA decides to be self run or a professional manager is hired, competent legal advice should be sought from an attorney that specializes in HOAs.
Sometimes developers will have provisions or rules that are in their own best interest during the construction and sale period that might later be modified or removed by official action of the Board of Directors (Board) of the homeowners association. For example, the developer may have had a restriction on parking in the streets for his own benefit in facilitating the movement of construction equipment during that time period. Homeowners may now decide by vote to change or remove that restriction if they choose to. This is an excellent time for any interested members to closely scrutinize the CC&Rs and Rules for any revisions that may be advisable. Any such changes to the CC&Rs should be reviewed by an attorney experienced in these matters and officially recorded as well.
Assignment of Developer’s Rights
Be aware that if there are vacant lots remaining after the developer/builder has turned over control of the homeowner association, there is some risk associated with what may happen on those lots. The developer builder may act responsibly and maintain the lots in an acceptable manner – or they may not. Some developers have been known to allow construction trash/rubble or equipment to be stored on vacant lots for extended periods of time. If the real estate market is soft and the developer moves on to another location or town – or goes out of business or declares bankruptcy – it’s going to be tough to hold them accountable. Even if this isn’t the case, there is often a provision (a developer exclusion) in the CC&Rs that makes it difficult to take action against these folks for undesirable behavior. Of perhaps greater concern would be a case where maybe several years have passed and building lots have still remained vacant and unsold. And, the original developer/builder is uninterested or unable to execute new construction on those lots, but rather sells the lots to an individual who wants to build a property that does not conform to the community standards. If the developer “assigns” their rights to the new lot owner, the HOA may not be able to have any control over what gets built on the lot. Well, some may say that, “that’s the way it ought to be”, but others who purchased homes on the adjacent lots – reasonably expecting that all of the homes to be built after theirs, were going to be single story houses as shown in the original developers plans – now find out that their spectacular view (that they paid an extra $30,000 for in lot premium) is going to be blocked by a large two-story house. It can get ugly. This writer learned this lesson the hard way while serving as President of the Board of Directors for his HOA.
Requirement to Provide Information
On future resale of an individual home in communities with 50 or more units, the HOA is required by law [Arizona Revised Statute (ARS) # 33-1802(4) and # 33-1260(3)(H)] to provide prospective buyers with a copy of the CC&Rs along with other related information and documents. When there are fewer than 50 units, this burden is on the individual seller of the property.
Purchase Contract Provisions
The Arizona Residential Resale Real Estate Purchase Contract incorporates an Addendum that covers the provisions related to HOAs. This one page document informs the buyers about any fees and dues and how they are paid, any assessments imposed by the HOA and if there are any fees related to the transfer for the property and who is going pay these monies. This addendum states the requirement discussed above about getting HOA documents and information to the prospective buyer within 10 days. More importantly perhaps, this addendum provides that, “Buyer is allowed five (5) days after receipt of the information from the Seller or homeowner’s association to provide written notice to Seller of any items disapproved.” Therefore, even after being under contract for the purchase of a home, a buyer can cancel the contract based on something they find undesirable in the HOAs’ CC&Rs – and they can retrieve their earnest money.
The HOA Addendum also has the following important provisions:
Information required by law to be provided:
- A copy of the bylaws and the rules of the association.
- A copy of the declaration of Covenants, Conditions and Restrictions (“CC&Rs”)
- A dated statement containing:
(a) The telephone number and address of a principal contact for the association or any other person designated by the board of directors.
(b) The amount of the common regular assessment and the unpaid common regular assessment, special assessment or other assessment, fee or charge currently due and payable from the Seller.
(c) A statement as to whether a portion of the unit is covered by insurance maintained by the association.
(d) The total amount of money held by the association as reserves.
(e) If the statement is being furnished by the association, a statement as to whether the records of the association reflect any alterations or improvements to the unit that violate the declaration. The association is not obligated to provide information regarding alterations or improvements that occurred more than six years before the proposed sale. Seller remains obligated to disclose alterations or improvements to the Premises that violate the declaration. The association may take action against the Buyer for violations apparent at the time of purchase that are not reflected in the association’s records.
(f) If the statement is being furnished by the Seller, a statement as to whether the Seller has any knowledge of any alterations or improvements to the unit that violate the declaration.
(g) A statement of case names and case numbers for pending litigation with respect to the Premises or the association.
- A copy of the current operating budget of the association
- A copy of the most recent annual financial report of the association. If the report is more than ten pages, the association may provide a summary of the report in lieu of the entire report.
- A copy of the most recent reserve study of the association, if any.
- Any other information required by law.
- A statement for Buyer acknowledgement and signature as required by Arizona Law.
So, as you can see, it is a big deal.
Transfer Fees
Definitely want to watch out for this one. Some HOAs assess a fee upon transfer of property ownership. In Tucson, as elsewhere, this fee may go by different names. Some HOAs call it a “Buyer Transfer Fee” – maybe $1,200 to $1,300. Others call it a “Working Capital Contribution” or a “Transfer Process Fee” which may be $400 to $700 or whatever their going rate is. Other names include “Capital Preservation Fee” and “Community Enhancement Fee”. A few HOAs are actually charging as much as 1% of the sale price of the property. On a $350,000 home, that’s $3,500. Agreeing on who pays this fee in the purchase contract becomes pretty important when these significant figures come into play. Some buyers may simply not be able to afford such a hefty tab.
Restrictions on Rental Property and Resale
Some homeowner associations have decided that is not in their best collective interest to allow property owners to rent, lease or sublease their properties. Obviously, if you are considering buying a house with this purpose in mind, it would be beneficial to be aware of the details of such restrictions or prohibitions. There are many variations on this type of restriction. In some cases, it is an outright ban, sometimes there is a restriction on how many properties can be rental properties at one time, other HOAs may require that rental periods be of certain length. There may also be strict notification requirements regarding property rental to sometimes include providing the HOA with a copy of any lease agreement entered into. Some HOAs even go so far as to reserve the right to approve the selection of the tenant(s) on a case-by-case basis.
A few HOAs have restrictions on how soon after a purchase the property can be resold. This kind of provision is intended to discourage investors and property “flippers” who do not intend to live in the property, but sell it at a profit in the near future.
HOA Dues
Keep in mind that the regular dues assessment, whether is $100 per month paid quarterly, or $12 per month paid annually – is subject to change in the future. It may be worthwhile to get in touch with the HOA contact or talk with other people living in the neighborhood to find out what’s been going on lately and if there are any significant changes coming in the future. Maybe there’s been talk of installing a community pool that will require an assessment of thousands of dollars six months from now. And maybe thereafter, the monthly dues are going to double to maintain it.
Perhaps the roadways are privately owned and are going to require repaving in two years causing a huge assessment on each property. This kind of thing does happen.
Your Future Plans for Property Improvement
If you are going to want to do any property improvements after moving in – is it going to be OK with the HOA? It may be a good idea to find out beforehand. Will it be permissible to build that storage shed you are going to need? How about those Bermuda shutters you want to install to shield the windows from the sun? Sometimes the seemingly simple and reasonable thing that you want to do – just won’t be allowed. It will be much better to find out now than be disappointed and upset later.
Flag Display
The “Freedom to Display the American Flag Act of 2005” was signed into law by President Bush on July 24, 2006. This new law prohibits restrictions on displaying the United States Flag on residential property by homeowner associations. Full information about this legislation is available at:
http://thomas.loc.gov/cgi-bin/bdquery/z?d109:h.r.00042:
Some older CC&Rs may still have such restrictions in them – but they are now clearly unenforceable.
Incidentally, the entire U.S. Code regarding the flag is available at:
http://www.access.gpo.gov/uscode/title4/chapter1_.html
Satellite Dishes
Many HOAs have had restrictions on placing satellite dishes on houses or in yards for any purpose. However, such restrictions have been illegal since 1996. Therefore any such CC&R provisions are unenforceable.
For more complete information on this topic, take a look at this FCC fact sheet.
http://www.fcc.gov/mb/facts/otard.html
For Sale Signs
In some communities in the past in Arizona, there were restrictions or outright bans on the placement of For Sale signs on individual homeowner properties. By virtue of Arizona Senate Bill 1062, which became effective on September 19, 2007, all HOAs must permit homeowners to display an industry-standard size sign on their own property.
Here is the actual language, in part, from actual regulations resulting from the bill which are Arizona Revised Statutes (ARS) 32-1261 and 32-1808:
A.R.S. 32-1261 Flag display; for sale signs; applicability
A. Notwithstanding any provision in the condominium documents, an association shall not prohibit the outdoor display of any of the following:
1. The American flag . . .
B. The association shall adopt reasonable rules and regulations regarding the placement and manner of display of the American flag . . . The association rules may regulate the location and size of flagpoles but shall not prohibit the installation of a flagpole.
C. Notwithstanding any provision in the condominium documents, an association shall not prohibit the indoor or outdoor display of a for sale sign and a sign rider by a unit owner on that owner's property, including a sign that indicates the unit owner is offering the property for sale by owner. The size of a sign offering a property for sale shall be in conformance with the industry standard size sign, which shall not exceed eighteen by twenty-four inches, and the industry standard size sign rider, which shall not exceed six by twenty-four inches.
A.R.S. 33-1808. Flag display; political signs; for sale signs
A. Notwithstanding any provision in the community documents, an association shall not prohibit the outdoor display of any of the following:
1. The American flag . . .
B. The association shall adopt reasonable rules and regulations regarding the placement and manner of display of the American flag, the military flag, the POW/MIA flag, the Arizona state flag or an Arizona Indian nation's flag. The association rules may regulate the location and size of flagpoles but shall not prohibit the installation of a flagpole.
C. Notwithstanding any provision in the community documents, an association shall not prohibit the indoor or outdoor display of a political sign by an association member on that member's property, except that an association may prohibit the display of political signs earlier than forty‑five days before the day of an election and later than seven days after an election day. An association may regulate the size and number of political signs that may be placed on a member's property if the association's regulation is no more restrictive than any applicable city, town or county ordinance that regulates the size and number of political signs on residential property. . .
D. Notwithstanding any provision in the community documents, an association shall not prohibit the indoor or outdoor display of a for sale sign and a sign rider by an association member on that member's property, including a sign that indicates the member is offering the property for sale by owner. The size of a sign offering a property for sale shall be in conformance with the industry standard size sign, which shall not exceed eighteen by twenty-four inches, and the industry standard size sign rider, which shall not exceed six by twenty-four inches.
Pet Restrictions
It is not uncommon for CC&Rs to restrict the number and type of pets permitted to be kept on the property. Obviously, to a pet owner or someone that plans to be, this can be a very important consideration
Busybodies with Clipboards
One of things that can happen in an HOA is that some people get a little carried away with their enthusiasm for rule enforcement and take it upon themselves to frequently walk around the neighborhood, with clipboard in hand, taking notes on alleged infractions by their neighbors. For example, “The trash can on lot 42 was left at the curb past the 5:00 pm deadline on trash pickup day – the homeowner was seen taking the container in at 5:10 pm.” Or, “the homeowner at 123 Appleseed Lane was observed operating a shop-vac for five minutes on Sunday afternoon in violation of the rule on operating power tools on Sundays.” These reports are then delivered to the Board of Directors with a demand for action. Again, depending on what side of the fence you are on regarding the friend or foe status of the HOA, this type of behavior can be very annoying or welcomed.
And, it doesn’t have to be the lone busybody, sometimes there is an entire committee of clipboard carriers who regularly take a walking tour of the community and find deficiencies in their neighbors’ properties and discover rule violations. These committees are sometimes empowered to send warning notices and demand corrections by a deadline. They may also be able to impose fines and penalties – in some cases rather significant amounts of money – and almost always with the cost of high emotion and stress.
This writer once helped a friend in another community in town (that had a very aggressive HOA landscape committee) by replanting and improving the landscaping in the friends front yard. While working in the yard, a gentleman drove by very, very slowly and observed everything going on with a very stern look. Nothing was said at the time, but a week later, the friend got a rather nasty letter from the Board advising her to never do anything again to her front yard landscaping without the advanced, express written permission of the Board of Directors. She was fined $95 for not seeking permission. The plants and landscaping fortunately were in compliance otherwise – so they very kindly waived the $500 fine they had considered.
Parking
Parking of even small vehicles can be a real challenge with the small garages typically built in Southern Arizona – not to speak of larger vehicles or SUVs. And then there are trailers, motor homes, and boats, etc. Prospective buyers will want to make sure that the CC&Rs are going to allow for adequate parking of the types and numbers of vehicles on their own property or perhaps on common areas or designated parking/storage areas. Some HOAs have very strict and aggressively enforced rules about parking. Some communities don’t allow vehicles of any description to be parked in the owner’s own driveway for more than a short period of time. A few HOAs prohibit street parking overnight. There are lots of variations.
Bigger Brothers
Another layer of influence over any given residential property may possibly be the existence of a Neighborhood Association. These organizations sometimes come into existence when there are significant issues in the area that affect multiple HOAs or also when HOAs in older communities become inactive. An example of one of these organizations and their website can be found at: http://www.lcmna.org/index.php.
Another really good source of information about and for HOAs is the Community Associations Institute: http://www.caionline.org/index.cfm. Another source of information is the National Institute of Community Management: http://www.nicm1.com/home.php.
Disputes
When friendly discussion with the HOA doesn’t produce the desired result, homeowners may consult with a qualified attorney for assistance, and/or they may choose to seek help from the Arizona Department of Fire, Building and Life Safety: www.dbfs.state.az.us/administration/hoa_information.asp
DISCLAIMER
John P. Hale is owner and Designated Broker of Touchstone Residential Realty, Inc., 2485 West Tom Watson Drive, Tucson, Arizona 85745. He has been a residential real estate agent in the greater Tucson Metropolitan area since 2000. In addition to being licensed as a Broker rather than a salesperson, John holds the following designations awarded by the National Association of REALTORS®: ABR – Accredited Buyer Representative, ASR – Accredited Seller Representative, CRS – Certified Residential Specialist, and GRI – Graduate Realtor Institute. And, John is among the very few that have been named, MRE – Master of Real Estate by the Arizona Association of Real Estate.
Please note that this article was written by him to reflect the author’s opinion of good practice at the time of its’ writing for the general benefit of those considering sale or purchase of residential real estate, it is not intended as definitive legal advice and you should not act upon it as such without seeking independent legal counsel. Frequent changes in the law and standards of practice may cause this information to become outdated and no longer applicable or even incorrect.