Let’s debunk some HOA and government myths

By Deborah Goonan, Independent American Communities

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Myth: Because HOAs are self-governing, residents experience a reduction in government intrusion.

This is a favorite talking point of strong supporters of States’ Rights and Home Rule at the local level. What could be more local than your homeowners, condo, or cooperative association? Supporters love the idea that the Association can write its own rules without any interference from the state or federal government.

But in reality, the “rules” are not written by residents or even the property-owning residents. In almost all cases, the Declaration, which includes the Covenants, Conditions, & Restrictions (CC&Rs), is written by attorneys representing the developer long before ground is broken and the first unit of housing is sold to a buyer. Consequently, the rules are written to benefit the developer and to favor the collective property rights of the Association.

This often results in extensive use restrictions on private property, as well as strict penalties for non-compliance that can be out of proportion to the nature of the alleged offense. Homeowners have been fined and threatened with eviction and foreclosure over minor issues such as displaying a small flag in a flower pot, parking a pickup truck in the driveway instead of the garage, and not concealing their trash cans.

And the fact is that CC&Rs are intentionally written to be exceedingly difficult to change. That obliterates the argument that HOAs have broad power of Home Rule.

Because HOAs are considered by law to be private organizations, they are not strictly bound to Constitutional constraints on self-governance. That can – and often does – lead to abuse of power from board members with control issues. Over the years, a significant number of  homeowners have commonly characterized their HOAs as dictatorships, communists, or even Nazis. Self-governance merely results in a different kind of government, not necessarily less government.

Truth: HOAs operate as alternate forms of local government, often more intrusive than municipal or county governments.

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Myth: Because they are private enterprises, HOAs are more efficient than public government.

There’s simply no compelling evidence to prove this myth.

The most critical factors that result in consistent, efficient delivery of services are collecting sufficient revenue and providing proper management oversight. If either one of these objectives is not met, quality of service will suffer. That’s true for both public governments and private HOAs.

However, HOAs are generally at a disadvantage, because their unpaid Boards tend to lack management skill, and their reserve accounts  – if they exist at all – tend to carry insufficient funds. For many HOAs, it can be difficult to fill vacancies on the board. In those cases, the HOA either relies too heavily on a manager, or fails to lead at all.

No one keeps track of the data, but anecdotally it is clear that owners’ associations are more likely to suffer financial distress or bankruptcy than local governments. And at least local governments receive assistance from the state once they are officially designated as distressed. HOAs are expected to resolve their financial problems on their own.

Truth: Because HOAs are often directed by inexperienced, volunteer board members and because HOA revenue is limited to collection of assessments, most struggle to continuously provide even basic services.

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Myth: HOAs are so plentiful because of consumer demand.

In fact, new construction of Association Governed Residential Housing is either strongly encouraged or mandated by local planning codes. It has nothing to do with what homebuyers want. In many parts of the country, a buyer has little or no choice but to purchase a home burdened with HOA governance. There simply aren’t enough non-HOA homes on the market. As a result of short-sighted government policy, supply is out of whack with demand.

Historically, an overzealous HOA industry has been aided and abetted by lax federal lending policies – the very same policies that led to predatory and non-performing mortgages, and creative but toxic bundling of mortgage-backed securities. Lending policies are more strict today, but industry is once again exerting pressure at the federal level to relax standards for FHA financing.

Truth: HOAs exist because of government interference through federal and state housing policy, combined with local land planning restrictions and requirements for new development.

Independent American Communities
Independent American Communities

Myth: Residents of HOAs do not need government regulation, because they are self-regulating.

This is perhaps the biggest myth of all. And it’s perpetuated by the HOA industry that benefits from weak or non-existent regulations on its business activity.

Consumer protection is sorely lacking in the Association Governed Residential Housing sector, compared to other major market sectors. For example, most states Attorney Generals will receive and investigate complaints regarding “Lemon Law” motor vehicles, telemarketing scams, defective household products, insurance and Medicare fraud, and  false advertising claims. But “who ya gonna call” about HOA issues? Nine times out of ten, the AG will insist the matter be taken up in civil court, even in cases where criminal activity, or deceptive or unfair trade practices are strongly suspected.

When it comes to HOA disputes, the consumer is at a distinct disadvantage. A homeowner that engages in a civil case in court not only pays his or her own legal expenses, but also – by way of regular assessment payments – financially supports the HOA’s adversarial legal action.

And because the courts tend to give HOA boards the benefit of the doubt under the business judgment rule, it’s exceedingly difficult to reach a fair compromise.

Truth: Residents need a level playing field to settle legal disputes with their developers or HOAs, and vigorous public investigation of financial abuse, theft, fraud, and embezzlement that occurs with alarming frequency in their Associations.

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