Buying a home in a community association (HOA), beware of fake news

By Deborah Goonan, Independent American Communities

FACT: Many articles we see in print and online are nothing more than public relations, marketing, or political propaganda. That’s why there’s been such a buzz about #FakeNews.

And, of course, the real estate industry that promotes the creation, sale, and ongoing care of association governed communities has been publishing and promoting all kinds of misleading information about the virtues of “community association” living for several decades.

Websites like IAC and others exist to expose the harsh realities of community living by contract law, shedding light on how corporate management structure often conflicts with the public interest, private property rights, and civil rights.

The following press release from the industry, written by association management corporation, First Service Residential, is another example of news that isn’t really news.

Buying a Home in a Community Association: Part One – Dispelling Common Myths

 

Consider the “news” source

Now, first of all, consider the source of this article that attempts to paint a rosy picture of homeowners, condominium, and cooperative associations. First Service Residential touts itself as the most prominent community management company in North America. But there is more to FirstService than residential management. Listed as FSV on NASDAQ, the company’s  latest corporate investor presentation highlights some interesting facts that are not normally shared with housing consumers.

For one thing, FSV generates significant profit from the industry – $1.55 billion in revenue and $138 million in adjusted annual earnings as of June 2017. However, according to FSV, only 59% of its earnings come from its residential management operation. The remaining 41% of earnings come from FirstService brands, ancillary business enterprises that create significant vertical integration for the company.

FirstService brands include businesses – both franchised and company-owned – that provide essential services to association governed communities: disaster restoration, home inspection services, painting, window cleaning, floor covering sales and installation, closet organization systems, HVAC and home warranty programs, and fire protection and safety equipment.

See for yourself.

If your association is managed by FirstService Residential, it’s a safe bet that many of your association’s services are provided by one of these ancillary businesses that significantly increase the bottom line for the vast corporation and its shareholders.

But is that good for consumers? For example, should a condo or home buyer in a community managed by FirstService Residential feel comfortable using Pillar to Post – a Franchisee of FSV – to do the presale home inspection? Can a condo association board feel confident that they are getting a competitive bid on retrofitting a fire sprinkler system, when FirstService presents its own company, Century Fire Protection, as the low bidder or best value? Is there a potential for conflict of interest when your association management company also provides residential and commercial restoration services following an insured disaster?

Let the reader decide.

By the way, one of the hottest state legislative issues now is how to prevent potential conflicts of interest on the part of board members and management companies of association-governed communities. Florida and California have recently enacted legislation aimed at offering additional consumer protection by prohibiting questionable financial arrangements that would ultimately benefit a board member or management company, rather than the collective membership of the residential association.

 

Dispelling the mythical myths

Now that we have considered the source of the article, let’s take a look at the content.

It is quite clear that FirstService is responding to widespread criticism of the industry.  No surprise, as it has become increasingly difficult for the industry to avoid thousands of factual reports of corruption and dysfunction tied directly to association-governed common interest communities.

Theft and embezzlement. Fraud. Conflicts of interest. Construction defects. High profile lawsuits pitting neighbor against neighbor. Crumbling infrastructure in once attractive planned communities. Chaotic condo associations. Discrimination and Fair Housing lawsuits. Petty conflict, bitter rivalry, and even violence among residents. Hostile takeovers and forced conversions of failed condo associations. Homeowners looking at alternatives to dissolve their Associations. Lenders refusing to write mortgages for homes in many of the most troubled associations.

The facts can no longer be ignored. The stories can no longer be dismissed as “isolated incidents.”

What that means is that the industry is now on the defensive, and regularly engaging in damage control. And the FirstService article dispelling myths is just one more attempt to convince consumers and investors that All Is Well in America’s association-governed communities.

So let’s tackle the myths one by one.

Myth: Most people regret moving into an HOA community.
Fact: The majority of homeowners who belong to HOAs are happy with their communities.

Of course, the usual ploy of the industry is to cite the latest survey bought and paid for by industry trade group Community Associations Institute. Let’s face it, when a service industry positions itself as a political player in the multibillion dollar real estate sector, one has to take any research or public opinion survey they create and control with a grain of salt.

In this 2014 On the Commons podcast, Shu Bartholomew and I discuss why consumers and Legislators should not take CAI survey results too seriously. But even if we take CAI’s survey at face value, 65% rate their overall experience of living in a community association as positive, but 34% rate their experience as negative or “neutral,” whatever that means.

Would you choose a hotel, a new vehicle, a physician, or a home improvement contractor with only a 65% positive rating? Probably not. And that’s down from a 72% positive rating 5 years ago.

Besides, I talk to owners and residents from all over the U.S. and Canada. I have come to realize that while people may like their home and their neighbors, they definitely do not like their HOA. So asking about overall experience, rather than the HOA specifically, is bound to skew the results in a more positive direction.

Myth: Community associations have too many restrictions.
Fact: Restrictions are there to protect your property value.

Note the poor logic here. The “fact” does not dispute the “myth” that HOAs have too many restrictions. It simply states that those restrictions are good for your property values.

A recent IAC reader poll shows that a significant number of consumers think there are indeed too many restrictions.

 

The truth is that most local governments already prohibit overgrown lawns or turning your property into a junkyard. No HOA needed for basic restrictions prohibiting threats to public health and safety or public nuisances.

But HOA covenants and restrictions usually go far beyond the basics. They can be petty and ridiculous.

If HOAs were truly only concerned about regular grass mowing, then we would not hear from thousands of residents all over the country with regard to restrictions on display of flags, political campaign signs, disputes over paint colors, violation notices for not having white or beige window coverings, and more of the same nonsense.

Incidentally, many buyers truly value the convenience of storing their boats and RVs on their own property. (Some HOAs actually allow this, too.) For those buyers, a prohibition against having their recreational vehicles parked nearby reduces the desirability and value of the property.

Bottom line – there is absolutely no documented proof that restrictions on private property rights will “protect” property values, either quantitatively or qualitatively.

Myth: Residents are at the mercy of power-hungry and uncaring board members.
Fact: Most board members genuinely care about their community.

This is a case where the “fact” is irrelevant. So what if “most” board members genuinely care? What about board members who truly are on a power trip? What about board members who act in their own self-interest or behave like dictatorial bullies?

A prevalent problem with the association-governance model is that there few meaningful safeguards to prevent a board member (or members) from going rogue. Most American consumers lock doors to homes and vehicles in order to prevent theft. Many consumers spend thousands annually on various insurance policies to cover losses in the event of an unforseen disaster. Elected officials are carefully vetted before and during their candidacies. But any member of a mandatory association can serve on the board, regardless of personal qualifications or ethical principles.

It’s also exceedingly difficult and expensive to hold the HOA board accountable for incompetence or misconduct. Most of the time, it requires the homeowner to spend tens of thousands of dollars – or more – to file a lawsuit that will take 2-7 years to shake out in civil court.

And, in the end, even if the homeowner prevails in the case, the cost to “win” exceeds any legal recovery for damages and attorney fees.

The article does not even consider the very real possibility that your association could be majority controlled by the developer, a real estate broker, or an investment group, in complete opposition to the interests of the majority of homeowners and residents.

Power-hungry and uncaring board members are not the only risk faced by residents of HOAs. Other risks include poor management (even if professionally managed), financial insolvency, and premature functional obsolescence. And in this day and age of short-term rentals and widespread foreign investment in real estate, interpersonal conflict and potential for economic exploitation are also on the rise.

Myth: Fees can skyrocket – and nobody knows where the money goes.
Fact: Increases are usually capped, and the board must disclose the budget and actual financial statements to homeowners.

While annual assessment (fee) increases are often capped, the board has fairly broad authority to impose one or more special assessments, often without a vote of membership. Even if a vote of membership is normally required, most states and governing documents permit the board to enact “emergency”assessments without a vote. That power can be abused.

It has been widely reported that more than 70% of association governed communities have underfunded reserve accounts. So special assessments are more common than the industry would have you believe.

And even if governing documents limit year to year increases to 10%, in a few years, most homeowners will begin to feel the pinch. Do the math. Assessments could nearly double in 7 years.

And while state laws may require full disclosure of financial documents and an annual budget, homeowners regularly report that their HOA fails to provide easy access to official records for the association. The complaint is so common that dozens of states have enacted or are considering legislation to increase enforcement of access to records statutes by an Attorney General or similar state regulatory agency. By the way, it should come as no surprise that the industry continues to fight vehemently against meaningful enforcement of state laws.

 

Myth: Residents lose money by paying for amenities they may never use.
Fact: Amenities increase property values.

This “fact” is laughable. Amenities increase maintenance costs and liabilities for homeowners. In a mandatory association, you must pay for them, whether you use them or not.

If properly managed and preserved, recreational amenities can help sustain property values, but only if the majority of home buyers value those amenities.

However, research conducted by National Association of Home Builders (NAHB) indicates that today’s buyers are not that interested in golf courses, playgrounds, tennis courts, sports facilities, gated entries, movie viewing rooms, and other trendy or once popular perks of condominiums or planned communities. (See this previous blog on unpopular amenities for more details.)

Planned communities and condominium complexes around the country are beginning to show signs of age. Renovation and reconstruction of worn out amenities is costly, and many associations are opting not to restore some or all of them.

One fact the industry fails to mention is that most of these amenities – and more – already exist in the public and private sectors. State and city parks and playgrounds, private and public swimming pool, tennis, golf, and country clubs, are just a few examples.

Also, many owners have told me that they maintain a membership at the local YMCA or fitness club, simply because the amenities in their own planned communities are either poorly maintained or not accessible during the hours they would like to use them.

What value does that add?