Many state Legislatures are considering regulation of homeowners’ associations (HOAs). Some propose consumer protection through creation of agencies to enforce HOA laws. But the real solution to HOA disputes, abuse of power and corruption, lawmakers must work to prevent HOA problems with meaningful legislative reforms.
By Deborah Goonan, Independent American Communities deborahgoonan@gmail.com
What is the most effective way to prevent pervasive HOA problems?
In my opinion, it’s critically important to revoke excessive and inappropriate powers of HOAs. Focus on state laws that enable HOA abuse of power through homeowner or developer-controlled governing boards, management agents and HOA attorneys.
If state Legislators are serious about protecting the rights of owners and residents in HOA-governed communities, here’s what they should do to rein in HOA disputes. First, understand that conflicts between homeowners and HOAs escalate when the HOA board abuses its power.
1. Put an end to HOA fines, foreclosures, and rule-making authority.
First and foremost, state lawmakers should withdraw and prohibit power of HOA boards to fine, foreclose liens, and make rules and regulations without consent of owners. This one reform would prevent the majority of HOA problems.
This is important, because the majority of HOA abuse occurs when power hungry boards target unpopular homeowners and their political adversaries. Sadly, human nature leads too many HOAs to weaponize their powers. HOAs misuse fines, the threat of foreclosure and creation of new rules targeting specific homeowners and residents.
The U.S. government already has a judicial system, designed by its founders to settle legal disputes between property owners.
We should expect homeowners and HOA boards to use small claims courts to resolve minor legal disputes. The cost and emotional stress of litigation should lead 99% of HOAs and homeowners to resolve minor conflicts without involving attorneys. That would be a good thing, something that would encourage stronger communities.
Lawmakers should also address another closely related issue.
Stop enabling selective enforcement.
Some HOAs, backed by management companies and prominent HOA law firms, selectively enforce fines and foreclosures against certain owners. HOAs tend to choose owners who are soft targets. One example of a soft target is the person who owns their home or condo without a mortgage. Other examples include:
- owners living on fixed incomes,
- people with physical or mental disabilities, and
- people who speak English as a second language.
Therefore, lawmakers should withdraw inappropriate governing powers from HOA boards and opportunistic HOA-industry “professionals” to exploit vulnerable homeowners.
There is no shortage of reports of such HOA abuse.
2. Change voting and election process to ensure integrity.
A good starting point for lawmakers: Limit the number/percentage of voting interests that can be held by any one member of the HOA.
One fundamental flaw of HOA governance is its reliance on a corporate shareholder membership voting system. Most HOA bylaws tie a property owner’s voting power to the amount of property one owns.
In a typical HOA-governed planned community, an owner gets one vote for each single-family home or townhouse that he or she owns. Does your neighbor, John Doe, own 3 houses? He is entitled to cast three votes for each of his favored board candidates or ballot measures. If you own one house in the community, you get only one vote. John Doe has triple the voting clout!
Many condo associations assign greater voting interests to larger, more desirable condo units. Let’s take a hypothetical example of a condo building with 10,000 square feet of living space (not including common spaces). Jane Doe owns a three-bedroom 1,500 square foot condo. Abby Roe owns a 500 square foot studio apartment. Because Jane Doe’s unit occupies a higher percentage of the total space in the building (15%), her voting interest is three times higher than Abby Roe’s (5%).
The HOA voting system is easily abused
Now consider that, in many HOA communities, a person can own dozens of properties under a limited liability corporation. The LLC can exercise voting rights for each of those homes or condos.
This threatens the stability of HOA communities. Any one owner can buy enough votes to fix elections, or potentially stage a hostile takeover of the board.
Savvy members of some homeowners’ associations have amended their governing documents to prevent any one owner (shareholder) from gaining too much political power in the HOA.
But many HOAs find it difficult to amend their governing documents. That’s why state lawmakers should institute a cap on the total percentage of votes that can be held by any single owner or entity. This would prevent infiltration of hostile investors intent on forcing owners to sell and move out of the community.
Other election and voting reforms.
To ensure the integrity of HOA elections, lawmakers should aim to eliminate sources of fraud, cheating, and conflicts of interest in the voting process.
Some suggestions: (not an exhaustive list)
- Require a secret ballot, or, alternatively, an encrypted e-ballot
- Eliminate proxy votes, substitute absentee ballots
- Allow members to play an active role in the nomination of board candidates
- Require written notice of board member elections and votes on ballot measures well in advance of the membership meeting and voting deadline
- Prohibit HOA board members, HOA board candidates, HOA management agents, and HOA attorneys from monitoring the election, disseminating or collecting ballots, or providing e-voting services.
- For larger communities, require a neutral third party to serve as an election monitor.
- Institute a locked ballot box requirement and
- Require that ballots are opened counted in the presence of all members so they can observe the opening and tabulation of ballots as they are counted.
3. Eliminate Declarant (developer/investor) control of communities.
Here on IAC, I’ve previously addressed 4 risks of purchasing and owning a home in a community where the developer controls the HOA board.
Briefly, these are the risks to housing consumers:
- It’s extremely difficult to hold a developer accountable for poor quality construction of homes and community infrastructure.
- Developers retain near absolute control on the purse strings. (They can either keep HOA fees artificially low or raise them as high as they want.)
- A developer can — and often does — amend the CC&Rs (Covenants and Restrictions) multiple times, at will. This enables the developer to change the character of the community and to break promises made to owners.
- Developers reap profits from multiple revenue sources — while property owners subsidize their business expenses.
For further details, read the full post here.
Although some states have set a time limit for developer control of HOA boards, the law does nothing to address these four risks.
Legislators should consider alternative types of housing development that eliminate the Declarant/developer’s absolute control of HOA finances and governance.
4. Eliminate HOA regulation of privately owned property.
It’s one thing to establish HOAs to fund and govern common property. It’s quite another thing to allow HOAs to govern privately owned property.
For example, what is the purpose of having an HOA overlord to compel owners and residents to get approval for landscaping design? Is it really necessary to require HOA approval of exterior paint colors, or home improvements that don’t require a local building permit?
The owner of a private home on a private lot should be entitled to the same bundle of rights as the owner of a home that is not part of an HOA.
What about a condominium or co-op, where apartments are stacked, or walls are shared? HOA regulation is somewhat necessary. Nevertheless, the law must still limit HOA power.
For example, some reasonable regulations are needed to prevent structural changes (such as removing walls or relocating windows). Of course, members expect to avoid nuisances and noise disturbances. Condo documents may require padding under hard surface floors or carpeting in lieu of hard surfaces. Most condo associations establish designated “quiet hours.” Pet rules and parking restrictions are unavoidable.
But, beyond that, condo and townhouse HOAs should not be able to dictate the use of personal space. For instance, HOAs should allow each owner to choose window coverings and interior design. Likewise, the HOA should not dictate the type of passenger vehicle a resident is allowed to park in the driveway.
5. Mandate HOA transparency and assist homeowners in enforcing it.
Homeowners are obligated by law to pay fees to their HOA. Therefore they ought to have the absolute right to know how the HOA spends their money. But even though many state laws require HOAs to provide access to financial records upon request of any member, HOAs frequently delay or avoid doing so.
Unfortunately, most states don’t enforce transparency requirements. An owner’s only other option is to sue their HOA, hoping the court will order the HOA to present the records. But few owners sue, because the cost of litigation is high. Even worse, the HOA often drags out the process as long as possible, hoping to deter owners from asking questions about HOA finances.
State Legislators must be willing to establish a well-educated, fully funded consumer protection division for HOA members — an agency that will stand as an ally to property owners who are not on the HOA board.
Lack of state enforcement, combined with HOA intimidation tactics are the two main reasons that state laws mandating HOA transparency are ineffective.
That’s why state lawmakers must first implement the other four reforms, to prevent HOAs from using their excessive power as a weapon against homeowners who dare to report irresponsible, non-transparent HOAs to a consumer protection regulatory agency.
Conclusion
State legislators must look at the Big Picture when it comes to HOA regulation. Lawmakers need to revoke excessive powers of HOAs before they attempt to enforce HOAs to govern and manage the community with transparency.
As long as HOAs can penalize and intimidate owners with no recourse for owners, HOAs will continue to stonewall homeowners and prolong conflicts with litigation.
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