Why HOAs are bad

In this post, we will dive into the topic of why HOAs are bad. This is written to add value to anyone considering purchasing property within an HOA, providing important food for thought for investors. Over the following paragraphs, we will explain how limited control over your property, lack of personal ownership in the community by managers, greater potential for financial mismanagement, and annoying rules are all reasons why HOAs are bad.

LIMITED CONTROL OVER YOUR PROPERTY

The first reason why HOAs are bad is because the moment you purchase into an HOA, you are limiting your control over your property and outsourcing that control to what are often several third-party stakeholders. Whether you are considering purchasing the property for you or your family to reside in or as purely a financial investment, this limited control is going to have a major impact on you. To better understand this, think of all the areas that an HOA might have control in your community. This may include things such as:

• The overall building structures and roofing

• The community's sidewalks

• The community's landscaping

• The community's roadways and parking

• The community's parks

• The community's fitness center

• The community mailboxes

• The community trash dumpster or trash collection process

• The community pool

• The shared common areas within the community

• The insurance policies of the community

• The appearance of individual properties

• The pets you are allowed to have

Now let's look at this from the perspective of someone who is an investor in real estate. As an investor, you might do a phenomenal job in making sure that the property you purchase is in great condition. You might be an expert in your field and have a better understanding of properties than 99% of other people. However, how can you prepare for the leak in the building two streets over that does significant damage to multiple condominiums and requires the HOA to pass a special assessment to complete a major capital improvement project and fix the units and roofing? Truth be told, you may be great at forecasting and be able to account for these types of things, but the shared responsibility of the community within an HOA limits your control over your property and presents more variables than you might otherwise be comfortable with. Even from the perspective of a homeowner on a fixed budget, you need to understand that things can happen within an HOA. Special assessments can pass, and HOA fees can double over a few years. These types of variables might be totally outside your control, and that's a major factor to consider when looking at properties within an HOA.

LACK OF PERSONAL OWNERSHIP IN THE COMMUNITY BY MANAGERS

The second reason why HOAs are bad is that there is a lack of personal ownership in the community that exists among community managers. Here we are referring to those individuals who are responsible for the day-to-day management responsibilities of the community. When it comes to board members, we hope that they at least reside within the community full-time. When it comes to the managers of the community, we think it's important to reflect on how committed you think they are to the success of your community if they do not live within the community. Do we think the person or people managing the community absolutely have to live within the community? No, because you might not have someone qualified to do that within your community, but it would be ideal if you did. We simply think this is important to note because most of the HOAs we have been a part of involve managers and management teams that do not live within the community and therefore do not have the same level of vested interest in the success of the community that someone living there would. It can be like having an employee who is working for your business that does not care about your business and is simply there to collect their check. The difference being that this employee is even harder to control or remove, and that employee is potentially in charge of managing the community where your family resides at night.

GREATER POTENTIAL FOR FINANCIAL MISMANAGEMENT

The third reason why HOAs are bad is that there is great potential for financial mismanagement. Think about the fact that even the best-run businesses in the world, led by individuals with Wharton MBAs and large finance departments, struggle to manage their finances appropriately. We are sad to say this, but your HOA will most likely not be run by the most competent individuals, and lack of financial competence is only part of the problem. Ask yourself, do the individuals managing your property have a vested interest in managing its financials as diligently as you would? We think it's safe to say that the answer to that question is no, and so you can imagine it might be a problem for you to trust an HOA to have their hands on millions or at least hundreds of thousands of money collected from the community.

With regard to financial mismanagement within HOAs: We've heard horror stories where a change in management occurs and large sums of money simply go missing. Ask yourself - how much financial oversight do you think you would have within a given HOA community?

We've heard horror stories where contractors are paid for large projects and never complete the project. Ask yourself - how much of a vested interest in ensuring the responsible use of HOA funds do the board members and community association managers within a given HOA community have?

We've heard horror stories where contracts are given to family members and close friends of board members. Ask yourself - is there any oversight of the contract bidding process that takes place in a given HOA community?

These are all important things to consider when it comes to HOAs and financial mismanagement. We believe that due to a lack of financial competence, lack of personal investment in the success of the entire community, and overall lack of oversight by the larger community in the actions of the management company and board members that HOAs are ripe for mismanagement of funds at best. At worst, you can imagine that there may be a lot of outright fraud and theft that takes place in HOAs.

ANNOYING RULES

The fourth and last reason why HOAs are bad is that they may pass rules that you find annoying. This is very straightforward to understand but has a very real impact on your life, and we felt obligated to include it as well. For example, imagine trash pickup becomes an issue for the community association managers and board members and they decide to limit access to the community dumpster to times between 8 am and 11 pm. Is that fair to all the owners? What if the board decides to gate many of the community amenities with electronic key access but limit the amount of keys per household to 2. Does that have the same impact on a family of 5 with teenage children as it would in a 2-person household of adults? Surely not, but the point here is not to debate different scenarios and make HOAs seem worse than they are. The point is that HOAs can have rules that you may find annoying and restrictive to your freedom and that is something worth considering. As a final note, these communities are constantly adapting and changing throughout time, so when you elect to reside in an HOA there will always be the possibility of policy changes that you don't agree with. You might have been thrilled to live within a certain community for the last 10 years and then there's a major change in the board and all of a sudden there are new policies put in place that affect your way of life.

Summary

Homeowners associations (HOAs) are bad because they present several challenges for property owners and investors alike. Firstly, HOAs limit control over individual properties, as decisions regarding maintenance, amenities, and community rules are outsourced to third-party stakeholders. This lack of autonomy can disrupt personal plans and investment strategies. Secondly, the detachment of community managers from personal ownership can lead to a lack of commitment and accountability, potentially impacting the quality of management services. Thirdly, HOAs are prone to financial mismanagement, with limited oversight and expertise contributing to the risk of funds disappearing or being misused. Lastly, HOA rules, often perceived as arbitrary and restrictive, can impede residents' freedom and enjoyment of their properties. Despite these challenges, HOA residents and investors must navigate the complexities of community living and weigh the benefits against the drawbacks before making decisions.

HOA joke of the day: Why are HOAs bad? They are like that overbearing coach who thinks they know what's best for everyone. They're constantly barking orders and blowing the whistle on your every move. It's like living in a reality show where the drama never ends, and the only prize is a perfectly manicured front yard.

Thank you for reading this post. We hope you found it informative and interesting.

You can read our next post on why HOAs exist

-HOA Chief 3/18/24