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HOA’s: Are They Killing the Real Estate Recovery?

Are out-of-control HOA’s killing the housing recovery?  Have they outlived their usefulness? Litigation run amok and foreclosures are hampering the real estate recovery in some covenant controlled communities.

Arnie Becker LA Law: Possible HOA Attorney? (Source: Bing Images)

Arnie Becker – LA Law
Possible HOA Attorney?
(Source: Bing Images)

Many people – even people who are REALTORS® – mistakenly believe that HOA’s were created to stop homeowners from imposing Pepto Bismol colored homes, front porch “frat house” couches and front-lawn “shady tree mechanic” cars-on-blocks upon their neighbors.

You’d be wrong.

Did you realize that HOA’s became popular in the US during the middle part of the 20th Century as a tool to discriminate?

That is true.  Many HOA’s were established to restrict entrants moving in who were considered “the wrong types of people”.  It seems ludicrous to say that in 2013, but it’s true.  “For example, a racial covenant in a Seattle, Washington neighborhood stated, ‘No part of said property hereby conveyed shall ever be used or occupied by any Hebrew or by any person of the Ethiopian, Malay or any Asiatic race.’”  (Source: Wikipedia)  The Fair Housing Act of 1968 banned the use of them for discriminatory purposes.

However, just like THAT practice reduced the overall market for buyers and, thus, slowed down the transaction velocity of homes, modern-day HOA’s are doing similar damage.

You may have read the story in the Washington Post “Feud over sign could force Fairfax’s Olde Belhaven to sell square”. In that story, a not-quite-so-neighborly squabble about posting a political yard sign got out of control.  The end result: litigation worthy of Arnie Becker from LA Law.  Five years and $400,000 of litigation later, the homeowners won the litigation and the HOA is bankrupt.  Some see it as a stand against HOA’s run amok.  Others ask: why move someplace if you aren’t going to follow the rules?

Irrespective of that, those HOA’s and that litigation is NOW affecting resales of homes.  Whether the litigation is justified or not, it’s a hot potato a buyer doesn’t want to catch – particularly when there are so many other reasons a home can lose value nowadays.

Alternatively, the high degree of foreclosures in some HOA’s have left them without operating capital and creating the need to impose special assessments or raise fees to make up shortfalls.  Given many states permit a “super lien” (a superior position) on properties by the HOA, some HOAs are now taking the initiative and foreclosing on those very homes to recovery late dues – especially when banks don’t cough those dues up unless required to clear the title at closing which can take YEARS.  Ironically, THOSE foreclosures are muddying up the title and causing even more problems when the “opportunistic investor” buys the foreclosure lien, thinking that clears the entire title (an increasing problem) in the harder hit foreclosure areas.  Irrespective, the HOA is an added cost to disgorging the property.

Now, to compound it, banks are examining the HOAs financials more diligently and may decline lending based on unsound financials from the prior two situations: litigation and foreclosure-driven insolvency.  So, if a HOA has problems…the bank is not financing.

So, we don’t make a judgment.  We just ask: Given the increasing frequency of HOA issues (litigation, foreclosures and increasingly challenged collateralization) are HOA’s killing the real estate recovery?


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