Wednesday, September 1, 2010

Homeowners Associations

Pros and Cons of Homeowners Associations.

My golfing buddy bought 4 bank owned townhomes for rental properties last year. He had them all rented out, positive cash flow. Life was good—he had time to golf instead of mowing lawns on his properties. He believed association maintained homes would be so much less headache, especially for a part time landlord.

Why wasn't I doing this? Even though it took me months to find a little kid slide for Rosie Rabbit (my 3 bunnies go to gymnastics class), I found a townhome in Maple Grove to purchase near my home in a few minutes. It was a short sale, great condition, good vibes. My offer was accepted contingent on bank approval and the contingency for all association homes—10 days to review the Homeowners Association (HOA) documents.

Think of buying a townhome like getting married: your spouse is the townhome unit and the HOA is like your in-laws. My brother-in-law is one of my closest friends. Unfortunately, this Maple Grove HOA was not a good relative.

The first hint of trouble was when I called the number for the property manger listed in the HOA book. The phone was disconnected. Then I realized the book was only updated to 2005 when the current owners bought the unit. Be careful when signing off you received the HOA documents that they are current. If they are not, note that and that the 10 day review clock hasn't yet started.

I contact the listing agent. The HOA of 104 homes is now self managed and all the owner has is an email address. So I send an email, saying my intent to purchase the unit for rental and asked some questions.

Then the homeowner gets a notice for the upcoming annual meeting—and a proposal to ban any new rentals and existing rentals would lose that status when the units are sold. I get the phone number for the HOA president from the City of Maple Grove and I call her.

“Ignorant” would be a kind way to describe this woman. “Did you know”, I asked her, “ by banning rentals the homes in your association are now ineligible for FHA financing and many homes in this price range are be financed by FHA loans?”

“Our attorney didn't tell me that.” They should have used Mary Taylor with Lindquist and Vennum, an expert on HOAs, who told me about the FHA restriction. She asked for Mary's number.

“Well,” I continued. “What happens if one of your owners is in the National Guard and gets called out for a 2 year duty and needs to rent his unit?”

“We can make a case by case exception to that.”

“What if a couple is getting divorced? Someone dies? Someone gets sick. Life happens. You are putting your property owners at risk with this policy. What do you have against renters anyway?”

“We had a really bad experience with a Section 8 tenant. The Met Council owns 2 units in our association.”

“Your policy won't address that anyway as long as the Met Council keeps their units. Why don't you just ban Section 8?”

I was getting no where fast with this lady.

As I was still waiting on a response from the bank, I was going to sit tight and see how the HOA voted on this issue.

I look at another unit in a different city. It was beautiful and had good vibes. The HOA dues were on the high side but there was a pool, clubhouse and tennis courts. I wander around the grounds and come across Matt, the full time on site property manager. He was wonderful. I asked about rentals and he said sure—just supply him with a criminal background check, and the lease for a minimum 6 months that makes mention of the HOA rules. With Matt around I have confidence he would spot troubled tenants.

I came home, wrote an offer on that unit, and canceled the one in Maple Grove. Even if the rental ban didn't pass I didn't want to be married to this particular HOA.

I play golf with my buddy. “How are your townhome rentals doing?”.

“Well”, he said, mine were doing great. I have 2 in the same complex, a 36 unit association. Then someone else bought one to rent, their tenants party until 2:00 in the morning, and now the HOA is voting next month whether to ban rentals .” Now my friend is looking at twin homes that are NOT in an association.

Twin homes have the added risk that your neighbor next door doesn't maintain their unit and yours looks bad. I've owned single family rentals and I don't want to mess with the lawn and the snow and the roof. I don't even like dealing with my own house – though I do like to shovel snow.

So I'm going to see how the HOA thing works, being very careful about reviewing the HOA docs. Experience has taught me that documents don't tell all. You need to talk to people. Ask the listing agent, before I even look at a townhome, if there is a professional property manager. If I like the unit interview the property manager. And talk to the HOA president to see if they plan to keep the same property manager and to make sure there are no wackos like the lady in Maple Grove.

All is subject to change. Which is why its critical to purchase a unit that is good for resale, not just rental.

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