ABCs of HOAs (eBook)

SECTION 1

HOA BASICS

What Is an HOA?

A homeowners’ association (HOA), common interest development (CID) association, or property owners association (POA) describes a form of real estate where each owner holds exclusive rights to a portion of the property typically called a unit or lot and shared rights to portions of the property typically called the common area. If a development does not have a common area, it is not a common interest development. An easy example would be a townhome in a community with ninety-nine other townhomes. The owner of the townhome has exclusive rights to their unit. They can rent it out, live in it, or simply, enjoy their property. And if the community has a pool or tennis courts, they have the right to swim in the pool and play on the courts if they have paid their dues and are in good standing, but they do not own these amenities and have no right to sell them when they decide to sell their townhome. Usually, they own a portion of that common area, and that is transferred to the buyer when they sell their property.

Who Is a member?

Members of a homeowners’ association are the owners of the individual units or lots, and the terms “members” and “owners” are used interchangeably in this book and in most governing documents. A member is like a shareholder of a corporation and has certain rights, like the ability to vote for board members, access to the common areas, and the right to inspect association documents. The member contributes a monthly assessment to the association (called dues), and these are used to pay for monthly operating costs such as landscaping, insurance, and utilities, and a portion of the dues are put in reserves (similar to a community savings account) to be used in the future to repair common area systems such as roofs, streets, or replastering the pool.

Why are HOAs Required?

The first homeowners’ association in the United States comprised the private streets and neighborhoods of Saint Louis, Missouri. Benton Place in Saint Louis opened in 1867, and the covenants, conditions, and restrictions (CC&Rs) of these private neighborhoods mandated that the homeowners not only owned the streets but also the water and sewer lines. Some of the early associations in Los Angeles were established for the ignoble reasons of creating deed restrictions limiting ownership of property to exclude non-Caucasians or non-Christians. Now, associations are formed ostensibly to improve property values and provide a better quality of living for the owners, and cities prefer owners to pay for services once provided by the local municipalities.

Why Do Cities Not Just Allow, But Require CIDs?

In 1978, Proposition 13 was overwhelmingly approved by 62 percent of the voters in a statewide initiative. The initiative was very simple in its intent: to limit the increase in annual property taxes. Home prices had increased dramatically, and county assessors were increasing some property tax bills by double digits for many homeowners. The official name of the ballot measure was “People’s Initiative to Limit Property Taxation,” and it implemented the following changes to the tax code: the base assessed value of a residential or commercial property was rolled back to 1976, the maximum annual property assessment was set at 1 percent of the assessed value, and going forward, the maximum increase in the annual property was limited to a 2 percent increase. The impact of this initiative was profound.

Within a year of its passage, property tax revenue to local governments declined by over 60 percent statewide. Since 1976, home values have increased by over 200 percent, but property taxes have increased by only 67 percent. Since cities could not realize as much tax revenue from residential projects as compared to commercial ones, they rezoned undeveloped areas to retail. Cities could now collect sales taxes at current prices rather than lose money on residential properties, as Proposition 13 did not allow them to raise taxes to keep up with the rate of inflation.

Proposition 13 is considered the “third rail” of California state politics. If someone wants to win an election, or stay in office, no matter what the office, they cannot even mention amending Proposition 13. If property owners remain the majority of voters, this law will not change. In 2020, there was an effort to retain Proposition 13 for residential properties while allowing commercial properties to be assessed at current market values, and even that failed miserably. Cities, counties, and the state have had to craft policies to accept the political reality that new residential developments do not have the same tax value as retail, especially in the future. A city might get an immediate income surge from a new residential development by charging the builder for developer and impact fees, which sometimes costs the developer $30,000 to even $100,000 for each property. But over time, these developments result in a cost to the city, unless the city requires the homeowners to pay for services once provided by the city, and a homeowners’ association accomplishes this.

Also, because of the presence of some of the highest priced homes in the country, and a lack of developable land in built-out communities, cities have embraced higher density communities, particularly townhomes and condominiums. Associations may be good for cities and their financial bottom line, but are they a benefit to the owners?

Why Are HOAs Ever Increasing?

There are two major reasons why there has been a proliferation of HOAs since the early 1980s. One is specific to California, and the other is a nationwide trend. First, land prices have increased, causing single family home prices to increase substantially, and a segment of buyers prefer higher density housing near downtown areas. There has been a transition away from single-family detached homes, which had been the dominant residential development trend in the country. Developers traditionally focused solely on building and selling single-family detached homes as fast as possible to make a profit. They did not concern themselves with building public amenities like parks. They assumed that city governments would tax new residents to build such things. By the 1970s, developers had mostly run out of good land for such low-density developments and began to focus on building higher density developments, often on marginal land that had been previously overlooked because it was considered too rugged or distant from urban downtowns. To make these developments profitable, while complying with local density restrictions (which usually measured density in terms of average numbers across an entire development), they would often build high-density structures on one parcel, such as a condo complex, a cluster of townhouses, or a line of patio homes with zero lot lines (all of which require less sprawling infrastructure than the equivalent number of single-family detached homes it would take to house the same number of people). They would simultaneously set aside an adjacent parcel to be left undeveloped as open space or to be developed into a recreational area like a park to benefit and serve the residents of the development.

But first, developers needed to find a way to ensure that the inhabited parcels benefiting from the adjacent recreational areas would take care of them. Second, in California, the enactment of Proposition 13 by voters severely limited the ability of local governments to raise property taxes. This made local governments increasingly reluctant to approve new residential developments, since they were now uncertain about their ability to provide adequate public services to new residents based on current or future projected revenues. Before approving new developments, local governments began to force developers to privatize all kinds of services that had been traditionally regarded as public services: street maintenance, street landscaping, sewer service, lighting, security, fire protection, recreational centers, parks, and the like. Developers were compelled to create homeowners’ associations that would extract fees and assessments from homeowners to pay for such services.

What Are the Pros of HOAs?

Ample Amenities

If you own a $10 million dollar home in Los Angeles, you may be able to afford an Olympic sized pool, a tennis court, and a secure gated entry. If you are in the market for a $750,000 home in Orange County, it may have a pool, but you will have to live without the private tennis court. But I live in a three-hundred owners’ association in Huntington Beach, and we have all of those amenities, but I only pay for 1/300 of them. By pooling our resources and splitting the costs, we can afford these amenities. Some communities have private golf courses, extravagant club houses, and fitness facilities that rival luxurious hotels, which would otherwise be out of reach for an individual homeowner outside of an association.

Cannot Paint Their House Pink

An annoyance in neighborhoods without rules and regulations is the ability of an owner to ruin the aesthetics of the entire community because of their bad taste. The only “rules” a homeowner must adhere to are the local compliance laws regulated by their city. Most of the requirements are quite broad, and it...