Homeowner association

Picture of a condo building undergoing periodic maintenance in Japan.

For a discussion of nonprofit, voluntary neighborhood advocacy groups, see neighborhood association.

A homeowner association is a corporation formed by a real estate developer for the purpose of marketing, managing, and selling of homes and lots in a residential subdivision. It grants the developer privileged voting rights in governing the association, while allowing the developer to exit financial and legal responsibility of the organization, typically by transferring ownership of the association to the homeowners after selling off a predetermined number of lots. It allows a civil municipality to increase its tax base, but without requiring it to provide equal services to all of its citizens. Membership in the homeowners association by a residential buyer is typically a condition of purchase; a buyer isn't given an option to reject it. Some homeowner associations hire and retain property management companies. The board of directors is responsible for the retention of these companies.

Most homeowner associations are incorporated, and are subject to state statutes that govern non-profit corporations and homeowner associations. State oversight of homeowner associations is minimal, and mainly takes the form of laws which are inconsistent from state to state. Some states, such as Florida and California, have a large body of homeowner association law, and some states, such as Massachusetts, have virtually no homeowner association law.

The fastest growing form of housing in the United States today is common-interest developments (CIDs), a category that includes planned-unit developments of single-family homes, condominiums, and cooperative apartments. Since 1964, homeowner associations have become increasingly common in the USA. The Community Associations Institute trade association estimated that HOAs governed 24.8 million American homes and 62 million residents in 2010.

History

Homeowners associations first emerged in the United States in the mid-19th century. Their growth was limited, however, until the 1960s, when several factors led to a period of rapid national growth, including, a push towards large scale residential development by the Federal Housing Authority and the Urban Land Institute; an increasing cultural preference for architectural uniformity; a decline of readily available land; rising construction costs; and a modification of federal mortgage insurance rules to include cooperatives and condominiums.

Early covenants and deed restrictions were exclusionary in origin, and in the first half of the 20th century many were racially motivated. 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." In 1948, the United States Supreme Court ruled such covenants unenforceable, in Shelley v. Kraemer. However, private contracts kept them alive until The Fair Housing Act of 1968 banned them.

The explosion in the number of CIDs can be traced back to a publication by the Urban Land Institute in 1964, also known as TB 50. This technical bulletin was funded by the National Association of Home Builders and by certain federal agencies: the FHA, United States Public Health Service, Office of Civil Defense, the Veterans Administration and the Urban Renewal Administration.

The Federal Housing Administration in 1963 authorized federal home mortgage insurance exclusively for condominiums or for homes in subdivisions where there was a qualifying homeowner association. The rationale was that developers wanted to get around density laws. The effect, however, was to divert investment from multifamily housing and home construction or renovation in the inner cities, speeding a middle-class exodus to the suburbs and into common-interest housing. The federal highways program further facilitated the process. In the 1970s, a growing scarcity of land for suburban development resulted in escalating land costs, prompting developers to increase the density of homes on the land. In order to do this while still retaining a suburban look, they clustered homes around green open areas maintained by associations. These associations provided services that formerly had been provided by municipal agencies funded by property taxes; yet, the residents were still required to pay those taxes. Accordingly, local governments began promoting subdivision development as a means of improving their cash flow.

Another primary driver in the proliferation of single family homeowners' associations was the U.S. Clean Water Act of 1977, which required all new real estate developments to detain storm water so that flow to adjoining properties was no greater than the pre-development runoff. This law required nearly all residential developments to construct detention or retention areas to hold excess storm water until it could be released at the pre-development flow level. Since these detention areas serve multiple residences, they are almost always designated as "common" areas, which becomes a reason to create a homeowner association. Although these areas can be placed on an individual homeowner's lot, eliminating the need for an association, nearly all U.S. municipalities now require these areas to be part of a common area to ensure an entity, rather than an individual or the municipality itself, has maintenance responsibility. Real estate developers, therefore, have established homeowner associations to maintain these federally mandated common areas. With the homeowner association already in place, the developers have expanded their scope to provide other requirements and amenities that they believe will help them sell homes.

Industry

Community Associations Institute (CAI) is a trade organization of individuals and businesses that sell supplies or services to homeowners associations, such as lawyers and property managers. The CAI does not represent homeowners associations. It lobbies the legislatures of states that have significant proportions of homeowners living in HOAs to promote legislation beneficial to its members, while opposing laws that would harm its members.

Authority

A homeowners association is incorporated by the developer prior to the initial sale of homes, and the Covenants, Conditions, and Restrictions (CC&Rs) are recorded when the property is subdivided. There is no mutual agreement between buyer and seller regarding the CC&Rs, they are legally defined to "run with the land". If an owner sells the encumbered land/ home, he ceases to be a member of the association and the new owner is forced to become a member. All members must pay assessments to and abide by the restrictions of the association.

Powers

Associations provide services, regulate activities, levy assessments, and may, as delegated by the states legislature, impose fines. Unlike a municipal government, they are not subject to the constitutional constraints that public government must abide by. Some of the tasks which HOAs carry out would otherwise be required to be performed by local governments. A homeowners' association can enforce its actions through the threat and levying of fines, and private legal action under civil law.

Association boards may appoint corporate officers - or officers may be elected directly by the membership (depending on the jurisdiction). The officers and the board may create committees, such as an "architectural control committee", a pool committee, a neighborhood watch committee, and others.

Association boards are composed initially of developer-appointed members, then of a mix of appointees and of homeowners elected at the annual meeting to maintain the common areas and enforce the governing documents. The mix changes to solely homeowners as the percentage of land/home ownership shifts away from the developer.

Assessments

Homeowner associations can compel homeowners to pay a share of common expenses, usually per-unit or based on square footage. These expenses generally arise from common property, which varies dramatically depending on the type of association. Some associations are, not quite literally, towns, complete with private roads, street lights, services, utilities, amenities, commonly owned buildings, pools, and even schools. Many condominium associations consider the roofs and exteriors of the structures as the responsibility of the association. Other associations have no common property, but may charge for assumed services or other matters. Assessments paid to homeowner associations in the United States amount to billions of dollars a year, but are not classed as property taxes.

When determining what the monthly/annual assessment should be, it is important to consider what funds are required. There should always be a minimum of two funds: an operating fund and a reserve fund. The operating fund is used to pay for the operating expenses of the association. A reserve fund is used to pay for the infrequent and expensive common area assets maintenance, repair and replacement costs. The reserve fund is significant when reducing the chances of a special assessment (mentioned in the risks below). Obtaining a Reserve Study is recommended to help determine and set the reserve contribution rate which is included in the regular monthly assessment.

Benefits

An HOA provides people with shared neighborhood values, an opportunity to enforce regulations, consistent with overarching statutory constraints, to achieve a community representative of such values. In doing so, an HOA inherently restricts the rights that would otherwise exist for its members based on municipal codes. For instance, a degree of conformity is often required in exterior appearance of single family homes and there are often time limits and/or restrictions to activities generating noise.

These bylaws can be limited in various degrees by state laws, with some overriding federal judicial or statutory limits. Board members or officers are elected by the homeowners, with the ability in some states for the membership to remove board members, with some difficulty, even during term.

Homeowners Associations generally have meetings for the entire board and membership. These meetings are generally monthly or sometimes quarterly, and focus on handling the Homeowners Association's business. In some states, the meeting's minutes must by law be made available for viewing 24 hours a day online, requiring the HOA to launch or purchase a website.

Many homeowners' associations include management of a development's recreational amenities, maintained for exclusive use of its members. This can allow an individual homeowner access to a maintained pool, clubhouse, gym, tennis court or walking trail that they may not be able to otherwise afford to maintain on their own.

Each member of a homeowners' association pays assessments that are used to cover the expenses of the development. Some examples are landscaping for the common areas, maintenance and upkeep of the subdivision's amenities, insurance for commonly owned structures and areas, mailing costs for newsletters and other correspondence, employment of a management company or on-site manager, security personnel and gate maintenance, and any other item delineated in the governing documents or agreed to by the board of directors.

Some residents rate their overall experience living in a common interest development as good. A survey of 709 people by Zogby International, sponsored by the Foundation for Community Association Research, an organization created by the Community Associations Institute trade association, showed that for every homeowner who rated the overall experience of living in a homeowner association as negative, seven saw it as positive.

But another survey, conducted by a home improvement trade organization vendor, of over 3,000 people found that two-thirds found their HOAs were "annoying" or worse. 25% of those who responded had never lived in an HOA, 19% had been in a "war" with their HOA, and the remaining 56% had never had a conflict or resolved it quickly / considered it no big deal. 54% of the respondents said they would rather live with a sloppy neighbor than deal with an HOA. 24% responded positively about an HOA, and 45% responded positively or felt the HOA was a minor nuisance.

Advocates often maintain that people choose to live in HOAs, but some note that "choice" is misleading. HOAs have been mandated by municipalities for decades either directly or indirectly. This is often accomplished by conditioning plat or other approval on the creation of amenities such as roads, open areas, greenbelts, retention basins, etc. and an obligation to maintain them. In towns where such regulations exist, people who wish to purchase a home often have no choice but to live in an HOA. Whether non-HOA neighborhoods that were built in the last several decades exist depends on the location. The choice for most buyers seeking a newer home is only which HOA they will join.

The imposition of an HOA accomplishes several benefits for the municipality. First, these amenities may be burdened with property taxes which would not be the case if the amenities were owned by the municipality. Thus the mandated private amenities are cash generators for the municipalities. Second, the municipalities bear no obligation to maintain the amenities given that they are owned by the HOA. On the other hand, HOA communities are exempt from taxes on certain services provided by the municipality, if the HOA is providing them instead.

In The Voluntary City, published by the libertarian Independent Institute, Donald J. Boudreaux and Randall G. Holcombe argue not in universal favor of homeowners associations, opining that they do not necessarily have advantages over traditional governments. These include the fact that the association's creator, e.g. a developer, has an incentive to set up a government structured in such a way as to maximize profits and thus increasing the selling price of the property. If a certain decision would increase the selling price of certain parcels and decrease the selling price of others, the developer will choose the option with the highest net income to itself. This will sometimes result in suboptimal outcomes for the homeowners. Jim Fedako has argued that homeowners associations are better than other forms of government, because their powers are limited by contract.

Criticisms

Onerous regulations

Homeowner associations have been criticized for having excessively restrictive rules and regulations on how homeowners are allowed to conduct themselves and use their property. Some maintain that homeowner association leaders have limited financial incentive to avoid indulging in rigid or arbitrary behavior; unless people begin to leave in droves, it will have little effect on the value of a board member's home.

What is meant by arbitrary is usually understood to mean inconsistent treatment of homeowners who have the same issue.

Such arbitrary behavior by the leaders would be illegal and easily overturned by anyone who contests it. But the result might not be to a homeowner's liking, since it might well involve consistent treatment of others with the treatment of themselves - rather than the reverse.

And in the end, it comes down to whether the rules and regulations were in place, or authorized by the covenants, at the time each homeowner purchased their home. So in almost all instances,such criticism of the leaders and of the associations would be completely unfounded.

Undemocratic

Some scholars and the AARP charge that in a variety of ways HOAs suppress the rights of their residents. Due to their nature as a non-governmental entity, HOA boards of directors are not bound by constitutional restrictions on governments, although they are essentially a de-facto level of government.

At their own expense, a homeowner-member may sue a board of directors for perceived breach of duty. Association insurance provides not only for a board member's legal expense, but any judgment attained against them. Homeowners must pay out of pocket for any case they bring to court and risk being personally liable for any judgment and/or association's legal fees as well as their own.

Corporation and homeowner association laws provide a limited role for HOA homeowners. Unless either statutory law or the corporation's governing documents reserve a particular issue or action for approval by the members, corporation laws provide that the activities and affairs of a corporation shall be conducted and all corporate powers shall be exercised by or under the direction of the board of directors. Many boards are operated outside of their state's non-profit corporation laws. Knowledge of corporate laws and state statutes is essential to a properly-run HOA.

Once notified by a homeowner, attorney or other government official that an HOA organization is not meeting the state's statutes, the boards have the responsibility to correct their governance. Failure to do so in certain states, such as Texas, can result in the levy of misdemeanor charges against the board and open the board (and HOA) to potential lawsuits to enforce state laws of governance. In some instances, a known failure to rectify the board's governance to meet the state's statutes can open the board's members to personal liability as most insurance policies indemnifying the board members against legal action do not cover willful misconduct.

Homeowner associations establish a new community as a municipal corporation. Voting in a homeowner association is based on property ownership, Only property owners are eligible to vote. Renters are prohibited from directly voting the unit, although they can deal directly with their landlords under their lease contract, since that is the party who has responsiblity to them.

Additionally, voting representation is equal to the proportion of ownership, not to the number of people. The majority of property owners may be absentee landlords, whose values or incentives may not be aligned with the tenants'. Homeowners have challenged political speech restrictions in associations that federal or state constitutional guarantees as rights, claiming that certain private associations are de facto municipal governments and should therefore be subject to the same legal restrictions.

Of great concern is the fact that several court decisions have held that private actors may restrict individuals' exercise of their rights on private property. A recent decision in New Jersey held that private residential communities had the right to place reasonable limitations on political speech, and that in doing so, they were not acting as municipal governments. With few exceptions, courts have held private 'actors' are not subject to constitutional limitations — that is, enforcers of private contracts are not subject to the same constitutional limitations as police officers or courts.

In 2002, the 11th Circuit Court of Appeals, in in Loren v. Sasser, declined to extend Shelley beyond racial discrimination and disallowed a challenge to an association's prohibition of "for sale" signs. In Loren, the court ruled that outside the racial covenant context, it would not view judicial enforcement of a private contract as state action, but as private action, and accordingly would disallow any First Amendment relief.

In the Twin Rivers case, a group of homeowners collectively called The Committee for a Better Twin Rivers sued the Association, for a mandatory injunction permitting homeowners to post political signs and strike down the political signage restrictions by the association as unconstitutional. The appeals court held the restrictions on political signs unconstitutional and void, but the appeals court was reversed when the New Jersey Supreme Court overturned the Appellate courts decision in 2007 and reinstated the decision of the trial court.

The Court determined that even in light of New Jersey's broad interpretation of its constitutional free speech provisions, the "nature, purposes, and primary use of Twin Rivers property is for private purposes and does not favor a finding that the Association’s rules and regulations violated plaintiffs' constitutional rights." Moreover, the Court found that "plaintiffs' expressional activities are not unreasonably restricted" by the Association’s rules and regulations. Finally, the Court held that "the minor restrictions on plaintiffs’ expressional activities are not unreasonable or oppressive, and the Association is not acting as a municipality."

In some HOAs, the developer may have multiple votes for each lot it retains, but the homeowners are limited to only one vote per lot owned. That has been justified on the grounds that it allows residents to avoid decision costs until major questions about the development process already have been answered and that as the residual claimant, the developer has the incentive to maximize the value of the property.

Board misconduct

The New Jersey Department of Community Affairs reported these observations of Association Board conduct:

"It is obvious from the complaints [to DCA] that that [home]owners did not realize the extent association rules could govern their lives."

"Curiously, with rare exceptions, when the State has notified boards of minimal association legal obligation to owners, they dispute compliance. In a disturbing number of instances, those owners with board positions use their influence to punish other owners with whom they disagree. The complete absence of even minimally required standards, training or even orientations for those sitting on boards and the lack of independent oversight is readily apparent in the way boards exercise control"

Overwhelmingly ... the frustrations posed by the duplicative complainants or by the complainants’ misunderstandings are dwarfed by the pictures they reveal of the undemocratic life faced by owners in many associations. Letters routinely express a frustration and outrage easily explainable by the inability to secure the attention of boards or property managers, to acknowledge no less address their complaints. Perhaps most alarming is the revelation that boards, or board presidents desirous of acting contrary to law, their governing documents or to fundamental democratic principles, are unstoppable without extreme owner effort and often costly litigation.

Certain states are pushing for more checks and balances in homeowners' associations. The North Carolina Planned Community Act, for example, requires a due process hearing to be held before any homeowner may be fined for a covenant violation. It also limits the amount of the fine and sets other restrictions.

California has severely limited the prerogatives of boards by requiring hearings before fines can be levied and then limiting the size of such fines even if the owner-members do not appear. In California, any rule change made by the board is subject to a majority affirmation by the membership if only 5% of the membership demand a vote. This part of the civil code also ensures that any dissenting individual who seeks a director position must be fully represented to the membership and that all meetings be opened and agenda items publicized in advance. In a state such as Massachusetts, there are no laws to prohibit unilateral changes to the documents by the association board.

Double taxation

Most homeowners are subject to property taxation, whether or not said property is located in a planned unit development governed by a homeowners' association. Such taxes are used by local municipalities to maintain roads, street lighting, parks, etc. In addition to municipal property taxes, individuals who own private property located within planned unit developments are subject to association assessments that are used by the development to maintain the private roads, street lighting, landscaping, security, and amenitites located within the planned unit development. A non-HOA property owner pays taxes to fund street repairs performed by the city; the HOA property owners pay these same taxes, but without the same benefit, since the local government will not maintain the streets to their homes. Thus the HOA property needs to pay a second time, to privately maintain the street.

The proliferation of planned unit developments has resulted in a cost savings to local governments in two ways. One, by requiring developers to build 'public improvements' such as parks, passing the cost of maintenance of the improvements to the common-interest owners; and two, by planned-unit developments being responsible for the cost of maintaining infrastructures that would normally be maintained by the municipality.

Financial risk for homeowners

In some U.S. states (such as Texas) a homeowners association can foreclose a member's house without any judicial procedure in order to collect special assessments, fees and fines, or otherwise place an enforceable lien on the property which, upon the property's sale, allows the HOA to collect otherwise unpaid assessments. A proposed constitutional amendment in Texas would limit the power of HOA's in such matters. A case in point involves a soldier who, in 2008, was informed his fully paid-for $300,000 home in Frisco, Texas had been foreclosed on and sold for $3,500 by his HOA over unpaid dues of $800 while he was serving in Iraq. In 2010, the case was settled and the soldier regained ownership of the home. Federal laws protecting military personnel may have been his defense; however, a gag order prevents details from being known.

Other states, like Florida, require a judicial hearing. Foreclosure without a judicial hearing can occur when a power of sale clause exists in a mortgage or deed of trust.

A report self-published by a professor at Washington University disputes the claim that HOAs protect property values, stating, based on a survey of Harris County, Texas (which had an unusual legal regime regarding foreclosures): “Although HOA foreclosures are ostensibly motivated by efforts to improve property values, neither foreclosure activity nor HOAs appear linked with the above average home price growth.”

Homeowners association boards can also collect special assessments from its members in addition to set fees, sometimes without the homeowners' direct vote on the matter, though most states place restrictions on an association's ability to do so. Special assessments often require a homeowner vote if the amount exceeds a prescribed limit established in the Association's by-laws. In California, for example, a special assessment can be imposed by a Board, without a membership vote, only when the TOTAL assessment is 5 percent or less of the association's annual budget. Therefore in the case of a 25 unit association with a $100,000 annual operating budget, the Board could only impose a $5,000 assessment on the entire population ($5,000 divided by 25 units equal $200 per unit). A larger assessment would require a majority vote of the members. In some exceptional cases, particularly in matters of public health or safety, the amount of special assessments may be at the board's discretion. If, for example there is a ruptured sewer line, the Board could vote a substantial assessment immediately, arguing that the matter impacts public health and safety. In practice, however, most Boards prefer that owners have a chance to voice opinions and vote on assessments.

Increasingly, homeowner associations handle large amounts of money. Embezzlement from associations has occurred occasionally, as a result of dishonest board members or community managers, with losses up to millions of dollars. Again, California's Davis-Stirling Act, which was designed to protect owners, requires that Boards carry appropriate liability insurance to indemnify the association from any wrong-doing. The large budgets and expertise required to run such groups are a part of the arguments behind mandating manager certification (through Community Association Institute, state real estate boards, or other agencies).

The AARP has recently voiced concern that homeowners associations pose a risk to the financial welfare of their members. They have proposed that a homeowners "Bill Of Rights" be adopted by all 50 states to protect seniors from rogue Homeowner Associations.

Limits to powers

Prior to the Telecommunications Act of 1996, HOAs could restrict or prohibit satellite dishes. Many communities still have these rules in their CC&Rs, but after October 1996, they are no longer enforceable. With a few exceptions, any homeowner may install a satellite dish of a size of one meter or smaller in diameter (larger dishes are protected in Alaska). While HOAs may encourage that dishes be placed as inconspicuously as possible, the dish must be allowed to be placed where it may receive a usable signal. Additionally, many HOAs have restrictive covenants prohibiting a homeowner from installing an OTA (Over-The-Air) rooftop antenna. These restrictions are also no longer enforceable, except in some instances. For example: the antenna may be installed at any location unless it imposes upon common property. Also, the antenna must be of a design to receive local, not long-distance signals and must not extend any higher than twelve feet above the top roof-line of the home, unless an exception is granted by the HOA due to extenuating terrestrial interference.

In Florida, state law prevents covenants and deed restrictions from prohibiting "Florida-Friendly Landscaping," a type of xeriscaping. In spite of the law, at least one homeowner has faced harassment and threat of fines from a homeowners' group for having insufficient grass after landscaping his yard to reduce water usage. Similar legislation was introduced and passed by the legislature in Colorado but was vetoed by governor Bill Owens. Residents in Colorado have continued to call for regulation to protect xeriscaping, citing homeowners' associations that require the use of grasses that consume large quantities of water and threaten fines for those who do not comply with the covenants.

Alternative to CIDs

An alternative to CIDs is the multiple-tenant income property, or MTIP, known in the United Kingdom as housing estates. CIDs and MTIPs have fundamentally different forms of governance. In a CID, dues are paid to a nonprofit association. In an MTIP, ground rents are paid to a landowner, who decides how to spend it. In both cases, certain guidelines are set out by the covenant or the lease contract; but in the latter scenario, the landowner has a stronger incentive to maximize the value of all the governed property in the long term (because he is the residual claimant of it all) and to keep the residents happy, since his income is dependent on their continued patronage. These factors are cited as arguments in favor of MTIPs.

See also

• Gated community
• Davis-Stirling Common Interest Development Act
• Housing society
• Business Improvement District

References

The original article was based on an article first published at Internet-encyclopedia.org.

Further reading

• David T. Beito, Peter Gordon, and Alexander Tabarrok, eds., The Voluntary City: Choice, Community, and Civil Society, University of Michigan Press, ISBN 0-472-08837-8/
• Ronald M. Sandgrund and Joseph F. Smith, "When the Developer Controls the Homeowner Association Board: The Benevolent Dictator?" The Colorado Lawyer, January 2002, p. 91.
• Robert H. Nelson, Private Neighborhoods: And the Transformation of Local Government Urban Institute Press (Washington, DC): 2005. ISBN 0877667519/ ISBN 978-0877667513/
• George K. Staropoli,The Case Against State Protection of Homeowners Associations Infinity Press 2003. ISBN 0741416204 / 978-0741416209/