💼 Guilt by Association
briefcase | invest smarter | Issue #126
Check out the Canadian Real Estate Investor Podcast, where in one of their latest episodes they discuss how the government makes 3X more revenue from new construction than developers. 3X!
And the situation isn’t much different in the U.S. where 40% of development costs go to government taxes and fees.
Now…speaking of over-reach…Here’s what you thought about today’s topic, HOAs:
😯 wHOA!
Today we are going to explore the wonderful world of Homeowners Associations (HOAs)…the good, the bad, and the cringeworthy.
Particularly given the rise in HOA anti-Gnome behavior.
I mean, if I want to put a Benjamin Button demon baby with a red hat in my garden, it’s my right!
Let’s face it, HOAs are a necessary part of life, they provide much-needed work and services that local governments are unable to take on.
Further, homeowners appreciate uniformity and having a voice in how their community operates.
Here are a few statistics to help situate our discussion:
53% of American homeowners are members of a Homeowners Association (HOA).
As of 2021, 82% of all single-family homes were a part of one.
By 2040, it’s expected that the HOA model will be the most common form of homeowners in the U.S.
HOAs collect an astonishing $100 billion annually through resident dues.
Resident dues sit at an average of $250 a month.
New HOA construction increased by 131.5% between 2009 and 2019.
California and Florida have the highest number of HOAs.
The reality is that HOAs are a booming business, and here’s where it gets complicated. Today alone, 22 new HOAs will be formed, taking over the debt ceiling as the fastest-growing annoyance in America.
TLDR: HOAs are one of the fastest growing almost-government entities, and more and more homes are being added to them.
An Almost-Government
So what exactly are HOAs? Formally, HOAs are run by a board of fellow homeowners that collect dues, manage amenities like pools and playgrounds, and can enforce landscaping and aesthetic guidelines. And membership in an HOA is not voluntary, if you want to buy a home in an HOA community you are required to be a member and pay dues.
Most HOAs are formed by developers who then turn them over to an elected association board when construction on the new development is finished.
And things seem to be going well, with 67% of HOA residents saying they have had a good experience with their association.
But there are some issues with HOAs that make you go…
Hoaly Shit!
Racially Charged – One HOA in Denton County, Texas, which manages 2000+ homes, passed a rule that bans renting to anyone using a publicly financed or subsidized housing program. These are basically Section 8 vouchers. The HOA measure would displace 150 families, over 90% of which are Black.
For Profit — Most HOAs will hire for-profit companies to enforce rules and guidelines. And guess what happens when you introduce a for-profit business that makes money by giving out as many fines as possible? But cities love HOAs…
“Real estate developers and cities see dollar signs with private governments. If you create a private subdivision or ideally a condominium, you can get much greater density, and the developers can get more houses on less land…Cities love this because they get a whole bunch of new taxpayers paying a full property tax and they don’t have to provide the services to them they have to provide to everybody else.”
Unregulated — The nation’s 350,000 HOAs are largely unregulated, as the government considers disputes with them to be private matters. This causes a problem because HOAs can actually foreclose on people’s homes.
“The way HOAs are legally structured, they can do pretty much anything they want…HOAs function exactly like governments but are exempt from the checks and balances we expect — because they’re set up as corporations.”
Foreclosure — HOAs can legally foreclose on people’s homes. So they can self-administer fines from rules they created and when someone doesn’t pay they can legally take their homes. For instance, Colorado had 2,400 foreclosure cases between 2018 and 2022.
Environmental Concerns — Due to restrictive land-use rules, many environmentally friendly upgrades such as rooftop solar panels, charging stations, and more natural lawn planning that attracts pollinators are prohibited.
Free Speech — In one example, an HOA gave out fines to community members who criticized it on Facebook.
HOAs are a necessary and growing aspect of America’s housing fabric. Expect state governments to increase regulatory oversight of these associations, such as in Texas, Arizona, Idaho, and Colorado.
Weekly Real Estate News
🤔 That’s Rich! SVB and Signature Bank CEOs blame the media and government for their bank’s failing — CO
😁 Cuz I’m Happy: Homebuilder sentiment pulls out of negative territory for the first time in nearly a year, rising five points — CNBC
📈 Stocks Join Party: Homebuilder stocks soar to new highs because of the insatiable demand for housing — NMN
🤬 Glad You’re Having Fun! But, homeowners are not so happy with those who think it’s a bad time to buy hitting a 45-year high — MarketWatch
🤝 WeOut: WeWork's CEO Sandeep Mathrani is out as the company continues to restructure and focus on its core business — TRD
🤫 Shotgun Top Bunk! Inside Vladimir Putin’s secret bunker in the Black Sea, and the public plans that show his escape routes — BI
⚒️ Fix & Flop: Profit margins for fix and flip investors getting squeezed as material cost inflation and rising rates take hold — HW
📉 Slow (Rent) Roll: April 2023 marks the fifteenth month of slowing rent growth, with asking rents in the 50 largest metros increasing to $1,734, up by $4 MoM — Realtor
🥊 It's On! Bidding wars come back to the housing market as buyer demand increases with scarce new listings — Zillow