You Don't Know What You Don't Know

Background

Communities governed by Homeowners Associations (HOAs) administer and manage their common area usage, maintenance and security of amenities including, but not limited to, clubhouses, tennis courts, lakes, pools, parks, retention ponds and entrance signage. They also protect owner investments through enforcement of Community Covenants and Restrictions (CCRs) and maintaining architectural control in accordance with CCR documents. Funding is facilitated primarily through homeowner dues and, in some instances, facility rental, fines, or other minor income producing activities.


Proper HOA management requires business acumen, a fiduciary responsibility to homeowner members, receipt and management of homeowner assessments, enforcement of CCRs, access to association books and records, open meetings and commitment to "one master.” The business activities and control of for-profit companies (Declarants/Developers) and nonprofit homeowner associations should be clearly separated... but they are not in the majority of instances in Alabama. Conflict of interest, and more often self-dealing, prevails.


To gain perspective on the problem, one must understand its origin and the general path pursued at inception of an HOA-governed community. Generally, HOAs are set up as non-profit corporations with a Board of Directors (BOD) appointed (not voted upon) generally consisting of the Declarant company's employees and individuals with an allegiance to the for-profit corporation, i.e. family, staff, associates, builders, etc. Non-profit corporations operating under state statutes are taxed differently than for-profit businesses. They are created as a legal entity generally concurrent with the creation of the development, or before the first sale of any individual properties. It is at this point the Declarancy is created. The Board relationship between the Declarant and the HOA creates a fiduciary duty under which the Declarant owes the highest responsibility to the property owners. This is literally impossible since it is easily argued that they owe the same or higher duty to their for-profit company. Decisions pertaining to how homeowner funds are spent and other decisions can appear or be self-serving when they seem weighted in the best interest of the Declarant. For instance, a Declarant may waive dues for months to years as an incentive to a Builder to purchase lots. The association (owners) are left to underwrite those waived costs. Debt can also accumulate very quickly when initial costs for operation and maintenance are not factored in as a part of development costs. Association accounts have become "Cash Cows" with generally no to little oversight. The IRS can become actively involved if it is suspected that association funds are being spent outside the association for nonmember benefit. Unfortunately, this is not an isolated situation.  Trying to get a look at the books, to which an owner is entitled, can be very difficult to impossible. 


Purchasers are generally uninformed, misinformed and most often perform little due diligence prior to a purchase. Simply speaking, "they don't know what they don't know". They more often focus on “the pretty package” (curb appeal, location, schools, and nearby amenities) and make unwise decisions while underlying issues could surface later that could ruin their investment. Most purchasers are way too trusting and unwisely assume they have the same level of protection in Alabama as in other more consumer oriented states. They DO rely on their licensed real estate professional and an agent’s lack of knowledge leaves them blindly purchasing in many instances with potential exposure to fiscal and emotional damage.  MAKE SURE YOU HAVE AN EXPERIANCED AGENT. Don't be afraid to ask how they gained their knowledge.   


Real estate professionals representing buyers are potentially at risk for not performing their due diligence by identifying and disclosing information that may be considered material in nature, although they are “playing against the house” when it comes to accessibility and cooperation. But Agents as well "don’t know what they don’t know" and they are starting to create their own disclosure and contingent offer forms to better serve the consumer and mitigate their personal liability. A DRAFT example is located under the REALTOR® and Purchaser tabs. In deference to the agents, they get little if any comprehensive training on the threat and how to mitigate risk. Lenders have started investigating the wellbeing of HOA communities to insure they are well capitalized and not plagued with issues that could reduce their borrowers’ equity, risk their investment or place the loan in jeopardy and are starting to deny loans.


Purchasers and Agents are often met with resistance, threats or simply dismissed for asking important questions. Purchasers have a right to Disclosure, Accountability and Protection. The root of the problem is that Alabama lacks adequate consumer protection to protect the public regarding purchase of real estate subject to HOA control and the real estate profession seems to be waiting on the legislature to lead the way. But, the legislature is hamstrung by self-serving special interest groups and any appreciable changes are unlikely to materialize in the near or distant future. .


You can make your offer contingent upon receiving and approving material information before you are committed to purchase.  Do you have adequate representation? Make sure your Agent is well trained and experienced in dealing with HOA issues?  


Don't be bullied into skipping this important part of purchasing. If the agent or seller says "NO," just say ,"NEXT," and move on. 


Effective protection does not Exist Due to special interest groups objections.