3 Ways a HOA Can Derail your Real Estate Deal  

The homeowners association: you either love it or despise it. It makes your life easier or it complicates too much of it. NBC News’ Jackie Faye once described homeowners associations (HOAs) as “little governments,” wielding the power to demand that flags be removed, homes be repainted and even foreclose for non-payment of fees.

 When it comes time to buy or sell a home in a managed community, the HOA may rear its ugly head and present any number of problems, guaranteed to kill the deal. We like to call them the “Deadly ‘Ls,’” liens, litigation and loans.

1. Lien on me

When an HOA isn’t able to collect money from a homeowner it will levy a fine. The most common fine is for neglecting to pay dues but you may also get dinged for not performing required maintenance on the home, legal fees and insurance deductibles should you or your guests cause damage in the common areas.

If you don’t pay the fine, the HOA may go a step further and file a lien against your property – you will pay what you owe or they’ll stop you from selling until they get their pound of flesh.

Yes, they do have the power to do this – it’s listed clearly right there in your HOA documents – remember that huge stack of papers you were supposed to read when you bought your home?

The buyer’s lender won’t loan money to someone that wants to buy a property with a lien on it so it will need to be cleared if you hope for the deal to go through.

2. Litigation, Lawsuit, whatever you want to call it

One of the most common problems we see when working with a buyer or a seller in a community governed by a HOA is litigation. This is another situation in which the lender will deny a loan. Sometimes the lawsuit is brought by the HOA against the developer for construction defects, fraud or a number of other reasons. Homeowners may sue the HOA or the developer.

Of the number of different forms of litigation, those that deal with construction defects are the worst – they will bring the deal to a screeching halt and lenders won’t go through with a loan until the lawsuit is concluded.

3. Loans and lenders

If the truth be known, lenders don’t particularly care for condos. Because the lender has to evaluate not only you, but the building and the HOA, loans for condos tend to be evaluated as riskier.

First, the loan underwriter will scrutinize the HOA’s financial situation, paying close attention to how much cash the association has on reserve and the number of homeowners who are delinquent in paying their dues. If that number exceeds 15 percent, the buyer will most likely not get the loan. Then, the lender will look at the tenant/owner ratio in the complex. They’ll also look at the number of units currently for sale 

We always counsel our clients to never sign off on the purchase of a home in a managed community until you, or your lawyer, reads every word on every page of the HOA documents.  This little government will dictate how you use your home for the entire time you live in it.

Since so many deal killers are out of the homeowner’s control, if you are planning on selling a home in an area governed by an HOA, pay attention to what your HOA is doing. Get clear on any litigation issues, watch the occupancy rate and remain engaged with the HOA.

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