Cheat Sheet: Why HOAs exist, and the role of the board

This is the first of the Cheat Sheet series, a primer for new HOA board members.

The “Terrace House”, where my brother-in-law Patrick lives with ten friends.

Patrick’s situation is why we have HOAs.

Sharing: Mine, but you can have some

According to The Banks™, the US has two categories of housing: (1) owner occupied, Mom, Dad and the kids in the house they own, and (2) rental, roughing it with the poors in overcrowded tenements.

This view is a gross oversimplification—obviously—I grew up in suburbia but now live in a big city, where plenty of wealthy people rationally prefer to let someone else worry about the water heater in their high-end rental housing. And, ask any college student, member of the military, or priest: there’s a lot beyond the typical “house vs. apartment”.

One of those options is co-housing: split the 6-8 bedroom house (and $8-10k/month rent) across 10-15 people, and live as a group. Some people would hate this; my wife’s brother Patrick wouldn’t have it any other way. They look after each other’s dogs, own a single car for the entire group, and have big dinners once/week. All while living simply and saving a ton of money—many have brokerage accounts well into six figures.

Patrick could afford to buy a house, but prefers living with his housemates. What should he do?

Option #1: Rent from a landlord. Their current arrangement, but far from ideal:

  • Control: even if they’re happy today, there’s no escaping the possibility of rent increases, lease termination, or even sale to a different landlord.
  • People want out: Nothing lasts—people start families, go to graduate school, change jobs. Who’s on the lease? Who gets to say whether a new person can live there, or not?
  • Risk: How much do you trust your housemates? Enough to cover their rent during a job loss, pony up for vacancy, or even pay when their friends damage the place? And whose job is coordinating all of this, anyway?

So maybe you’d rather own? Buy the place and list everyone as a legal owner? This is called tenancy-in-common (TIC), and believe me, if you find yourself in one of these, you’d only wish you could rent:

  • Risk: Think rent is bad? Try, your neighbor lost her job and can’t pay property tax. Or Fred in #2 can’t pay his share of the mortgage, I hope you can cover it, or the bank’s going to foreclose on the whole place!
  • Financing: You need a $300k mortgage. The Banks™ need to know: how much is this place worth, exactly? Does it support a $300k mortgage?
    • “I’m buying a house” version: Banks pays appraiser $500, appraiser produces report, done.
    • TIC version: Pay an expensive lawyer several thousand dollars to comb through the “TIC agreement”, 300+ pages of legalese detailing ownership transfers, property and transfer tax allotment, etc. Routine things typically done by software at the banks (documents for foreclosures, escrow, appraisal) now require custom, expensive drafting by lawyers. As a borrower financing a TIC purchase, expect to pay, a minimum of 0.25-0.50% over comparable “house” rates, and put a lot more down—20-30%—complicating the purchase process, depressing prices, and perhaps most consequentially, forcing you to work with a very small number of lenders even willing to do it at all.
  • Governance: Who owns the porch? What if we need money to fix the roof and someone won’t pay?

What causes these issues? Sharing. The building has one porch—who “owns” it? What does “ownership” here even mean? Can I claim ownership of the porch, and charge you rent? (There’s a fun toddler game here somewhere.)

It comes up everywhere:

  • Shared facilities: My family has a lake house—who owns the lake? Ditto for ski mountains, private clubhouses and pools, even athletic clubs (e.g. tennis) or neighborhoods with private golf courses
  • Infrastructure: I live in a 15-story condo; the building has parking lots, elevators, and pumps to lift water. With 800 residents, not a day passes without something needing attention.
  • Multi-unit buildings: Medical suites, airplane hangars, and hydroponic facilities are also commonly structured as HOAs.

Some terminology: HOAs are divided into separate interests (as in “ownership interest”) which is each member’s “private” area. After the separate interests are “carved out”, what’s left is the common interest—the roof deck, walkway, or boat launch. Managing the common interest is the board’s job.

Something better: homeowners associations

Circling back to Patrick – a guy who’d rather own, but likes living with friends. What would be ideal for him?

  • Security of ownership: legally enforceable property rights letting him buy/sell on his own terms, protection from property crimes (vandalism, trespass), and Patrick’s choice of how the unit is used (including the right to rent it out, for whatever price he sees fit)
  • Simple financing: mortgage lending that’s as easy as buying a house—many lenders competing for his business, reasonable rates, and a straightforward foreclosure process in case he doesn’t pay
  • Minimal risk: If Patrick’s housemate loses his job, Patrick might want to help out, but it should be his choice, not something forced on him by imminent loss of property. And if they ultimately don’t pay (property taxes, mortgage, etc)
  • Reasonable governance: since some things are shared (e.g. the roof, trash collection), there will need to be processes for collecting funds, deciding what to fix, and making rules. That’s reality.

Here in California, we got the Davis-Stirling Act, in 1985. The law was California’s attempt to create a standard legal framework for what it called “common-interest developments”, a generic term for anything with a “common interest” (including most HOAs). The sheer size of the effort—some 10 million Californians living in more than 60,000 CIDs across the state—this was bound to be a huge law, undergoing several major revisions, with dozens of sections on everything from notice requirements, to structural inspections, annual disclosure requirements frequently running to 100+ pages, and a procedure for liens (in case dues aren’t paid). While well-intentioned, the law imposes an overwhelming compliance burden on the approximately 40% of HOAs without professional management. Helping boards discharge their duties—do what they are legally obligated to do, by California’s Civil Code—is a major goal for Dials.

What boards do

As a board member, you first obligation is to the law. This generally includes your state’s condo law (if you have one, which most do), as well as its corporate code, in case your state organizes HOAs as corporations (California does). Again speaking for California, the things boards must do include:

  • Notices: Notify association members of important events. California law defines two categories of notice: “individual” delivered directly to the member (either electronically or by postal mail), or “general”, often a paper in a display case, or posting to a website. Over a dozen events (e.g. management changes) trigger such requirements for “notice”, and each member is free to designate (a) electronic vs postal delivery, and (b) a “secondary recipient” entitled to all communication from the association (in addition to the primary member/owner).
  • Mandatory annual disclosures, generally sent 30-60 days prior to year’s end, detailing the association’s fiscal condition, insurance policy, to its pro forma budget, reserve status, each unit’s assessment level, FHA/VA loan approvals, and late policy
  • Detailed financial requirements including a minimum dollar figure before liens are eligible for foreclosure ($1,800), and limiting associations to late charges “not exceeding 10 percent of the delinquent assessment”

In larger communities, building law also comes up a lot — the Americans with Disabilities Act (ADA), as well as local ordinances (e.g. building code, fire safety) that impose requirements such as door clearances for wheelchairs, elevator inspections, and fire protection equipment (exit signs, sprinklers).

Second, follow your governing documents: (a) CC&Rs, (b) bylaws, and (c) rules and regulations. New board members are often surprised that everything—officer titles and responsibilities (e.g. treasurer as collector of funds), meeting requirements including time and place—it’s all in there.

Third, look after the common areas. Ensure they’re maintained and available—both today and for the future (this is where assessments and heavy-duty financial planning come into play), and used safety, and in compliance with all legal requirements (e.g. if you area requires pool gates for safety, ensure they’re installed). If you live in a condo, make sure there’s clean drinking water, and that waste and sewer systems are operable.

And finally—try to keep people happy—board members are elected representatives, after all—people will appreciate quality-of-life items like paint, stable/increasing property values, and the occasional social event. But, critically, resident happiness must come after things like following the law, safety, and your governing documents.

That last point about keeping people happy is one of the most difficult lessons of running a board—or, frankly, organizational leadership of any kind (synagogue, company, city, even nation). The good news is that, though it can be trying, serving on a board is a great way to learn the ins and outs of practical politics and leadership, a critically important talent at every level of society.

On behalf of your community, thank you for choosing to serve. And if you haven’t yet, please consider it.

This is the first of the Cheat Sheet series, a primer for new HOA board members.

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