Buying a Property with an HOA and taking control of an HOA

[Mike Lawt]

Hello,

I am working on a deal to purchase a majority of condo units (54%) which are part of an HOA. I have never owned property in an HOA let alone had the ability to control the association. I'm trying to understand what due dilligence I need to perform and educate myself on how to gain control of the HOA after I purchase the majority of the units. Since the HOA is a seperate entity from the property, I'm not sure what language to put in the P&S. I will add a subject to provision to review the HOA financials, board minutes, and disclosure of any legal documents pertaining to the HOA. Are there any words of wisdom from someone who has expeirence controling an HOA that you would give to someone who plans to gain control of an HOA?

I appreciate it.

[Melanie P.]

I would want to see as many years budgets as the seller has available and a copy of the most recent reserve study. Also community rules, rental restrictions, pet restrictions, occupancy restrictions - anything that could interfere with your operations. 

As to "taking control" you'll have to wait until there are board elections (typically annually although usually for part, not all of the board) and run yourself and people you control for the board seats. It will take years to take over the board and in that time I predict you won't want to. You'll find some people there who really care, know the history and you'll want to keep them around. 

[Mike Lawt]

Thank you Melanie. I have requested those items from the seller. I hope not to find out that it's been underfunded. I do know a number of the roofs need to be replaced soon. As far as the HOA board, I like the idea of community members being part of the board.

[Chris Seveney]

@Mike Lawt

Also realize if you own this much the valuations will go down significantly as now buyers cannot get conventional financing.

[Melanie P.]

Quote from @Mike Lawt:

Thank you Melanie. I have requested those items from the seller. I hope not to find out that it's been underfunded. I do know a number of the roofs need to be replaced soon. As far as the HOA board, I like the idea of community members being part of the board.

Give them time. Most people with the time and inclination to attend HOA meetings and serve on HOA boards are truly awful people. There will be one or two who have real estate or business experience and are trying to control costs and do the right thing. But the majority are there to cater to power trips, ego, etc.

[Steve Smith]

Quote from @Melanie P.:

I would want to see as many years budgets as the seller has available and a copy of the most recent reserve study. Also community rules, rental restrictions, pet restrictions, occupancy restrictions - anything that could interfere with your operations. 

As to "taking control" you'll have to wait until there are board elections (typically annually although usually for part, not all of the board) and run yourself and people you control for the board seats. It will take years to take over the board and in that time I predict you won't want to. You'll find some people there who really care, know the history and you'll want to keep them around. 

You hit the nail on the head!

[Mike Lawt]

Thanks again for the input, very helpful. @Chris Seveney

@Chris Seveney could you help me understand what kind of discount I should expect to see due to the condos being non-warrantable and not qualifying for conventional financing? Two years ago one of the condo units in the complex was foreclosed upon and sold for less than half what I would expect to see. I was told that the ower of the unit was behind on taxes, HOA fees, and the unit was in disrepair. Five years ago there was another foreclosure sale at a similar discounted price. My lender is concerned that the units will not appraise for the purchase price. When looking at recent sales comps of condos in the area, my purchase price will be about 15% below comps.

The HOA fee is 50%-60% less than comprable condo buildings built within a three year time frame of the condos in this deal so I'm pretty sure that once I see the HOA's financial position, I will see that it is under funded. The deal still makes sense even after factoring in a 60% increase to the HOA fee.

[Chris Seveney]

Quote from @Mike Lawt:

Thanks again for the input, very helpful. @Chris Seveney

@Chris Seveney could you help me understand what kind of discount I should expect to see due to the condos being non-warrantable and not qualifying for conventional financing? Two years ago one of the condo units in the complex was foreclosed upon and sold for less than half what I would expect to see. I was told that the ower of the unit was behind on taxes, HOA fees, and the unit was in disrepair. Five years ago there was another foreclosure sale at a similar discounted price. My lender is concerned that the units will not appraise for the purchase price. When looking at recent sales comps of condos in the area, my purchase price will be about 15% below comps.

The HOA fee is 50%-60% less than comprable condo buildings built within a three year time frame of the condos in this deal so I'm pretty sure that once I see the HOA's financial position, I will see that it is under funded. The deal still makes sense even after factoring in a 60% increase to the HOA fee.

 Well it will be cash buyers. Cash buyers may seek 20-30% discount. This is just a guess. Also recognize that if there are more defaults in the association, again your buyer pool will be very low as investors typically do not like condos and most owner occupied borrowers do not have cash.

IF I was buying that many units I would also have a third party engineering study done or ask the HOA when the last one was done. Also ask for a capital budget of what is expected to be spent. I have seen fees go up 4x in some condos because they were underfunded and they never had a capex budget or any engineering study to determine what was needed.