- HOAs Take Some Of The Bundle Of Rights Away From Property Owners
- If The HOA Rules Seem Unreasonable, They Might Deter Buyers, Hurting Values
- Higher Monthly HOA fees Are Usually Inversely Related To Property Values
As a property owner, you lose some of your bundle of rights when your home is part of a homeowner’s association (HOA). You may own the property’s interest in a full-on, fee simple form, but an aggressive HOA can encroach on the value proposition. The proliferation of HOA horror stories might suggest we are even at peak HOA. The premise of having rules overseen by an association infers a promise that a property’s value is maximized by good management – the stricter, the better to keep the riff-raff out (like someone that doesn’t keep their garbage cans spotless or hangs blue shades in one of their bedroom windows). Except when it goes wrong.
It’s less about specific nuances than it is about causing buyers to pause and decide whether they want to put themselves into a situation where an HOA goes unchecked. It might only take one resident who is talented at navigating the legalize of the stated rules to create havoc or their own personal serfdom.
Rising, Unchecked HOA Fees
The higher the HOA fees, beyond what is considered standard in the market, can restrain value growth. Rising inflation can push monthly operating costs higher because it competes with funds needed by the owner to pay principal and interest on a mortgage payment. But that’s not what I’m really talking about here. Suppose an HOA goes rogue and systematically does not perform financial due diligence when vetting contractors to determine a reasonable price on a job, steering jobs to friends and associates at higher prices, or seemingly taking on many new projects, pushing the HOA fees much higher, under the premise of creating higher values for homes the development. In that case, the HOA can lose its competitiveness with like projects in the area. With the proliferation of new projects in the pandemic development frenzy due to record low mortgage rates, it may be too soon to see such behavior emerge at scale. Still, higher HOA costs are probably coming to your development. It is essential to pay attention.
I learned this years ago with my foray into academic research as a co-author of a white paper that included the impact of higher monthly HOA costs. This white paper was a joint effort between New York University’s Furman Center and me nearly twenty years ago. It was called The Condominium V. Cooperative Puzzle: An Empirical Analysis Of Housing In New York City. We looked at about 100,000 co-op and condo sales in Manhattan prior to 2006, that my firm had collected when co-op sales (about 75% of the residential market) were not in public record. The paper was vetted around the country with good reviews and was published in the Journal of Legal Studies at the University of Chicago. NYU has already hinted to me that it’s time for an update. Arguably, the white paper is probably overkill for this subject, but you might find it interesting to read.
HOA monthly costs can play a significant role in establishing the market value of a residence. That sounds commonsensical, but keeping costs in check and managing responsibly is an integral part of this aspect of homeownership – plus, homeowner associations wield a lot of power.
In New York City, we have been tracking the HOA costs (plus real estate taxes) of sold transactions on an average per month and an average per square foot per year. The growth of HOA charges is not linear.
HOA Horror Stories
If you simply google “HOA Horror Stories,” it reveals an entire category of terrible behavior by homeowner associations. There is potential for abuse of power, and with that can come higher costs. Those higher costs can reduce your development’s competitiveness in the market, restraining price growth.
BuzzFeed has a collection of 24 really petty stories of HOA bad behavior. Here are some of the more awful tales.
“The HOA came to my house right when we moved in at 6 a.m. to let me know that we chose the wrong garbage company to pick up our trash. 6 a.m.”
BuzzFeed
“Our old HOA had rules about how many plants you could have in your window, what type of blinds you could have, how many decorations could be visible from your windows, what you were allowed to have on your balcony, etc. I once got an ‘official notice’ for hanging a wet towel over the back of the chair on the balcony for less than an hour to dry after going to the pool.”
BuzzFeed
“My mother was in the hospital dying from cancer when she received a letter from the HOA of her condo complex that her patio curtains needed to be white, not blue.”
BuzzFeed
Final Thoughts on HOA
From a valuation perspective, the impact of an overly aggressive homeowners association can be adverse because, as a member, you give up some element of control over your property. Zoning and city ordinances are good examples of restricting homeowner choices at a broader level. In the town where I used to live for 32 years, they prohibited the installation of “chain-link fences,” and the only such fences remaining were grandfathered in. It was a pleasing “aesthetic” for the appearance of the town’s single family housing stock. However, HOA rules provide another layer of regulations, which are usually more specific to the properties since they are typically found in new developments where the housing stock is homogenous. The HOA controls public-facing aesthetics, such as paint color, landscaping, lawn care, roofing, what can be parked in the driveway, banning flags, etc. For example, planting rosebushes might not be allowed around your new home because the new owner might not be allowed to touch the plantings.
Many homebuyers of planned developments do not give these things much thought, and anecdotally, I find HOA rules and their administration less transparent than something more public-facing like city zoning ordinances.
The basic principle here is that the more control an outside entity has over your property, the more significant the potential for conflict and the bigger the risk to price growth. Suppose a bad reputation develops in a specific housing development from an HOA that is out of control. In that case, there is a higher probability that the market value of a home could be negatively impacted compared to an adjacent development run by a different HOA.
Did you miss yesterday’s Housing Notes?
Housing Notes Reads
- Reading the resi crystal ball in the year of the race [The Real Deal]
- Tracking the "Hampton-ization" of the North Fork [The Real Deal]
- An Office Tower Sold for $8.5 Million. It Was Once Worth 40 Times That. [NY Times]
- First-Time Homebuyers at Higher Risk of Overpaying for Homes [CoreLogic]
- Sales of $100M homes are expected to double in 2024: ‘It’s a substantial uptick in the pace of sales’ [NY Post]
Market Reports
- Elliman Report: Florida New Signed Contracts 7-2024 [Miller Samuel]
- Elliman Report: New York New Signed Contracts 7-2024 [Miller Samuel]
- Elliman Report: Orange County Sales 2Q 2024 [Miller Samuel]
