HOAs Bolster Property Values!

A June 11, 2009 Associated Press article about homeowner and condo associations was picked up by newspapers all over the country. The article played on popular fears of rising foreclosure rates and bankruptcies around the country. Instead of reporting the important and growing role that associations play in maintaining property values, building community, and otherwise holding back the tide of the failing real estate market, the article links associations with the U.S’s rising foreclosure rate. It ran under lurid headlines like “Neighbors are Forcing Neighbors Into Foreclosure” and “Foreclosure Surprises Lurking.”

Of course, these days, foreclosures are about as popular as a snapping turtle in a swimming pool. In light of the recent bad press, and the fact that state and federal governments are taking a “shoot first ask questions later” approach to legislating perceived problems, it may be a good time to summarize the good associations do. The truth is that we need associations now, in a failing real estate economy, more than ever.

Associations are created by developers prior to any private sales to owners, and the obligations that run between the individual owners and the associations are covenants that run with the land. If some owners do not pay their share of these necessary costs, the association either fails to perform its responsibilities properly, or the other owners are forced to pay higher dues. If the Association does not perform its responsibilities properly, all the owners may face the costs of later repairs or liabilities.

The link between association duties and value was highlighted in the 2008 lawsuit brought by two homeowners in Colorado against their HOA for failing to properly maintain the neighborhood common areas and enforce restrictions. The plaintiffs asserted that the association’s failure directly resulted to decreases in their property value.

In fact, home and property values are dropping across the country. Foreclosure and bankruptcy rates are up. In June 2009, Reality Trac released a U.S. Foreclosure Market Report that garnered immediate media attention. The report illustrated the increasing rate of foreclosures around the country. Reality Trac’s data show that the Western States as a region have been the worst hit by foreclosures. Oregon and Washington bucked this trend, and have foreclosure rates lower than the national average. The West and sunbelt states grew a lot during the last building boom, which is one reason they have been hit hard by the bust. The same boom in building in the West coincided with a growing popularity of HOAs and condo associations. HOAs also grew in the Northwest.

It is no surprise that the growth in new homes was accompanied by a growth in associations. Developers marketed HOAs as a benefit and a selling point for buyers, and buyers seemed to agree, snapping up homes in planned neighborhoods with associations. Associations are marketed both as a means to maintain neighborhood quality and property values; and as a means to create community. Community Associations Institute, the nation’s largest group for associations, now estimates that nearly 60 million Americans live in associations.

Associations foster community by facilitating communication between owners, providing meeting places like club houses and common area parks, and even planning events. They also can help avoid direct neighbor conflicts by enforcing regulations. Some associations dilute the contention caused by disagreements even further by hiring managers and outside counsel to collect assessments and enforce regulations.

In theory, it is also easy to see how associations protect home values. Condominium and neighborhood associations perform important functions in their communities. Associations maintain landscaping, pools, insurance, and even roofs and other common elements in some communities. Most people will pay more for a home that is not next to a home with a glaring pink paint job and a jungle of a yard. Most people enjoy having access to clubhouses and pools.

Even though the link between associations and home values is easy to understand, and is supported by anecdotal evidence, little statistical research has been done in this area. A 2005 study by economist Alexander Tabarrok concluded that houses in HOAs were worth on average 5 percent more than similar houses in the same neighborhood but outside of HOAs in the area studied. Admittedly, however, no research reflects the current market. For instance, no one has compared how the value of homes in associations have fared versus homes not in associations. Likewise, there is still no data about the relative foreclosure rates in and out of associations.

One thing is for sure. Associations have to be run effectively and efficiently to have a positive effect. This always involves balancing the association’s obligations to the majority of owners with the association’s desire to build community. While the underlying causes of owner delinquencies and covenant violations may be sympathetic, associations must use all tools available to them to collect dues and to protect the property values of all of their members. Hopefully we can recognize the valuable role played by associations and they will not continue to be wrongly associated with the causes of our current economic troubles.