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August 2, 2015

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j. patrick coolican:

If you thought HOAs were bad now, just wait

J. Patrick Coolican

J. Patrick Coolican

Who needs caffeine when you’ve got today’s topic: homeowners associations!

Yes, your blood pressure is spiking at the sight of the dreaded acronym, HOA. They told you that you can’t paint your garage door pink. They take a slice of your paycheck every month and you’re not sure what they spend it on.

Now we learn some are dirty. In the news recently: HOA boards corrupted by political hacks, who then steered construction defect lawsuits to juiced-in law firms. The feds are securing new guilty pleas all the time.

But the HOA crisis I want to address here, though a far more worrisome, is a few years away.

It goes like this: Everything in Las Vegas that was new five or 10 years ago — your community pool, the roof on your condo building, the street in front of your home — will soon be middle-aged and require maintenance or replacement. And HOAs aren’t equipped — financially or otherwise — to deal with it.

“Stuff falls apart. It’s inevitable. And I know we’re not prepared for it.”

That’s Evan McKenzie, lawyer and political scientist at the University of Illinois at Chicago and the foremost expert on HOAs. He wrote the book on them, aptly titled, “Privatopia.”

Let’s quickly review the history here because most of you are from someplace else and have the same question I have when it comes to HOAs: Why do we need them?

HOAs, or under our statutes “common interest communities,” are a dominant governing paradigm for two reasons, and both are intertwined with the growth of the Sun Belt — a phenomenon that saw millions of Americans move South and West, many of them to escape the high taxes of the Northeast and Midwest.

First, an HOA allows municipal government to push responsibilities on to these private entities. And, if the city doesn’t have to build or maintain the neighborhood park, that means lower taxes. Of course, we still want the park and we want it maintained, so we still have to pay for it. But the HOA is probably cheaper than the cost of more robust local governments with their pension-gobbling public employees.

Second, the HOA acts as a cheap code enforcer so the neighborhood doesn’t go to seed. In older communities like where many of you come from, neighbors give subtle clues to neighbors. “Hey there, really lettin’ your lawn go aren’t ya, Ernie?”

But here, we’re afraid the neighbor might be a freak fugitive from Omaha, so we don’t want to make eye contact, let alone tell him to mow the lawn. So to preserve neighborhoods and their value, we have to give someone the power to be the local bad rent-a-cop: Get the car off the blocks and off the front lawn or it’s a $50 charge.

So, HOAs.

There are disadvantages, however: “When things were going well, HOAs were already in trouble,” McKenzie says.

“The reason is because the whole institution is premised on a faulty assumption: That owners can do all the things expected of them —to run the association and essentially operate a corporation. It relies on them having more time, money and loyalty than they actually have,” he says.

You can see this in the abysmal voter participation rates for HOA board elections, and in the minor and major scandals that erupt all the time. And that was during the good times.

The real estate crash has created massive new challenges: To begin with, neighborhood blight that follows a spate of foreclosures.

Then there’s money.

“If they’re not paying their mortgages, you know they stopped paying the HOA before that,” McKenzie says.

HOAs can recover some of the money owed them, up to nine months of dues and attorney fees plus collection costs, according to officials in the office of the state’s Ombudsman for Owners in Common-Interest Communities and Condominium Hotels. But many owners owe more than nine months of dues, thereby leaving a deficit for the HOA.

And although HOAs are required to give a summary report of their financial reserves, that’s all that’s required.

“If they’re not meeting those reserves, it’s the association’s responsibility to ensure they meet the reserve. That’s an internal … issue,” says Sharon Jackson, compliance supervisor for the ombudsman. In other words, that’s your problem.

Ombudsman officials say they don’t know how many HOAs don’t have the required reserves, but say most aren’t at 100 percent, which makes sense given the recession and all the people unable to pay their monthly fees.

So in addition to zombie banks, we now have zombie HOAs.

And here’s where it gets ugly. Many of our valley’s developments are like the monorail in “The Simpsons”: thrown up quickly and cheaply and not exactly built to last. The maintenance bills are coming due. And if there’s not enough money in reserve, you’ll get a huge bill — and I mean huge — from your HOA to replace the roof of your condo building or repair your road.

That day is coming.

Apparently there was some confusion between myself and state officials as to what an HOA can collect on unpaid HOA fees. The $1,950 cap is for collection costs only. The HOA can also collect nine months of dues. I've changed the column to reflect that. In any case, the problem remains: HOAs often can't fully recoup what they are owed.

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