Sometimes you’ll find amazing investment property deals that include homes under a homeowners association. On the surface, it might seem like a good deal for a rental property. Maybe you’ve lived under an HOA before and didn’t think it was that bad. You may not mind living in a home governed by a homeowners association, but here’s why it isn’t the best decision for rental properties.
Maybe it’s a person’s innate need for freedom and aversion to being told what to do, but many tenants will refuse to follow HOA rules they find to be useless. For example, most HOAs don’t allow you to put anything on the window sill. This means no knick-knacks, no decorations, no alarm clocks, no incense burners, no holiday decorations, nothing.
For people who like to use or decorate their window sills, they will have a hard time following this rule. It’s not even going to be an obvious violation, either, and will likely happen by accident. They probably won’t even know they’ve done anything wrong until someone reports them. By that time, they will have settled into the unit and will feel violated for being told they can’t even put their alarm clock on the window sill. It sounds petty, and HOAs have their reasons, but it’s a big deal to tenants.
You don’t want your property racking up fines because your tenant won’t move their alarm clock, or something similar in nature. Other common violations tenants understandably resist include forcing residents to keep their garage doors open, planting trees that are too short, or owning an older vehicle. Some HOAs even require police officers to park their cars in the garage out of sight. If these violations seem petty, it’s because HOAs want to maintain certain aesthetics in the neighborhood.
You can go over all the rules ahead of time before signing the lease, and it may not make a difference. A lot of HOA rules seem different on paper and the reality only hits when you’re slapped with a notice to stop. For example, the man who was fined $5,000 for planting magnolia trees three feet too short probably never thought it would be an issue, even though it was outlined in the bylaws when he bought his property.
At a glance, when reading the bylaws, requiring new trees to be six feet tall seems reasonable, until it comes time to plant your own, and you choose smaller trees because they grow better than larger trees. Most people aren’t going to remember the rule, nor will they check the bylaws to make sure their trees are the proper height before planting them because it’s not logical.
Most tenants will find themselves getting fined at some point for doing something totally normal that doesn’t even seem like a violation. Many will outright refuse to pay the fine and it will all fall on you. It’s just more of a risk to you when your property with an HOA is a rental.
Anytime you purchase property governed by an HOA, you become legally responsible for the former owner’s violations, including unpaid fines. Many people find this out the hard way when they buy a home from an auction as-is for what looks like a great deal, and don’t realize it comes with some hefty fines.
The only way to know what you’re getting into is to request an HOA estoppel or certificate before the sale closes. With this information, you can stipulate that the seller must pay all outstanding fees before the sale will be completed. It’s also wise to request documentation from the HOA to confirm that the property has no violations or outstanding fees, and isn’t in collections.
Despite the fact that you have a mortgage, an HOA can foreclose on your property for unpaid fines. Never trust the word of the seller that the property is lien-free. They might be hiding the truth, or they may not have all the information.
If you’re going to buy a property in a HOA community, have an attorney conduct a title search, and then get an owner’s title insurance policy to protect yourself just in case any liens are missed during the title search.
The possibility of foreclosure will still exist when you rent to a tenant because you will still be held legally and financially responsible for their violations. This means one problem tenant can potentially cause you to lose your property.
In addition to hiring an attorney to perform a title search and getting an owner’s title insurance policy, you’ll also need to request a Resale Package from the HOA in order to find out about pending violations that can turn into a lien later. You won’t find this information in a title search and it won’t be covered by title insurance.
A Resale Package will also include important information like:
All of this is important information to have, but it creates far more work for you as a property owner. When all you want to do is buy property and rent it out, an HOA will slow you down.
At the end of the day, you won’t be able to collect more rent for a house under an HOA, so there really is no significant advantage to using one as a rental property. When it comes to HOA rentals, there are major disadvantages that are compounded by the fact that you have to trust your tenants not to violate the rules or HOA bylaws because it can cost you serious money. You can try to pass the bill to your tenant, but if they’re already violating the rules they agreed to when moving in, it’s unlikely that you’ll get them to pay unless you take them to court. Lawsuits are expensive and not worth the energy if you can avoid them.
If you’re a property investor in the Austin area, consider the benefits of hiring a professional property management company to handle your rental process. From repairs and maintenance to tenant screening and selection, we can do it all.
As the premiere property management company in Austin, our team of professionals have decades of experience supporting property owners so they can spend less time managing their business and more time focusing on their bottom line. Contact us today and get a free property analysis to learn more about our services.
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