how bad is HOA bankruptcy?

I’m interested in buying a lot in a subdivision but have reservations due to the sustainability of the HOA and the possibility of them assessing owners for non-critical future “improvements”.

Some details:

1) It’s a five or six year old “equestrian” subdivision located in Florida with between maybe 200-300 lots.

2) Only about 20% are built and occupied.

3) The subdivision is split in to two sides, with one have smaller lots (one & two acres) and the other having larger lots (two and a half to 14 acres). Most of the residents live in the smaller side.

4) Land value has plummeted but the homes are still appraising as if they were selling at original cost.

5) There’s a playground for kids, a few ponds, horse trails, an equestrian ring, and a few motorized gates that the HOA is responsible for in addition to the landscaping of common areas, street lights, and road maintenance.

My concerns:

1) With such low occupancy of the subdivision a large number of the property owners didn't pay their annual assessment last year.

2) Most of their budget is spent on landscaping, upkeep of the equestrian amenities (my biggest expense concern), street lights, and gate repairs.

So, my first question is does any of this sound like a potential deal breaker? I’m most concerned that because so much is spent on the equestrian amenities that if the time comes for street repairs (or another large expense) the money will not be there to pay for it. My guess is that very few homeowners even use those amenities.

If I were to buy the land I know that there are ways to amend the covenants, but I am afraid that they could hit me with a large assessment prior to that happening. Another consideration I’m taking in to account is the possibility of bankruptcy for the HOA. From what I've read cities take temporary control of spending (which I would be in favor of) while the HOA re-establishes its leadership. Is there more to this?

Honestly, I started looking for land outside of a HOA but couldn't find the size and price I have budgeted for it. If the HOA were to disappear I feel like it might even be a positive for me. I would abide by the rules they have set but would be compromising what I really want to do with my property for the opportunity to have the space I desire.

Thanks in advance for any help or ideas anyone can share!

John,

There are two important lessons I have learned from this forum that would apply to your situation.

First, buying into an uncompleted development is risky anywhere even under the best of conditions. No matter how well everyones' intentions are, things can turn sour in a heartbeat. In this case, only 20% of the lots have been sold in five or six years, owners are not paying their assessments, and you have serious doubts about the viability of the association. None of this is good.

Second, from an owner's perspective, Florida has the worst HOA and condo laws in the country. Buyers can find themselves obligated without notice to pay the previous owner's assessments plus related fees. Owners may be forced into joining a long-dead association. Personally, I cannot imagine any good reason for buying property in an association of any kind in Florida.

This is a case of DANGER WILL ROBINSON DANGER vs. But it's really really pretty and I want it and will find any excuse no matter how slim to get it.

Thanks for all your time.

This is truly about me educating myself on the pros & cons of buying in this subdivision. I'm going in to it open minded. If after doing my research it’s clear that this HOA is a risky investment I will have no problem walking away and not looking back. But, it would be a disappointment to miss such great deals. Within the last six months sales activity has pick up dramatically.

I looked as best as I could without fully examining the past two years’ meeting minutes and didn't see all the information regarding delinquent accounts that I thought I read in the past. It must have been farther back then I remembered. In the most recent budget report they approved adding a “reserve study category” for 2013. So, I would guess that means they didn't have it in the past. I did read where they've had an engineer assess the roads life span and other expenses. The annual assessments have been consistent over the past couple of years and are not outrageous (less than $100 a month).

Tim-
Is it common for HOAs to give out information about delinquent accounts or reserves available to perspective home buyers?

Common areas were kept up well, even though the board has been unhappy with the performance of the companies they've contracted to do their work. They probably spend the majority of their budget on landscaping. The recent budget did put a cap (if not reducing a previous cap) on repairs to common areas including the equestrian area and community fences.

I have read EXTENSIVELY their CC&Rs & guidelines. I know that I will have to make a lot of compromises to build there. All of which I can live with but would prefer not to be in place.

Larry-
My first choice (and my other half’s) would definitely be to end up in a non-HOA community but if we can live with the restrictions and feel they are fiscally responsible we’re willing to compromise.

Do you know of any insurance (like title insurance) to protect against surprise fees?

Glen-
I clearly understand how dangerous this could be. That’s why I’m trying to learn as much as I can.

Melissa-
We both very much like the area in addition to the size of the lots. When I first read how much they spent for the community I started wondering if it would be positive or negative for them to go bankrupt. That’s when I learned that they rarely completely disappear.

OK, it appears that they are now looking at (or have done) a reserve study and will be setting money aside for future planned maintenance and replacement. Good, they are on the right track.

When we had our 1st reserve study done in 2010 we discovered that assessments needed to be raised by 20% in order to fund the reserves. If you haven't had a study until last year and the assessments haven't gone up, you should expect some sort of increase in the future to properly fund the reserves. It may take a year or two for the Board to realize that.


NO. Members have a right to this information. You are not a member until you actually purchase the property.
Therefore, it would be up to the seller to actually obtain and provide you with that information.

Another option is to ask if they have a planned unit development (PUD) statement for banks. If they do, ask for a copy.
This may provide more information on the financial health of the Association.


Hope they said why?
Were the expenses too much - which would indicate that assessments were too low?


Make sure that you can actually live with them. You would be surprised how the little annoyances can add up (and I mention it because you indicated there were a lot of them you would need to compromise on).


Some insurance companies will provide riders called "loss assessment insurance coverage" to cover any special assessments required that is associated with the Associations insurance claim. That is to say, a storm destroys the stable and the HOA makes a claim to their insurance company. If the insurance doesn't cover the entire cost of repairs or replacement, a special assessment will be needed to make up the difference. If you have that rider, your insurance will kick in some money.

See LOSS ASSESSMENT COVERAGE article (pdf document) by HOASupport for more info.

NOTE: if the HOA doesn't make an insurance claim (perhaps because it won't be more than the deductible), then your rider won't kick in and you will need to cover any special assessment yourself.

Hope this helps to allow you to make an informed decision.

Others have given you really fine advice, JohnW. Do try to get an idea about how much this HOA will need to set aside for reserves. It sounds as though it has a huge number of lineal feet of fence + posts ,etc. There needs to be funds in reserves to repair this item and another line item estimating the life of it and cost to eventually replace all of it.

Motorized gate repair probably can be in the operating budget, but replacing the motors & the gates themselves needs to be in reserves. They'll need to reserve for turf sprinklers, if any. Ditto if there are pumps for such sprinklers and/or in the ponds, for the playground equipment, street lights and road resurfacing. Some HOA's have a reserve line item to replace trees. Tree maintenance--trimming, etc. should be in the operating budget.

I think it comes down wanting to live there. There are always issues no matter where you choose to live. Be it in a HOA or not. Just going into this deal with your eyes open is good. I wish you luck and hope you happiness in your new home. We will be here to ask any questions if you have any.