What if an HOA has questionable finances?

Dear Property Guy-

I’m looking at investment property in a subdivision with a homeowners association (HOA). A friend recently bought a home in the same subdivision and (the) lender required a review of HOA documents. These documents turned out to be in a significant state of disarray, which delayed the closing process.

Should this concern me? How big of a red flag is it when the HOA won’t provide financials? Could poor HOA management impact the value of the property? If I buy in this community am I on the hook for their poor management?

Confused in Sisters

Dear Confused:

HOAs can be a blessing or a curse. At their best, they maintain standards of living and property values. At their worst, they become fiefdoms for power-hungry, petty residents with nothing better to do than check paint colors, measure grass, and ensure fences are set back properly. The problem with many associations is they are run by volunteers who have neither the expertise nor experience to manage what is essentially a good-sized business.

A well-run HOA will maximize property values and minimize drama. That’s the best you can hope for. A poorly run HOA can destroy property values by limiting potential buyers, sow enmity among residents, and create financial liability for residents by mismanagement.

Oregon has some laws on the books regarding HOA handling of financial documents. They need to be sufficiently detailed for accounting purposes. They need to consist of a balance sheet and income statement. Finally, these statements need to be reviewed by a CPA, and distributed to each owner.

That’s it.

This is all a pretty low legal bar. Notice the law doesn’t require third-party review of individual journal entries, or any specific requirements as to review of expenditures.

Financial data should be available on the HOA website. If the Board isn’t forthcoming with financial data or expenses seem out of whack this should be a major red flag to any resident or potential buyers. As a buyer, HOA docs should be part of your disclosure packet. Make sure to review them.

Finally, realize that when you are buying into an HOA property, you are assuming liability for the actions of the HOA. Meaning if the finances go bad, you may be on the hook for a (potentially large) special assessment.

For these reasons, I always recommend every resident in an HOA neighborhood take an active part in the oversight and management of what is likely your largest single asset, your residence.

Mike Zoormajian is Principal at WetDog Properties in Sisters, OR. Providing investor, property management, and relocation services. Questions to: [email protected]

Legal advice is worth what you pay for it. Consult a real attorney before doing anything crazy.