Perhaps more than any other state, Arizona is rife with homes that are located within communities governed by homeowners or community associations. There are a lot of advantages and also some disadvantages to purchasing an investment property within a community association. The purpose of this article is to briefly explain the legal basis of community associations, then review a few of the considerations investors should have when investing in a community association property.
When a developer is platting and dividing out a development, it is common for that developer to record restrictive covenants against each future owner of those lots to be a member of a community association, intended to obligate the owners to contribute funds to the maintenance and management of the community, and obligating those owners to conform to certain community standards and rules. During the development and sale of the lots, the developer, or an agent of the developer, is often empowered to make all decisions and choices for the community. Once a threshold of resident ownership is met, management of the community is transferred to the resident owners. Thereafter, elections are held whereby the resident owners of the community select a board of directors who serve to control the community for terms until replaced in future elections.
At the outset of developing the property, the developer adopts a governing document for the community most often known as the covenants, conditions and restrictions (“CC&Rs”). Those CC&Rs spell out the authority of the association and its board of directors, restrict certain elements of the member properties, provide for common areas and their maintenance, and generally set forth the ‘rules’ of the community. The CC&Rs are recorded by the developer and, thereafter, are reflected in the title of each lot, meaning that each lot within the community is bound by its terms and each future owner must comply with the same.
Benefits: For an investor, purchasing a property within a community association can have some very valuable benefits. Typically, each property within the community will be required to maintain a certain standard of condition, meaning the investor won’t need to worry as much about the poor decisions of neighbors negatively effect the value of the investor’s property. Many community associations offer amenities such as community pools, exercise facilities, parks, and more, which benefit potential renters of the property without creating additional maintenance burdens for the investor. Additionally, certain communities offer services such as front-of-property landscaping maintenance for the properties, further reducing the burden and concern of the investor regarding the condition of a rental property.
Disadvantages: While there are a plethora of benefits to investing in a property within a community association, for certain types of investment properties, the disadvantages can outweigh the benefits. One significant potential disadvantage that investors should research before purchasing a property within a community association is use restrictions on the property, especially as regards rental use restrictions. Many associations completely disallow short-term rentals, an increasingly popular use of investors. Other HOAs restrict ‘house-hacking’ strategies, where all of the residents are not family of one another. Finally, certain associations may restrict rental of properties entirely. Another potential disadvantage of a community association for an investor can be the instance where the community has an overzealous board or community manager. I have seen many instances where the board or manager is a bit too excited to identify violations of the CC&Rs by investors, resulting in a lot of violation fines and headaches for an investor who initially expected the property to be a simple and relatively passive investment.
Whether purchasing an investment property in a community association is right for you as an investor is a decision that will require your recognition of your intended use for the property, a thorough review of the community governing documents to ensure that your intended use complies with the governing documents, and your analysis of whether the benefits that specific community provides outweigh the disadvantages that exist given the circumstances of your potential investment.
Community governing documents like CC&Rs, community guidelines, and bylaws can be confusing and are typically packed full of legalese. If you are considering investing in a property that is within a community association and you’re not sure whether your plans mesh well with the association, please reach out. I can review your plans and the community governing documents to provide you a clear idea of whether the investment is a good fit. Feel free to reach out to me at (602)457-2191 or via email at firstname.lastname@example.org.
by Michael J. “Mick” McGirr, Phocus Law