HOAs are like closely held partnerships — beware

In these troubled times — and nobody could ever believe that “heaven on earth” HOAs would ever encounter hard times — who are the financial backers of last resort? Will the state come to the rescue as NY State did with NYC in the 1970s, or as now being contemplated with Detroit? Or will the state use eminent domain to clear out the deteriorating landscape?

Answer: “None of the above” is the most likely scenario.

Prof McKenzie brings a dose of this harsh reality with his comments in a USA Today piece, Municipal duties move to ‘burbs as HOAs must step in:

“It’s the most dramatic privatization of local government services that we’ve ever seen. Transferring these responsibilities to homeowner associations places more of a financial burden on individual homeowners and drives up the overall cost of housing. The costly repairs of aging streets or retaining ponds can become too much for a small group of residents in the community, particularly as many HOAs continue to reel from the lost revenue created by foreclosures. I just think as a short-term solution to the fiscal problems of cities, what they created potentially is a long-term problem. At some point, my question is this: ’Is not the responsibility going to come back to the municipality? They’ll have slums on their hands.’”

In 2008 I wrote in Why should we bail out HOAs?,

 Those in HOAs wanted a private community, free from government interference. Well now it comes time to pay for your own private way. . . . and homeowners must now pay for their private government failures, and penny-pinching attitudes.

It should be understood that the HOA is a communal society and very much like a partnership where all the members are collectively responsible, under law, for the obligations of the HOA.  Those who can pay will pay, and those who can’t pay are “covered” by those who can.  Furthermore, like a close-held small business, exit from the “business” is very difficult, especially without financial impact on those seeking to exit.

And recourse to additional funds comes only from the members who have “deep pockets” to carry others. That’s why in partnerships each partner must be well-heeled, and is examined for this purpose, so not to have an impact on the other partners — a business truism neglected by the HOA advocates.

Foreclosure and default judgments may make members feel better, but don’t really solve the problem.  There are no backers of last resort for HOAs!

Published in: on March 4, 2013 at 8:22 am  Leave a Comment  
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