Large-scale investors prefer to buy up properties in homeowners associations. But, do institutional investors in HOAs have a positive or negative effect on the community?
Institutional Investors in HOAs: What They Do
Institutional investors are entities that accumulate funds to buy real estate and other assets. Within the context of homeowners associations, institutional investors buy properties in HOA communities by bulk with the intention of leasing them out.
HOA institutional investors are more common now than in the past. After the housing market crashed, developers were left with a large number of vacant homes. Institutional investors entered the picture and bought homes in huge quantities for not much money. As the United States became more of a renter nation, investor-purchased homes were rented out. With the demand for rental properties climbing, investors saw an opportunity to charge higher rent.
Why Do Institutional Investors Target Homes in HOAs?
There are many homes for sale across the country, and a lot of them don’t fall under the control of homeowners associations. But, why is it that institutional investors seem to prefer homes in HOA communities?
Institutional investors prefer to buy homes in HOA communities because of the power that comes along with it. Within a homeowners association, every unit or home has voting power. As such, when an investor buys a lot of homes, they accumulate more shares of the HOA. This equates to more votes as well.
When an investor controls a large chunk of the votes, it becomes easier for them to affect decisions concerning HOA matters. This includes amending the governing documents, increasing the budget, and increasing dues. Compared to homes in a non-HOA community, the level of power an investor can acquire in an HOA-run neighborhood is significant.
The Pros and Cons of Institutional Investors in HOAs
One obvious benefit of having institutional investors in HOAs is the money they can bring to the association. If your association is suffering from low membership rates, which means you have a lot of unsold properties, an institutional investor can buy them up and stimulate cash flow by paying dues.
But, this also has its downsides. For one thing, institutional investors typically lease the properties they buy in bulk. That means your association can expect more tenants in the community. This is not always a good thing.
In fact, many HOA boards dislike renters because they can disrupt the feel of the community. Tenants may be less likely to abide by the association’s rules since they don’t hold a stake in the community, unlike homeowners.
Additionally, too many renters in the community can cause permanent residents to feel unsafe, especially when it comes to short-term rentals. All in all, having renters can have a negative impact on curb appeal, thereby affecting property values as well.
Institutional investors can sow discord within the community. If an investor gains enough voting power by buying properties in bulk, they can influence HOA decisions. They can even end up controlling the HOA or condo board. With such power, they can choose to amend the documents of the association and even terminate the HOA altogether.
Finally, with more investors, owners will have a more difficult time selling their properties to non-investors due to lending requirements. You can no longer obtain Federal Housing Administration financing, Fannie Mae loans, or Freddie Mac loans.
Protecting Your Community from HOA Institutional Investors
While there are institutional investors in the HOA scene, many experts have yet to encounter them firsthand. It seems that they are more common in some areas compared to others. But, that does not mean that they will remain that way forever. There are some companies that invest in properties in HOAs on a smaller scale. If that is any indication, though, it is not unreasonable to assume that institutional investors will rise in popularity soon enough.
You might think that protecting your community from institutional investors is easy. Unfortunately, homeowners associations can’t totally prevent institutional investors from buying property. It is not as simple as amending your documents to say that companies are not allowed to purchase homes. But, that does not mean there are no other methods.
If you want to protect your association from institutional investors, consider the following:
1. Adopt a Moratorium
Since institutional investors in HOAs have a goal of leasing out their purchased properties, a good way to discourage them from infiltrating your community is to adopt a moratorium. Homeowners associations can’t require owners to live in their properties. But, what you can do is disallow owners from leasing their properties for the first two years of ownership. Having such a buffer will drive institutional investors away since they can’t immediately turn their investments into profit.
2. Place Rental Restrictions
Many homeowners associations already have rental restrictions in place. A community with no such restrictions is very attractive to institutional investors since they can basically do whatever they want. If you have yet to make yours, consider amending your CC&Rs to include them.
Rental restrictions can vary depending on the association. But, some of the most common and helpful ones include:
- Only allowing a certain percentage of total homes to be rented
- Prohibiting short-term rentals
- Requiring tenants to abide by the association’s rules
- Requiring owners to submit rental applications (including tenant details, length of stay, etc.) to the HOA board
If your association only plans to allow long-term rentals, make sure to clearly define what counts as a long-term rental. This way, there are no loopholes within your restrictions.
3. Act Fast
Homeowners associations that struggle with institutional investors are often the ones that already have them within their communities. Therefore, the first thing you should do is act fast.
Before any investors come in and buy a ton of properties, amend your governing documents to include rental restrictions or moratoriums. If an investor already owns a large percentage of homes in your community, then they have more voting power and can vote against such changes to keep the rules in their favor.
The Time Is Now
Institutional investors in HOAs may not be as rampant now, but many communities do have them. Given the current condition of the real estate market, more HOA communities will likely see institutional investors purchasing homes in large quantities. Considering the negative effects such investors can have on your community, you must get ahead of the curve and act as soon as you can.
Managing a homeowners association is not always easy. If you need help, reach out to the experts at Clark Simson Miller. Give us a call today at 865.315.7505 or contact us online for a free proposal.
RELATED ARTICLES:
- What Is A HOA Resale Certificate? What’s It For?
- Is HOA Bankruptcy An Option?
- Protecting Your Community From HOA Fraud