- April 28, 2024
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The recent housing bubble and subsequent collapse have taught us several lessons. Let's look at a few that tripped up many unwary buyers.
Lesson one: Have a plan B.
Stocks can be sold on very short notice, but a real estate sale usually take months or more from listing to closing. Developers of deed restricted communities often incented prospective buyers with a two-year waiver of association assessments and/or club dues. For thousands of first-time real estate investors intending to flip their purchase, two years was way beyond their planning horizon. For the same reason, they weren't worried about taking out a three-year, interest-only balloon mortgage, thinking the mortgage would soon be paid off when the property flipped.
When the bubble burst, potential buyers disappeared as the value of the property plummeted. Two years passed quickly, and association assessments and club dues kicked in. Unable to refinance the balloon mortgage or to continue the increased carrying costs, investors were left without a plan B.
Lesson two: Deed restricted communities do (indeed) have deed restrictions.
Deed-restricted home communities are governed by covenants, conditions and restrictions or documents of condominium and associated rules. Homeowners associations and condominium associations administer and enforce the rules. If you violate a rule, you may be fined and/or be responsible for all remediation costs.
Rules are in place to ensure uniformity, to enhance the value of the property and to ensure the safety of owners and guests. Property owners are bound by them, but they may place unexpected and unwanted restrictions.
Rental — Most communities place restrictions on the minimum term and of leases and/or the number of leases allowed per year. Some communities prohibit rentals entirely. In any case, the owner is responsible for the tenant's adherence to the rules.
Pets — Most communities have restrictions on the number, and possibly the size, of pets. Pets may be banned or restricted to specific areas of the community.
Parking — There are likely restrictions on the number and type of vehicles and/or areas of permitted parking. If you have a boat trailer or RV, be sure to check on restrictions. Commercial vehicles are normally not permitted.
Exterior finish and landscaping — In a condominium, the association handles exterior maintenance and landscaping. In home communities, exterior finish (roofing material, paint colors, etc.) and landscaping plans must be approved by an architectural committee.
Assessments — Assessments to cover common area expenses are not optional. Associations have the right to lien and foreclose if assessments remain unpaid.
Anyone who doesn't read and understand the documents associated with their community before purchasing is headed down a slippery slope. I am amazed at the number of buyers who skip this important step.
