Spring Lakes HOA Proposed Changes

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The HOA Board of Directors held a special meeting tonight and voted (3-1) to withdraw the proposed covenant changes from consideration. Buy THIS ISSUE IS NO LONGER UP FOR A VOTE AND THE CHANGES WILL NOT TAKE EFFECT. THIS IS NO LONGER AN ISSUE. If you have a yard sign in your yard please take them down.
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SUBJECT: An open letter to the residents of Spring Lakes
DATE: September 3, 2013

Neighbors,

As a longtime resident of Spring Lakes, I care very much for this beautiful community. I not only live here, I work here as well. As the Broker/Owner of Register Real Estate Advisors and the Host of “Houston Real Estate Radio” (KPRC AM950) I feel the need to inform you about the upcoming ballot initiative from the home owners’ association and the second and third order effects of such an action.

This ballot initiative is seeking to amend the Declaration of Covenants to force owed HOA dues senior to the mortgage on the house. In the event of a foreclosure, this means that the HOA collects their money before the mortgage holder. This is to cut down on the amount of uncollectable dues written off each year and hopefully lower (or at least not cause to go up) our HOA yearly dues. The board of the HOA supports this initiative and has asked that you vote “agree” to their proposed changes.

I have spent some considerable time and energy trying to get to the bottom of this and come to my own conclusions as to whether this proposal is a positive or a negative for this neighborhood. I have spoken to members of the board, neighbors who are opposed to this proposal, and housing industry experts. I conducted an interview on my radio show with an HOA attorney and a mortgage banker to find out the likely market reaction to this change in policy.

Brought to you as the solution to our collection problems, this sounds like a very reasonable initiative and will be a positive for the community. This, however, is not the case. I am asking for a moment of your time to read this letter before you vote for this measure. I think you will find that, however noble the intentions, this is a very bad thing for our community and not something we want implemented.

Unintended Consequences

With every action, there is a reaction. Quite often action taken to solve a problem creates new ones.

The policy of subordinating the mortgage to the HOA fees is not a common practice. This will hold Spring Lakes in the minority in the Houston Metro area to have such a policy.

Our neighbor, Allen Parker, laid out the case for voting against the change in a letter you may have gotten on your door over Labor Day Weekend. The HOA board of directors published a rebuttal the following day.

Lenders

There are a significant number of lenders that will simply not take a junior position to anyone when writing a mortgage. It can be argued how many will refuse to lend with such a provision. I have spoken to several lenders about this subject. Some of them can still get a mortgage underwritten, some (most) can not. The ones that still can complete a mortgage have limited options for investors that will buy their note. A significant number of investors are not interested in a note subordinated to anything.

When we spoke to an HOA board member on the phone about this, she stated that she realized that some lenders would not like this. Understand this; if lenders don’t like, you won’t either when it is time for you to sell your home.

To be clear, this will not limit the buyers in Spring Lakes to pristiq buy only cash buyers. It will, however make it much harder to find a lender willing to complete a loan on a home in Spring Lakes. There will be fewer available buyers because of this.

Realtors

You will never get a Realtor to admit this, but when homes in a particular neighborhood take much longer to close and are harder to close, Realtors would rather show other property that will be easier to close. The market statistics back this up.

There are a few neighborhoods in the Houston Metro area that have made similar changes to their governing documents. In each of these, the MLS data shows these neighborhoods under-performing the market. The time on market is longer and price/square foot is lower than their neighbors.

Supply and Demand

Economics dictate that when demand drops, so must prices. Knowing that this stipulation will exclude a significant portion of the market from purchasing a Spring Lakes home, the market will pressure prices down. It can be debated and discussed how much and how fast, but the pressure will be on prices to fall. With the current and upcoming influx of people into the area, it is possible that these pressures might not be measurably felt immediately. However, this economic law cannot be avoided forever. When you exclude a large portion of the market from purchasing a Spring Lakes home, prices will suffer.

True Collectability

As referenced in the the zestoretic online auctions management company’s letter to homeowners, the $64,948 of uncollectable fees written off by the HOA in 2012 is an interesting number to examine. Understand that the majority of these fees were due to the rash of foreclosures we had in 2008-2010 time frame. The rate of foreclosure has dropped dramatically in the recent couple of years. Knowing that the write-offs in the last couple of years and the next couple of years are from homes that this statute will not apply, and the current lending practices limit the risk of a large number of foreclosures in the future, this solution would not make as significant of a financial impact on the HOA as it sounds like it would.

There is definitely some debate as to the true collectability of all of the owed fees. This number consists of two things; the actual fees owed the HOA (a small number) and the interest, penalties, and attorney fees associated with collecting the fees (a large number). In the event that the HOA held a senior position to the lender in a foreclosure, some attorneys tell me that the only collectable portion of the owed fees would be the overdue fee itself, not the additional fees (majority) tacked on for being delinquent. Other attorneys have told me that the HOA can collect all of the fees.

I have asked the management company for a breakdown of this write-down for 2012 and have not received it as of the time of this publication.

To waive or not to waive…

The issue Mr. Parker pointed out in his letter (see above) with Bridgeland having to grant individual waivers is accurate. Our HOA will be forced to choose between granting waivers (further eroding the effectiveness of this policy) or not granting waivers (limiting the pool of potential home buyers.)

The HOA as a Home Owner

I am not going to go into the ramifications and tax consequences of the HOA being the senior creditor and the entity foreclosing on resident’s property. I think this is going to be a cost in legal counsel and liability that we as a HOA do not want to take on.

All Neighborhoods are Not the Same

For some neighborhoods, this is a wise move. River Oaks, for example, has this policy and has no significant ramifications from it. River Oaks also has a different set of buyers with a different set of lending needs than we do. Spring Lakes is not River Oaks.

Conclusion

No one is debating the legality of making this policy. No one is debating the intention of the board of directors to solve our collection problem. We are simply debating how wise of a change this is for the neighborhood.

I have no doubt that this policy will increase the collections of the HOA of delinquent fees. I think the rate of foreclosure in the future will be lower than it has been during the “housing crisis.” I think the financial impact of this policy will be positive for the HOA but negative for the homeowners.

To purposely and artificially limit the pool of buyers of our neighborhood homes is, in my opinion, not a good idea. The short term (and smaller than advertised) immediate increase in collections will not offset the long term destruction of our home value that this proposal is sure to bring.

The bottom line is, in my opinion, that this is not a good idea for our neighborhood. While the intent of increasing our HOA collections is a good thing, this proposed change will do far more harm to our neighborhood than good. I am strongly against this proposal and recommend voting against it.

See the video of my two radio segments about this subject at the bottom of this page for an in depth discussion of the ramifications of this action. These two segments have not aired yet but I thought it might give you some insight into this issue. I invited the management company as well as the members of the board on to discuss their point of view but they were not willing to come on the show to discuss it. Interestingly enough, I had many people willing to come on the show to talk about the negative aspects of this change. I could not find a single person willing to come on and talk about how it is a good idea.

Sincerely,

Shannon Register
Broker/Owner, Register Real Estate Advisors
Host, “Houston Real Estate Radio”

Please print this ballot, sign and date it and submit it to the management company to cast your vote. Please share this page with your neighbors. We need everyone to vote on this!

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The first segment with real estate attorney Brady Ortego and Mortgage Banker Mike Lesmeister.

Continued discussion with Mike Lesmeister.

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Feel free to contact me with any questions about this.