I want you to close your eyes for a second. Well,
don't close them if you're driving, but picture
the government. Okay. When I say that word, what
pops into your head? Yeah. You're probably picturing
the Capitol building in D .C., right? Right.
The big white dome, marble steps, sea sand. Exactly.
People in expensive suits arguing. Yeah. Or maybe
you think of your state capital or even City
Hall downtown where you go to pay a parking ticket.
We are, you know, we're trained to think of government
as this distant monolithic thing. It is the standard
civics class definition, you know, elected officials,
public accountability, the Constitution, the
big stuff. But here's the thing. For millions
of Americans, and I mean millions, the government
that actually controls their daily life. isn't
in a marble building. No. It's not thousands
of miles away. It's literally next door. It's
arguably sitting at a cheap folding table in
a community clubhouse on a Tuesday night, deciding
whether your hedges are three inches too high.
You were talking about the Homeowner Association.
The HOA. The HOA. And you are right to use the
word government. We tend to dismiss them as just...
neighborhood clubs or the lawn police. But structurally,
legally, and functionally, they are a massive
layer of private governance. And when we say
massive, I think people really underestimate
the scale. I was looking at the data from the
Community Associations Institute, and the numbers
are just staggering. They really are. As of 2010,
and you have to keep in mind that's over a decade
ago, so the trajectory has only gone up, nearly
25 million American homes were under this kind
of regime. And that translates to about 62 million
residents. 62 million. To give you a sense of
scale, that is a population larger than Italy.
It is larger than South Africa. If HOA land were
its own country, it would be a G20 nation. That's
wild. It's a nation within a nation. A nation
within a nation. But it's a weird kind of nation,
isn't it? Yeah. Because people rush to move there.
They pay a premium to live there. Oh, absolutely.
We move for stability, right? We want to know
that the guy across the street isn't going to
start an auto body shop in his front yard at
3 in the morning. We want our property values
to go up. That is the sales pitch. Stability,
predictability, amenities. You know what you're
getting. But there is a catch. And I don't think
people realize how sharp the hook is until they
are already on it. To get that stability, you
sign a contract that, and we're going to get
into the weeds on this, might actually limit
your constitutional rights. It often does. It
can expose you to what economists call double
taxation. Honestly terrifying scenarios. Allow
your neighbors to seize your house and sell it
without a judge ever looking at the case. That
is the trade -off we have normalized. We have
effectively privatized local government. And
today our mission is to figure out how on earth
this happened. Right. Because it wasn't an accident.
It wasn't just people deciding they liked cul
-de -sacs. It is the result of a really strange
cocktail of 19th century land deeds, some very
specific 1970s environmental laws and municipal
budget cutting. Hold on. You just said environmental
laws. You're telling me that saving the planet.
somehow led to people getting fined for the wrong
shade of beige paint. Believe it or not, the
Clean Water Act is one of the biggest reasons
HOAs are everywhere today. That sounds like a
stretch, but I'm ready to be convinced. But before
we get to the rainwater and the budget cuts,
we have to start at the beginning. The origin
story. The origin story. Frankly, looking at
the research, it's not exactly a heartwarming
tale of community building. It's pretty dark.
It is dark. If we want to be honest about the
DNA and the HOA, we have to go back to the late
19th and early 20th centuries. We didn't have
associations back then in the modern sense, but
we had something called deed restrictions. OK,
explain that for the non -lawyers listening.
What is a deed restriction? So when you buy a
piece of land, you get a deed. That's the piece
of paper that says you own it. A deed restriction
is a clause written into that paper that limits
what you can do with the land. And crucially,
it runs with the land. Runs with the land. That
sounds ominous. It means it's permanent. Think
of it like a sticky note that's been super glued
to the house. It doesn't matter if you sell the
house or if the person you sold it to sells it
again five times over. The sticky note is still
there. That sticky note stays there. The restriction
binds every future owner forever unless a court
specifically strikes it down. And in the early
1900s, I'm guessing these weren't just about
keeping the grass cut, were they? No, not at
all. I mean, some were about setbacks from the
road or building materials, sure. But we have
to look at the precursors, organizations like
the Arroyo Seco Improvement Association in Pasadena
around 1905 or the Los Feliz Improvement Association
in 1916. And if you dig into the archives and
read the actual text of these covenants, the
primary goal was often segregation. Outright
segregation. Blatant. The economic theory of
the time, which was widely accepted, was that
property values were direct— I was reading through
some of the source material you sent over, and
I found a covenant from a neighborhood in Seattle
that actually made my stomach turn. It wasn't
vague. It explicitly banned, and I'm quoting
the legal document here, Hebrew, Ethiopian, Malay
or Asiatic races from occupying the property.
And that was common. It was systematic. It wasn't
just a few racist homeowners. Developers wrote
these into the initial deeds for entire subdivisions.
It was a tool of urban planning used to create
and enforce all white enclaves. So this is just
legal. You could put that in the contract. For
a long time, yes. But then in 1948, we had a
landmark Supreme Court case called Shelley v.
Kramer. OK. And the court looked at these racially
restrictive covenants and made a very specific,
very clever ruling. They didn't say the covenants
themselves were illegal to write. Wait, what?
So you could still write them? You could still
write them. But what the court said was that
they were unenforceable in court. The reasoning
was subtle. They said private parties can sign
whatever voluntary contracts they want, but the
state, meaning the courts, cannot be used to
enforce discrimination because that would be
a state action violating the 14th Amendment.
That's a distinction without a difference, isn't
it? If you can't enforce it, what's the point?
Well, it took away the legal teeth. But for another
20 years, these covenants still existed and they
were enforced socially through real estate agents,
through gentlemen's agreements, through intimidation.
So it moved from a legal barrier to a social
one. Exactly. It wasn't until the Fair Housing
Act of 1968 that discrimination based on race,
religion and national origin was finally actually
made illegal in housing transactions. OK, so
the explicit racism gets legally dismantled.
Mostly by the late 60s. But that's exactly when
the HOA boom starts to go exponential. So if
they couldn't use it for segregation anymore.
Why did the model explode? There were two major
engines driving this, and they both revved up
right around that same time in the 60s. The first
was the Federal Housing Administration, the FHA.
The FHA. In 1963, the FHA started approving federal
mortgage insurance for condominiums and subdivisions
that had HOAs. Which basically means the federal
government said, we will back these loans. And
that's the green light for developers if the
government will insure it. The banks will fund
it. It was a massive green light. It fundamentally
changed development patterns. Before this, developers
were mostly constrained by local zoning laws.
If a town said you can only build two single
family houses per acre, that's all you could
build. Right. But with the new HOA model, developers
could go to the town and propose something called
a planned unit development or a P .U. They could
say, hey. Let us cluster the houses closer together.
We'll build four houses per acre, but we promise
to leave the rest of the land as common open
space. So they get to sell more units on the
same plot of land. They sell more units on the
same amount of land. It's pure profit maximization.
But to make that work, you need a mechanism to
manage that common open space. You can't just
leave it there. Who mows it? Who insures it if
someone gets hurt there? Enter the association.
Enter the association. And this wasn't just some
vague idea floating around. In 1964, the Urban
Land Institute published something called Technical
Bulletin 50. Technical Bulletin 50. Sounds like
the title of a very boring movie. It sounds...
Dry as dust. But I promise you, this document
is essentially the Bible of modern suburbia.
It was funded by federal agencies like the FHA
and the National Association of Home Builders.
It wasn't just a suggestion. It was a recipe
book. A recipe book. It laid out the exact legal
language for the covenants, the exact corporate
structure, the exact management techniques for
creating a planned unit development with an HOA.
So it was a franchise manual. Like, here is how
you build a McDonald's, but for neighborhoods.
Perfect analogy. It was plug and play. Before
TV 50, these associations were sort of custom
built experimental. After TV 50, they were a
standardized product. You could just copy paste
the bylaws from the manual. This is why an HOA
in Florida looks almost legally identical to
an HOA in Oregon today. They're all working from
the same playbook. Okay, so we have the profit
motive for developers, squeeze in more houses.
We have the government backing from the FHA,
which de -risks it for the banks. But earlier
you dropped that bomb about the Clean Water Act.
I'm still stuck on that. How does an environmental
law about rivers lead to me getting a letter
about... my trash cans. This is one of the classic
examples of unintended consequences in public
policy. So fast forward to 1977, the Clean Water
Act is expanded. The EPA starts cracking down
on what they call non -point source pollution.
Right off, like from streets and lawns. Exactly.
When you build a new subdivision, you are essentially
paving over a natural sponge. You put down asphalt
roads, concrete driveways, shingled roofs. So
when it rains, the water doesn't soak into the
ground anymore. It rushes off the pavement. picks
up oil from driveways, fertilizer from lawns,
and floods the local creeks with pollutants.
So the EPA comes in and says, you can't just
dump all that dirty water into the river. Correct.
They mandated that new developments had to manage
their own stormwater on site. The engineering
solution that became standard was their retention
pond. Their retention pond. You know exactly
what I'm talking about. Every suburban neighborhood
built after 1980 has one. It's that little man
-made pond near the entrance, usually with a
fountain in the middle. I never realized that
was a federal mandate. I just thought developers
liked fountains. The fountain isn't just for
looks. It's functional. It aerates the water
and keeps it moving so it doesn't get stagnant
and breed mosquitoes. But here is the legal rub.
That pond serves the whole neighborhood. It takes
the water from 50 or 100 different driveways.
So you cannot put that pond on one person's private
lot. Of course not. What if they decide to fill
it in? Exactly. It has to be designated as common
property. And if it's common property? Someone
has to own it. The city doesn't want to own it.
They don't want the maintenance cost or the liability
if a kid falls in. So the developer must, by
law, create a private corporation. The HOA, too,
hold the title to the pond and collect money
from all the homeowners to maintain it. So the
HOA is born out of the legal necessity to own
a drainage ditch. Essentially, yes, that's the
non -negotiable part. But once the lawyer has
set up the corporation to own the pond, the developer
thinks, well, hang on. We have this corporate
structure. We have this built -in ability to
tax the residents for the pond maintenance. Why
don't we just expand its powers? Let's use the
same corporation to maintain a community pool
and a clubhouse. And the front date. And while
we're at it, let's give it the power to regulate
the aesthetics of the houses to keep sales prices
high while we're still selling units. The pond
was the Trojan horse. It was the legal anchor.
Once the anchor is there, you can hang whatever
rules you want on it. And that is why today it
is almost impossible to buy a new construction
home in the suburbs without an HOA. The developer
physically cannot get the permits to build the
neighborhood without creating a legal entity
to manage the stormwater. That is absolutely
fascinating. We're living under these vast private
governments because of drainage engineering.
It's the butterfly effect of bureaucracy. A rule
meant to clean up rivers ended up reshaping American
civil life. So let's dig into what this government
actually looks like, because I think a lot of
listeners might be not. along thinking yeah i
pay my dues but if i buy a house i tend to think
i own this it's my castle but if it's in an hoa
that's not strictly true is it not in the way
we traditionally think of ownership when you
buy into an hoa you are doing two things simultaneously
you are buying a piece of real estate yes the
house, the plot of land, but you are also becoming
a mandatory member of a nonprofit corporation.
Mandatory being the key word. Mandatory. You
cannot opt out. It is a condition of the purchase.
And this goes back to that sticky note idea you
mentioned earlier, the deed restrictions. Exactly.
The governing documents are called the CC &Rs,
covenants, conditions, and restrictions. This
is the constitution of your little private nation.
And because those CC &Rs are attached to the
deed, the law says you have constructive notice.
Which means... Which means it doesn't matter
if you didn't read the 400 -page packet of documents
at your closing. Nobody reads the whole packet.
Nobody! You're signing 50 things at closing.
Your hand is cramping. You just want the keys.
But it doesn't matter. It doesn't matter if the
realtor didn't explain it to you. By signing
the deed, the law presumes that you have read,
understood, and agreed to every single rule in
that book. That's terrifying. And that is where
the friction starts. Because people move in thinking
it's a democracy. They think, well, if we don't
like the rule about mailboxes, we'll just vote
to change it. But an HOA is not a democracy.
It is a corporation. OK, break that down for
me. What's the real world difference in a civic
democracy like your city or your state? The principle
is one person, one vote. I vote. You vote. We're
equal citizens. Right. In an HOA, it is a shareholder
democracy. Voting power is based on property
ownership. So if I'm a big investor and I own
five houses in the neighborhood. I get five votes.
Exactly. And if I am a renter living there for
a decade, I get zero votes. Think about that.
You could live in a neighborhood for 10 years.
Your kids go to the local school. You walk your
dog on the same streets. You are arguably a deeper
part of the community fabric than the out -of
-state investor who owns the house but has never
even seen it. But I have absolutely no say in
the rules that govern my daily life. The color
I can paint my door where I can park my car.
Nothing. You're a resident, but you are not a
citizen. This creates a really weird class system.
The residents versus the owners. And it gets
even more skewed when the development is brand
new. There's what's called the developer control
period. Okay. When a developer is building a
neighborhood in phases, they want to maintain
absolute control over the look and feel of the
place until they are finished selling everything.
So they often write the bylaws to give themselves
weighted voting rights. Weighted how? Like, how
bad can it be? Oh, it can be a 3 to 1 or even
a 10 to 1 ratio. It's common. For every lot the
developer still owns, they get 10 votes. You,
the homeowner who actually lives there, get one.
So even if the neighborhood is 90 % full of actual
residents, the developer who only owns the last
10 % of empty lots might still be able to outvote
everyone else combined. Easily. Correct. They
can install their own employees on the board
of directors. They can set the budget to be artificially
low to attract new buyers. And they can basically
run the place as a private dictatorship until
the very last unit is sold. And then they just
leave. And then they hand over the keys to a
group of unprepared volunteer homeowners and
say, good luck. And that transition period is
often a complete disaster. I can imagine. The
new homeowner board takes over and they open
the books and realize, wait a minute, the developers
set the dues at $50 a month to make it look cheap.
But the actual cost to run the pool and mow the
common areas is $150 a month. And suddenly everyone's
dues have to triple overnight. And they all blame
the new board. Or worse, they realize the developer
did a shoddy job building the clubhouse and now
the warranty has expired and there's a huge repair
bill coming due. So we have this corporate structure.
We have a board of directors who are basically
just Bob and Karen from down the street. They
are volunteers. They probably aren't lawyers
or accountants, but they have immense power.
They have what we call a fiduciary duty. which
is a fancy legal term, but it just means they
are legally required to act in the best financial
interests of the corporation. But to enforce
that, they have an arsenal of weapons. Let's
talk about the weapons, because this is where
all the horror stories come from. We all know
about the fines. Your grass is two inches too
long. Pay $50. But it goes way, way beyond that.
The fine is just the first step. It's a slap
on the wrist. The real power comes from the assessment,
the power to compel payment. And if you don't
pay, whether it's your monthly dues or fines
or legal fees the HOA has tacked on. The HOA
can place a lien on your property. And a lien
means you can't sell the house. You can't refinance.
It's a black mark on your title until the debt
is paid. Right. But the final step, the nuclear
option, is foreclosure. And I want to be very,
very clear about this. In many states, an HOA
can take your home. I think people hear foreclosure
and they think of a bank. I didn't pay my mortgage
for a year, so the bank took the house. That
makes a certain kind of sense to people. It's
a huge debt. But you're saying the HOA can do
it, too, for what could be a much smaller amount.
Yes. And in some states, like Texas, for example,
they can do it via nonjudicial foreclosure. Nonjudicial.
That sounds like without a judge. That is exactly
what it means. They do not have to go to court.
They do not have to stand in front of a judge
and prove you actually owe the money before they
sell your house on the courthouse steps. They
just have to follow a specific notification process,
sending letters. There is a story from your notes
that I literally couldn't get out of my head.
The soldier in Iraq. I think we need to tell
this story in full because it illustrates just
how broken the system can get. This is the case
of Captain Michael Clower. This happened around
2008, 2009. He was a captain in the Army Reserve
and he was deployed to Iraq. He left his wife
and kids back home in their house in Frisco,
Texas. OK, so he is overseas serving the country,
a combat zone. Right. And you have to understand,
this house wasn't some underwater mortgage situation.
They had paid cash for a significant portion
of it. The home was worth about $300 ,000 and
it was fully paid off. They had zero mortgage.
They owned it free and clear. That's the American
dream right there. A $300 ,000 asset, totally
yours. While he was deployed in Iraq, his wife,
who was at home with the kids, fell into a deep
depression, which sadly isn't uncommon during
these long deployments. She - just stopped functioning.
She stopped opening the mail. Oh, no. And in
that pile of unopened mail were notices from
their HOA. They had missed a few dues payments.
How much did they owe? What was the original
debt? The original debt was roughly $800. $800.
They have a $300 ,000 house free and clear, and
they owe $800. Correct. The HOA tacked on late
fees, then legal fees. The debt grew. They filed
a lien. Then they initiated a nonjudicial foreclosure.
They put an ad in the local paper and they auctioned
off the house to collect the debt. So they actually
sold the house for how much? This is the part
that makes you gasp. They sold this $300 ,000
home for approximately $3 ,500. Stop. $3 ,500.
It's not even a typo. No typo. It was just enough
to cover the debt, which had grown with legal
fees, and the cost of the sale. The buyer, often
it's investors who specialize in and prey on
these auctions, got the deed to a $300 ,000 house
for the price of a used Honda Civic. So the captain
comes home from Iraq. He comes home from his
tour, drives up to his house, and realizes he
doesn't own it anymore. His family's home, their
single biggest asset, their life savings had
been completely wiped out. He had lost nearly
$300 ,000 in equity over an $800 debt. That shouldn't
be legal. I don't care what the contract says.
That is fundamentally unjust. That is theft.
It took a massive legal battle and national media
outrage to get it fixed. He eventually got the
home back, but largely because of a specific
federal law, the Servicemembers Civil Relief
Act, which gives special protections to active
duty military against things like this. But here's
the chilling part. What's that? If he had been
a civilian, if he had been a plumber or a teacher
who just got sick, had a medical emergency and
missed the mail for a few months, he likely would
have lost everything. There would have been no
reason. course. That is absolutely haunting.
The disproportionate nature of it, the punishment
so vastly outweighs the crime. That is the power
of the superlion that HOAs have in some states.
The HOA debt can take priority over almost everything
else. And while some states have reformed this,
California, for instance, now has a threshold
where you have to owe at least $1 ,800 or be
12 months delinquent before they can foreclose.
The basic mechanism still exists in many, many
places. It really challenges this core. American
idea of property rights. We think it's my land.
But really, you're just a tenant with a very
expensive buy -in fee. That's a valid way to
look at it. And it's not just about the ultimate
risk of losing the house. It's about your basic
rights while you live there. We all learn about
the Bill of Rights in school, freedom of speech,
freedom of assembly. But those protect you from
the government. Big G government. The state.
Right. The Constitution says Congress shall make
no law. It doesn't say the Maple Ridge Homeowners
Association shall make no law. Since the HOA
is a private corporation, a private contract
you voluntarily entered, the courts have generally
ruled that most constitutional protections do
not apply. So if I want to put up a sign in my
yard that says vote for Smith and the HOA rules
say no political signs allowed, the First Amendment
doesn't save me. In most cases, no. There was
a famous case in New Jersey, the Twin Rivers
case, where the state Supreme Court ultimately
upheld restrictions on political signs. They
said the private contract you signed outweighs
your free speech interest in that specific context.
Wow. There was another case, Lauren V. Sasser,
where a court disallowed a challenge to a ban
on for sale signs. They banned for sale signs.
That seems completely counterintuitive if the
goal is maintaining property values. The board's
reasoning was that too many signs looked tacky
and might signal that people were fleeing the
neighborhood. And the court said, if you signed
the deed, you agreed to the rule. Now, there
are exceptions where the federal government has
stepped in. Like what? The big one was satellite
dishes. Oh, right. I remember this. In the 90s,
everyone had those giant, ugly gray dishes on
their roof. And HOAs across the country banned
them universally. They said they were shittiest.
But in 1996, the FCC passed a rule under the
Telecommunications Act that specifically overrode
those private bans. Why? They argued that access
to broadcast information was a national interest.
So they said an HOA cannot ban a satellite dish
that's under one meter. They can have reasonable
rules about placement. Like you can't put it
in the middle of your front lawn, but they can't
ban them outright. If I watch CNN, I just can't
put a sign in my yard telling people what I watched.
Effectively, yes. And then you have the landscaping
wars. This is the new frontier of HOA battles,
specifically xeriscaping. Which is using native
plants, rocks, cactus stuff that doesn't need
a ton of water. Right. In states in the West
like Colorado or Arizona or Texas, you have massive
persistent droughts. Water is a precious resource.
resource. So residents want to tear out their
thirsty turf grass and replace it with beautiful,
water -saving native landscapes. Makes perfect
sense. But the HOA says no. The bylaws, written
in 1985, say you must have 75 percent of your
front yard covered in Kentucky bluegrass. We
demand you waste thousands of gallons of water
so the neighborhood can look like an English
countryside. Oh, exactly. And this has turned
into a huge legislative fight. States are now
passing laws to overrule the HOAs. Florida passed
laws protecting Florida -friendly landscaping.
Texas and Colorado have passed laws saying HOAs
cannot ban xeriscaping completely. But it is
a constant tug -of -war between the aesthetic
control of the HOA and the environmental reality
of the region. It seems like the core mission
of the HOA is always to fight change and keep
the neighborhood frozen in time. That is their
mandate, preserve and protect property values.
And the operating assumption, right or wrong,
is that uniformity equals value. Okay, so if
these things are such a headache, If they can
take your house, silence your speech, and force
you to water your lawn during a drought, why
do they keep growing? Why doesn't the market
just say, no thanks? Because the market isn't
the only player here. And homeowners aren't the
only customers. We have to talk about the economics
of the city. If you are a mayor or a city council
member, you love HOAs. They are your best friend.
Why? I would think they'd be a constant source
of complaints for the city to deal with. Think
about the city budget. If a developer comes to
you and wants to build 500 new homes, that's
500 new families using the library, the schools,
the police, the fire department. That costs the
city money. Sure. More services are needed. But
if those 500 homes are in a private HOA development,
the developer builds the roads inside the community.
The developer builds the sewer lines. The developer
builds the park and the pool. And then the HOA
takes over the maintenance of all that infrastructure
forever. So the city doesn't have to send a plow
truck to plow those streets in the winter. Never.
The city doesn't have to pave the potholes. The
city doesn't have to mow the park. The city doesn't
have to pay the electric bill for the streetlights.
But, and here's the key, the city still collects
the full property tax from those 500 homes. Wait,
let's do the math on that. I pay property taxes.
A big chunk of that is supposed to be for public
works, right? Maintaining roads and parks. Correct.
That's a huge part of any municipal budget. So
I pay my... say $5 ,000 in property tax to the
city, but the city isn't fixing my road because
it's a private road. So then I have to pay another
$2 ,000 a year in HOA dues to a private fund
to fix the road I actually live on. That is the
double taxation argument in a nutshell. You are
paying full municipal taxes for public services
you aren't using because you live behind a gate,
and you are paying HOA assessments for the private
services you are using. So I'm effectively subsidizing
the rest of the city. My tax dollars are paving
the road downtown, but I have to pay out of my
own pocket a second time to pave my own street.
Yes. And cities are very aware of this. That
is why many municipalities have changed their
zoning codes to actually require new developments
to be HOAs. It is a massive, permanent offloading
of infrastructure liability from the public balance
sheet to a private one. It's free money for the
city. But this must do something to us socially,
right? If I'm paying for my own private road
and my own private security guard and my own
private park, why would I ever vote? for a tax
increase to fix the public park on the other
side of town. You've just hit on the most profound
sociological problem. It's called the privatization
of the public realm. There was a major study
in 2009 looking at California HOAs that suggested
exactly what you fear is true. What did it find?
It found that residents in these private governments
are significantly less likely to support public
services and public spending. They have, in effect,
seceded from the broader civic contract. It's,
I got mine, I built a gate, good luck to the
rest of you. It fragments the community. Instead
of being citizens of a town, we become members
of dozens of little private clubs. But to play
devil's advocate for a moment, we have to look
at the financial upside for the homeowner. Because
there is one. Okay, what is it? Statistically,
the model works at what it's supposed to do.
A 2019 study in the Journal of Labor Economics
showed that homes in HOAs sell for a premium
on average, about 4 % more. That translated to
roughly $13 ,500 on the average home at the time
of the study. So the property value argument
is real. The market does reward that uniformity.
It is real. The market values that predictability.
It values the guarantee that there won't be a
rusty car on blocks on the lawn next door. But
the study also noted a very important correlation,
that premium is highest in areas with higher
levels of racial segregation and stricter land
use regulation. So you're paying a premium for
exclusion. You're paying for the gate, whether
it's physical or economic. That's what the data
suggests. Yes. But even if the value stays high
on paper. There is a huge amount of financial
risk inside the HOA. We talked about foreclosure,
but I want to talk about mismanagement because
these boards, as we said, are volunteers handling
millions and millions of dollars. Oh, the financial
risk is massive and it's often invisible until
it's too late. Everyone focuses on the monthly
dues. Can I afford $200 a month? But they forget
to ask about the special assessment. The dreaded
special assessment. Imagine you live in a high
-rise condo building. The roof is 30 years old.
It starts leaking. The engineers come out and
say it needs a full replacement. The cost is
$1 million. Okay, a big number. A well -run HOA
has something called a reserve fund. They should
have been doing a reserve study every few years
to predict this. They should have been saving
a little bit of money every single month for
30 years so that when the roof inevitably fails,
the million dollars is sitting there in the bank
ready to go. That makes sense. Like a savings
account for the building. It is. But remember,
board members are elected by their neighbors.
Nobody gets elected by running on a platform
of I'm going to raise your dues to save for a
roof that we'll need in 2040. No, they get elected
by saying I'll keep dues low. Exactly. So for
20 years, they kick the can down the road, they
underfund the reserves, and then the roof fails.
The bank account is empty. The board has no choice
but to levy a special assessment. They send a
letter to every homeowner saying, we need $1
million. There are 100 units in this building.
Your share is $10 ,000. It's due in 30 days.
Yeah. Can they do that? Just demand 10 grand
with a month's notice. If it is necessary for
the health and safety and maintenance of the
property, yes. In California, for example, there
is a rule that normally requires a membership
vote for very large assessments, but there's
a huge loophole. If it is an emergency related
to safety and a failing roof or a broken sewer
line is definitely an emergency, the board can
often bypass the vote and just send the bill.
And if you're a retiree on a fixed income and
you don't have $10 ,000 sitting in your savings
account. Then you are delinquent. Then comes
the lien. Then comes the foreclosure. We saw
this happen on a massive scale after the tragic
Surfside condo collapse in Florida. Suddenly,
every condo board in the country got terrified
and started actually inspecting their buildings.
And they found decades. of deferred maintenance.
They started demanding huge assessments to fix
structural issues they had ignored for years.
People on fixed incomes were suddenly hit with
bills for $50 ,000, $100 ,000 or more. It forces
people out of their homes. It absolutely does
and that doesn't even touch the issue of outright
fraud. You have volunteer treasurers with little
oversight managing these massive funds. The temptation
is real. I assume they get audited, right? Like
any business. They should. But most homeowners
don't have the financial literacy to understand
what they are looking at. When an auditor looks
at the books, they issue an opinion. And the
terminology is completely counterintuitive. You
want to see an unqualified opinion. Unqualified
sounds bad. Like you are unqualified to do this
job. It is the exact opposite. In accounting
speak, unqualified means without qualification
or reservation. It means the books are clean.
We have no complaints. That is the gold star.
Okay. So unqualified is good. Got it. What you
need to watch out for is a qualified opinion.
That sounds reassuring, like, hey, this is a
qualified professional. But in auditing, it means
everything looks OK except for this one messy
area we couldn't verify. It's a huge red flag
and an adverse opinion is the worst. It means
these books are a disaster. I would bet 99 percent
of homeowners have never looked at their HOA's
annual audit opinion. Most don't even know it
exists or that they have a right to see it. The
AARP, the seniors advocacy group, actually flagged
this years ago. In 2006, they proposed a homeowner's
bill of rights because they saw so many seniors
losing their life savings in their homes due
to rogue boards and financial mismanagement.
It is a consumer protection black hole. We've
covered a lot of the heavy, scary stuff, the
racism, the foreclosure, the financial ruin.
I want to pivot now to the almost philosophical
side of this, this idea of the common good versus
individual liberty. And there is a famous legal
case that involves cats. Ah, yes. Narset v. Lakeside
Village Condominium. Association, 1994. This
is the bedrock case for modern HOA law, especially
in California, but its influence is felt everywhere.
Tell me about Mrs. Narstedt and her cats. So
Natura Narstedt moved into a condo in Culver
City, California. She had three cats. The HOA
had a very clear blanket restriction in its CC
&Rs. No pets, no dogs, no cats, nothing. Seems
clear enough. But she decided to fight it. She
fought it. Her argument was very logical. She
said, my cats are indoor cats. They never go
outside. They never touch the common areas. They're
quiet. They don't smell. They don't bother a
single soul in this entire development. She argued
that the restriction, therefore, was unreasonable
as it was applied to her specific situation because
her cats were causing absolutely no harm to the
common interest. That sounds incredibly logical.
It's the classic, if I'm not hurting you or your
property. Why can't I do what I want in the privacy
of my own home? It does. But the California Supreme
Court disagreed with her. They ruled against
her, and their reasoning is what set the precedent.
They said that the reasonableness of a rule isn't
determined by the individual case. It's determined
by whether the rule in general serves a legitimate
purpose for the community. So they don't look
at the facts on the ground, just the rule on
the page. Correct. And more importantly, they
wrote that when you buy into a CID, a common
interest development, you are consciously agreeing
to sacrifice a certain amount of individual freedom
in exchange for the predictability and stability
of the collective contract. So they prioritized
the sanctity of the written contract over...
The actual reality of her situation. Precisely.
They basically said, if we let you keep your
quiet cats, then we open the door to having to
investigate every pet to see if it's quiet. That
is chaos. A blanket rule, even if it seems harsh
in one case, is enforceable because it provides
certainty for everyone. And that ruling is why
we have the endless laundry list of seemingly
absurd restrictions today. Yes. That is the legal
principle that allows an HOA to tell you what
color your front door must be. Or that your curtains
have to be white on the side that faces the street.
Or that you can't park a work truck in your own
driveway. Oh, the work truck thing drives me
crazy. I had a buddy, a plumber. He had a nice,
clean, white van with his company logo on the
side. The HOA said he couldn't park it in his
own driveway overnight because it was a commercial
vehicle. It's an incredibly common rule, and
it's a class issue, honestly. It implies that
the site of a working class vehicle is unsightly
and lowers property values. He had to park his
work truck, which contained all his tools, three
blocks away at a shopping center, and walk home
every single night. It's absurd. But under the
Narset principle, it is perfectly legal. The
community decided in their contract that they
didn't want to look at logos. He signed the deed
and so he agreed to it. It creates a de facto
municipal government without any of the constitutional
restraints. So is there any way out of this?
Are there any alternative models being discussed?
Or is this just the future of housing in America
forever? Well, there are people trying to rethink
it. It's not mainstream yet, but there is a concept
called MTIP, multiple tenant income property.
That sounds like an even more boring acronym
than the last one we talked about. It does. But
the concept behind it is interesting. It's essentially
a great landlord model. Instead of breaking up
all the common areas, the roads, the parks, the
pool, and giving them to a nonprofit association
run by bickering neighbors. Right. The common
infrastructure is owned and managed by a single
professional company or a landlord who collects
ground rent from everyone. So it's more like
a high end apartment complex model or even a
mobile home park model. But for single family
homes. Exactly. The argument is this. An HOA
board is made up of transient volunteer neighbors.
They might be petty. They might be incompetent.
They might have a personal vendetta against you
and they might move away in two years. They have
no real long term incentive to be good at customer
service or asset management. Right. Their goal
is to wield power or keep costs low for the short
time they are there. But a professional landlord.
a professional owner who wants to collect rent
for the next 50 years. They have a powerful financial
incentive to keep the residents happy, to maintain
the property well, to respond to complaints.
They treat the residents as customers they want
to retain rather than subjects they need to control.
So you trade your vote, which, as we've established,
isn't worth much anyway in many cases for better,
more professional customer service. That's the
theory. But it hasn't really caught on for single
-family homes yet. The ownership myth is just
too strong in the American psyche. People want
to believe they own the dirt. Even if that ownership
is heavily, heavily restricted. It is a powerful
myth. Yeah. So let's try to land this plane.
We have moved from 19th century racial covenants.
To post -war FHA policies that encouraged suburban
sprawl. To, of all things, environmental laws
that forced us to build retention ponds. Which
created the corporate structures that now govern,
what, 25 million homes and counting? It is a
massive self -perpetuating machine. And it does
create value. We have to admit that. The lawns
look nice. The pools are generally clean. There's
a predictable order to it. But the cost is a
fundamental surrender of rights. It is a shift
from public government with its checks and balances
and constitutional protections to private government,
which is often authoritarian, arbitrary. It makes
you look at those little gatehouses at the front
of subdivisions differently. It's not just a
security feature. It's a border crossing into
a different legal territory. It is. And I think
the big provocative question that listeners need
to ask themselves is this. We are seeing a trend
where municipalities are offloading more and
more of their traditional responsibilities. Roads,
parks, sewers, sometimes even trash collection.
If this trend continues, are we witnessing the
end of the public neighborhood as a concept?
And personally, for you, the listener, ask yourself
this. If your neighbor, just the guy next door
who got elected to the board because nobody else
wanted the job, has the legal power to take your
home and sell it for $3 ,500 without a judge
ever being involved, is it really your home?
Or are you just a shareholder in a corporation
that grants you the privilege of sleeping there?
Wow. I am definitely going to go home and check
my mailbox for violation notices. This has been
a true deep dive. Thanks for listening, everyone.