WEBVTT 00:00:00.000 --> 00:00:01.480 I want you to close your eyes for a second. Well, 00:00:01.480 --> 00:00:03.859 don't close them if you're driving, but picture 00:00:03.859 --> 00:00:07.240 the government. Okay. When I say that word, what 00:00:07.240 --> 00:00:09.939 pops into your head? Yeah. You're probably picturing 00:00:09.939 --> 00:00:11.460 the Capitol building in D .C., right? Right. 00:00:11.500 --> 00:00:16.440 The big white dome, marble steps, sea sand. Exactly. 00:00:16.660 --> 00:00:20.039 People in expensive suits arguing. Yeah. Or maybe 00:00:20.039 --> 00:00:22.739 you think of your state capital or even City 00:00:22.739 --> 00:00:24.800 Hall downtown where you go to pay a parking ticket. 00:00:24.960 --> 00:00:27.039 We are, you know, we're trained to think of government 00:00:27.039 --> 00:00:30.620 as this distant monolithic thing. It is the standard 00:00:30.620 --> 00:00:33.460 civics class definition, you know, elected officials, 00:00:33.880 --> 00:00:36.939 public accountability, the Constitution, the 00:00:36.939 --> 00:00:40.000 big stuff. But here's the thing. For millions 00:00:40.000 --> 00:00:43.200 of Americans, and I mean millions, the government 00:00:43.200 --> 00:00:45.890 that actually controls their daily life. isn't 00:00:45.890 --> 00:00:47.929 in a marble building. No. It's not thousands 00:00:47.929 --> 00:00:50.289 of miles away. It's literally next door. It's 00:00:50.289 --> 00:00:52.450 arguably sitting at a cheap folding table in 00:00:52.450 --> 00:00:55.390 a community clubhouse on a Tuesday night, deciding 00:00:55.390 --> 00:00:57.390 whether your hedges are three inches too high. 00:00:57.530 --> 00:00:59.170 You were talking about the Homeowner Association. 00:00:59.710 --> 00:01:03.009 The HOA. The HOA. And you are right to use the 00:01:03.009 --> 00:01:06.189 word government. We tend to dismiss them as just... 00:01:06.379 --> 00:01:10.359 neighborhood clubs or the lawn police. But structurally, 00:01:10.500 --> 00:01:13.560 legally, and functionally, they are a massive 00:01:13.560 --> 00:01:16.379 layer of private governance. And when we say 00:01:16.379 --> 00:01:18.840 massive, I think people really underestimate 00:01:18.840 --> 00:01:21.540 the scale. I was looking at the data from the 00:01:21.540 --> 00:01:24.239 Community Associations Institute, and the numbers 00:01:24.239 --> 00:01:27.090 are just staggering. They really are. As of 2010, 00:01:27.370 --> 00:01:28.989 and you have to keep in mind that's over a decade 00:01:28.989 --> 00:01:31.450 ago, so the trajectory has only gone up, nearly 00:01:31.450 --> 00:01:34.530 25 million American homes were under this kind 00:01:34.530 --> 00:01:37.609 of regime. And that translates to about 62 million 00:01:37.609 --> 00:01:39.989 residents. 62 million. To give you a sense of 00:01:39.989 --> 00:01:42.290 scale, that is a population larger than Italy. 00:01:42.590 --> 00:01:47.150 It is larger than South Africa. If HOA land were 00:01:47.150 --> 00:01:50.170 its own country, it would be a G20 nation. That's 00:01:50.170 --> 00:01:52.250 wild. It's a nation within a nation. A nation 00:01:52.250 --> 00:01:54.370 within a nation. But it's a weird kind of nation, 00:01:54.450 --> 00:01:56.430 isn't it? Yeah. Because people rush to move there. 00:01:56.469 --> 00:01:58.349 They pay a premium to live there. Oh, absolutely. 00:01:58.549 --> 00:02:00.590 We move for stability, right? We want to know 00:02:00.590 --> 00:02:02.349 that the guy across the street isn't going to 00:02:02.349 --> 00:02:04.329 start an auto body shop in his front yard at 00:02:04.329 --> 00:02:06.069 3 in the morning. We want our property values 00:02:06.069 --> 00:02:08.830 to go up. That is the sales pitch. Stability, 00:02:08.990 --> 00:02:11.250 predictability, amenities. You know what you're 00:02:11.250 --> 00:02:13.949 getting. But there is a catch. And I don't think 00:02:13.949 --> 00:02:16.530 people realize how sharp the hook is until they 00:02:16.530 --> 00:02:20.629 are already on it. To get that stability, you 00:02:20.629 --> 00:02:22.750 sign a contract that, and we're going to get 00:02:22.750 --> 00:02:25.150 into the weeds on this, might actually limit 00:02:25.150 --> 00:02:27.530 your constitutional rights. It often does. It 00:02:27.530 --> 00:02:29.750 can expose you to what economists call double 00:02:29.750 --> 00:02:34.759 taxation. Honestly terrifying scenarios. Allow 00:02:34.759 --> 00:02:37.620 your neighbors to seize your house and sell it 00:02:37.620 --> 00:02:40.580 without a judge ever looking at the case. That 00:02:40.580 --> 00:02:42.840 is the trade -off we have normalized. We have 00:02:42.840 --> 00:02:45.430 effectively privatized local government. And 00:02:45.430 --> 00:02:47.909 today our mission is to figure out how on earth 00:02:47.909 --> 00:02:50.289 this happened. Right. Because it wasn't an accident. 00:02:50.389 --> 00:02:52.349 It wasn't just people deciding they liked cul 00:02:52.349 --> 00:02:55.770 -de -sacs. It is the result of a really strange 00:02:55.770 --> 00:02:58.949 cocktail of 19th century land deeds, some very 00:02:58.949 --> 00:03:03.069 specific 1970s environmental laws and municipal 00:03:03.069 --> 00:03:06.009 budget cutting. Hold on. You just said environmental 00:03:06.009 --> 00:03:08.750 laws. You're telling me that saving the planet. 00:03:09.469 --> 00:03:12.069 somehow led to people getting fined for the wrong 00:03:12.069 --> 00:03:14.469 shade of beige paint. Believe it or not, the 00:03:14.469 --> 00:03:16.509 Clean Water Act is one of the biggest reasons 00:03:16.509 --> 00:03:18.930 HOAs are everywhere today. That sounds like a 00:03:18.930 --> 00:03:21.789 stretch, but I'm ready to be convinced. But before 00:03:21.789 --> 00:03:23.629 we get to the rainwater and the budget cuts, 00:03:23.729 --> 00:03:25.770 we have to start at the beginning. The origin 00:03:25.770 --> 00:03:29.229 story. The origin story. Frankly, looking at 00:03:29.229 --> 00:03:31.330 the research, it's not exactly a heartwarming 00:03:31.330 --> 00:03:33.689 tale of community building. It's pretty dark. 00:03:33.830 --> 00:03:36.469 It is dark. If we want to be honest about the 00:03:36.469 --> 00:03:39.389 DNA and the HOA, we have to go back to the late 00:03:39.389 --> 00:03:41.810 19th and early 20th centuries. We didn't have 00:03:41.810 --> 00:03:44.770 associations back then in the modern sense, but 00:03:44.770 --> 00:03:47.729 we had something called deed restrictions. OK, 00:03:47.810 --> 00:03:49.310 explain that for the non -lawyers listening. 00:03:49.729 --> 00:03:52.930 What is a deed restriction? So when you buy a 00:03:52.930 --> 00:03:55.629 piece of land, you get a deed. That's the piece 00:03:55.629 --> 00:03:57.550 of paper that says you own it. A deed restriction 00:03:57.550 --> 00:04:00.469 is a clause written into that paper that limits 00:04:00.469 --> 00:04:03.030 what you can do with the land. And crucially, 00:04:03.110 --> 00:04:05.530 it runs with the land. Runs with the land. That 00:04:05.530 --> 00:04:08.909 sounds ominous. It means it's permanent. Think 00:04:08.909 --> 00:04:11.009 of it like a sticky note that's been super glued 00:04:11.009 --> 00:04:12.710 to the house. It doesn't matter if you sell the 00:04:12.710 --> 00:04:15.469 house or if the person you sold it to sells it 00:04:15.469 --> 00:04:18.269 again five times over. The sticky note is still 00:04:18.269 --> 00:04:20.889 there. That sticky note stays there. The restriction 00:04:20.889 --> 00:04:25.269 binds every future owner forever unless a court 00:04:25.269 --> 00:04:27.769 specifically strikes it down. And in the early 00:04:27.769 --> 00:04:29.829 1900s, I'm guessing these weren't just about 00:04:29.829 --> 00:04:32.579 keeping the grass cut, were they? No, not at 00:04:32.579 --> 00:04:34.579 all. I mean, some were about setbacks from the 00:04:34.579 --> 00:04:37.540 road or building materials, sure. But we have 00:04:37.540 --> 00:04:39.720 to look at the precursors, organizations like 00:04:39.720 --> 00:04:42.500 the Arroyo Seco Improvement Association in Pasadena 00:04:42.500 --> 00:04:45.959 around 1905 or the Los Feliz Improvement Association 00:04:45.959 --> 00:04:49.279 in 1916. And if you dig into the archives and 00:04:49.279 --> 00:04:51.620 read the actual text of these covenants, the 00:04:51.620 --> 00:04:54.339 primary goal was often segregation. Outright 00:04:54.339 --> 00:04:57.300 segregation. Blatant. The economic theory of 00:04:57.300 --> 00:04:59.360 the time, which was widely accepted, was that 00:04:59.360 --> 00:05:03.430 property values were direct— I was reading through 00:05:03.430 --> 00:05:05.889 some of the source material you sent over, and 00:05:05.889 --> 00:05:08.410 I found a covenant from a neighborhood in Seattle 00:05:08.410 --> 00:05:11.430 that actually made my stomach turn. It wasn't 00:05:11.430 --> 00:05:14.129 vague. It explicitly banned, and I'm quoting 00:05:14.129 --> 00:05:17.910 the legal document here, Hebrew, Ethiopian, Malay 00:05:17.910 --> 00:05:20.649 or Asiatic races from occupying the property. 00:05:20.829 --> 00:05:23.550 And that was common. It was systematic. It wasn't 00:05:23.550 --> 00:05:26.149 just a few racist homeowners. Developers wrote 00:05:26.149 --> 00:05:28.970 these into the initial deeds for entire subdivisions. 00:05:29.329 --> 00:05:32.930 It was a tool of urban planning used to create 00:05:32.930 --> 00:05:35.870 and enforce all white enclaves. So this is just 00:05:35.870 --> 00:05:37.470 legal. You could put that in the contract. For 00:05:37.470 --> 00:05:40.480 a long time, yes. But then in 1948, we had a 00:05:40.480 --> 00:05:42.899 landmark Supreme Court case called Shelley v. 00:05:42.939 --> 00:05:45.740 Kramer. OK. And the court looked at these racially 00:05:45.740 --> 00:05:47.939 restrictive covenants and made a very specific, 00:05:48.259 --> 00:05:50.920 very clever ruling. They didn't say the covenants 00:05:50.920 --> 00:05:52.959 themselves were illegal to write. Wait, what? 00:05:53.079 --> 00:05:54.939 So you could still write them? You could still 00:05:54.939 --> 00:05:56.720 write them. But what the court said was that 00:05:56.720 --> 00:05:59.100 they were unenforceable in court. The reasoning 00:05:59.100 --> 00:06:01.860 was subtle. They said private parties can sign 00:06:01.860 --> 00:06:04.480 whatever voluntary contracts they want, but the 00:06:04.480 --> 00:06:06.639 state, meaning the courts, cannot be used to 00:06:06.639 --> 00:06:08.720 enforce discrimination because that would be 00:06:08.720 --> 00:06:10.839 a state action violating the 14th Amendment. 00:06:11.079 --> 00:06:13.439 That's a distinction without a difference, isn't 00:06:13.439 --> 00:06:15.560 it? If you can't enforce it, what's the point? 00:06:15.680 --> 00:06:17.839 Well, it took away the legal teeth. But for another 00:06:17.839 --> 00:06:21.100 20 years, these covenants still existed and they 00:06:21.100 --> 00:06:24.160 were enforced socially through real estate agents, 00:06:24.379 --> 00:06:27.740 through gentlemen's agreements, through intimidation. 00:06:27.899 --> 00:06:30.100 So it moved from a legal barrier to a social 00:06:30.100 --> 00:06:32.620 one. Exactly. It wasn't until the Fair Housing 00:06:32.620 --> 00:06:36.180 Act of 1968 that discrimination based on race, 00:06:36.240 --> 00:06:39.019 religion and national origin was finally actually 00:06:39.019 --> 00:06:41.759 made illegal in housing transactions. OK, so 00:06:41.759 --> 00:06:44.199 the explicit racism gets legally dismantled. 00:06:44.459 --> 00:06:47.399 Mostly by the late 60s. But that's exactly when 00:06:47.399 --> 00:06:50.360 the HOA boom starts to go exponential. So if 00:06:50.360 --> 00:06:52.100 they couldn't use it for segregation anymore. 00:06:52.639 --> 00:06:55.199 Why did the model explode? There were two major 00:06:55.199 --> 00:06:58.220 engines driving this, and they both revved up 00:06:58.220 --> 00:07:01.420 right around that same time in the 60s. The first 00:07:01.420 --> 00:07:04.560 was the Federal Housing Administration, the FHA. 00:07:04.759 --> 00:07:08.959 The FHA. In 1963, the FHA started approving federal 00:07:08.959 --> 00:07:12.060 mortgage insurance for condominiums and subdivisions 00:07:12.060 --> 00:07:14.839 that had HOAs. Which basically means the federal 00:07:14.839 --> 00:07:18.139 government said, we will back these loans. And 00:07:18.139 --> 00:07:19.959 that's the green light for developers if the 00:07:19.959 --> 00:07:22.259 government will insure it. The banks will fund 00:07:22.259 --> 00:07:24.759 it. It was a massive green light. It fundamentally 00:07:24.759 --> 00:07:27.980 changed development patterns. Before this, developers 00:07:27.980 --> 00:07:30.319 were mostly constrained by local zoning laws. 00:07:30.579 --> 00:07:33.279 If a town said you can only build two single 00:07:33.279 --> 00:07:35.660 family houses per acre, that's all you could 00:07:35.660 --> 00:07:38.660 build. Right. But with the new HOA model, developers 00:07:38.660 --> 00:07:40.620 could go to the town and propose something called 00:07:40.620 --> 00:07:43.399 a planned unit development or a P .U. They could 00:07:43.399 --> 00:07:46.000 say, hey. Let us cluster the houses closer together. 00:07:46.160 --> 00:07:48.540 We'll build four houses per acre, but we promise 00:07:48.540 --> 00:07:50.660 to leave the rest of the land as common open 00:07:50.660 --> 00:07:53.000 space. So they get to sell more units on the 00:07:53.000 --> 00:07:55.279 same plot of land. They sell more units on the 00:07:55.279 --> 00:07:57.860 same amount of land. It's pure profit maximization. 00:07:58.100 --> 00:08:01.259 But to make that work, you need a mechanism to 00:08:01.259 --> 00:08:03.560 manage that common open space. You can't just 00:08:03.560 --> 00:08:06.740 leave it there. Who mows it? Who insures it if 00:08:06.740 --> 00:08:08.660 someone gets hurt there? Enter the association. 00:08:09.060 --> 00:08:11.379 Enter the association. And this wasn't just some 00:08:11.379 --> 00:08:14.860 vague idea floating around. In 1964, the Urban 00:08:14.860 --> 00:08:17.420 Land Institute published something called Technical 00:08:17.420 --> 00:08:20.620 Bulletin 50. Technical Bulletin 50. Sounds like 00:08:20.620 --> 00:08:23.319 the title of a very boring movie. It sounds... 00:08:23.500 --> 00:08:26.420 Dry as dust. But I promise you, this document 00:08:26.420 --> 00:08:29.240 is essentially the Bible of modern suburbia. 00:08:29.300 --> 00:08:31.920 It was funded by federal agencies like the FHA 00:08:31.920 --> 00:08:34.279 and the National Association of Home Builders. 00:08:34.360 --> 00:08:37.039 It wasn't just a suggestion. It was a recipe 00:08:37.039 --> 00:08:40.120 book. A recipe book. It laid out the exact legal 00:08:40.120 --> 00:08:42.860 language for the covenants, the exact corporate 00:08:42.860 --> 00:08:45.039 structure, the exact management techniques for 00:08:45.039 --> 00:08:47.299 creating a planned unit development with an HOA. 00:08:47.419 --> 00:08:49.559 So it was a franchise manual. Like, here is how 00:08:49.559 --> 00:08:51.679 you build a McDonald's, but for neighborhoods. 00:08:52.720 --> 00:08:54.779 Perfect analogy. It was plug and play. Before 00:08:54.779 --> 00:08:57.779 TV 50, these associations were sort of custom 00:08:57.779 --> 00:09:00.879 built experimental. After TV 50, they were a 00:09:00.879 --> 00:09:03.019 standardized product. You could just copy paste 00:09:03.019 --> 00:09:06.059 the bylaws from the manual. This is why an HOA 00:09:06.059 --> 00:09:08.639 in Florida looks almost legally identical to 00:09:08.639 --> 00:09:11.139 an HOA in Oregon today. They're all working from 00:09:11.139 --> 00:09:13.659 the same playbook. Okay, so we have the profit 00:09:13.659 --> 00:09:16.399 motive for developers, squeeze in more houses. 00:09:16.559 --> 00:09:18.659 We have the government backing from the FHA, 00:09:18.799 --> 00:09:21.600 which de -risks it for the banks. But earlier 00:09:21.600 --> 00:09:23.799 you dropped that bomb about the Clean Water Act. 00:09:24.159 --> 00:09:26.480 I'm still stuck on that. How does an environmental 00:09:26.480 --> 00:09:29.059 law about rivers lead to me getting a letter 00:09:29.059 --> 00:09:31.659 about... my trash cans. This is one of the classic 00:09:31.659 --> 00:09:33.860 examples of unintended consequences in public 00:09:33.860 --> 00:09:36.580 policy. So fast forward to 1977, the Clean Water 00:09:36.580 --> 00:09:39.440 Act is expanded. The EPA starts cracking down 00:09:39.440 --> 00:09:41.879 on what they call non -point source pollution. 00:09:42.019 --> 00:09:44.559 Right off, like from streets and lawns. Exactly. 00:09:44.639 --> 00:09:47.679 When you build a new subdivision, you are essentially 00:09:47.679 --> 00:09:50.799 paving over a natural sponge. You put down asphalt 00:09:50.799 --> 00:09:54.159 roads, concrete driveways, shingled roofs. So 00:09:54.159 --> 00:09:56.419 when it rains, the water doesn't soak into the 00:09:56.419 --> 00:09:59.440 ground anymore. It rushes off the pavement. picks 00:09:59.440 --> 00:10:02.299 up oil from driveways, fertilizer from lawns, 00:10:02.299 --> 00:10:04.679 and floods the local creeks with pollutants. 00:10:04.759 --> 00:10:07.539 So the EPA comes in and says, you can't just 00:10:07.539 --> 00:10:10.019 dump all that dirty water into the river. Correct. 00:10:10.200 --> 00:10:12.820 They mandated that new developments had to manage 00:10:12.820 --> 00:10:15.679 their own stormwater on site. The engineering 00:10:15.679 --> 00:10:18.419 solution that became standard was their retention 00:10:18.419 --> 00:10:21.149 pond. Their retention pond. You know exactly 00:10:21.149 --> 00:10:22.970 what I'm talking about. Every suburban neighborhood 00:10:22.970 --> 00:10:25.789 built after 1980 has one. It's that little man 00:10:25.789 --> 00:10:27.889 -made pond near the entrance, usually with a 00:10:27.889 --> 00:10:29.490 fountain in the middle. I never realized that 00:10:29.490 --> 00:10:31.629 was a federal mandate. I just thought developers 00:10:31.629 --> 00:10:33.769 liked fountains. The fountain isn't just for 00:10:33.769 --> 00:10:36.370 looks. It's functional. It aerates the water 00:10:36.370 --> 00:10:38.570 and keeps it moving so it doesn't get stagnant 00:10:38.570 --> 00:10:41.509 and breed mosquitoes. But here is the legal rub. 00:10:42.000 --> 00:10:44.980 That pond serves the whole neighborhood. It takes 00:10:44.980 --> 00:10:47.600 the water from 50 or 100 different driveways. 00:10:47.759 --> 00:10:51.639 So you cannot put that pond on one person's private 00:10:51.639 --> 00:10:54.220 lot. Of course not. What if they decide to fill 00:10:54.220 --> 00:10:57.080 it in? Exactly. It has to be designated as common 00:10:57.080 --> 00:10:59.700 property. And if it's common property? Someone 00:10:59.700 --> 00:11:02.009 has to own it. The city doesn't want to own it. 00:11:02.049 --> 00:11:04.049 They don't want the maintenance cost or the liability 00:11:04.049 --> 00:11:07.590 if a kid falls in. So the developer must, by 00:11:07.590 --> 00:11:11.250 law, create a private corporation. The HOA, too, 00:11:11.429 --> 00:11:13.529 hold the title to the pond and collect money 00:11:13.529 --> 00:11:15.789 from all the homeowners to maintain it. So the 00:11:15.789 --> 00:11:18.710 HOA is born out of the legal necessity to own 00:11:18.710 --> 00:11:21.250 a drainage ditch. Essentially, yes, that's the 00:11:21.250 --> 00:11:23.669 non -negotiable part. But once the lawyer has 00:11:23.669 --> 00:11:26.250 set up the corporation to own the pond, the developer 00:11:26.250 --> 00:11:27.950 thinks, well, hang on. We have this corporate 00:11:27.950 --> 00:11:30.509 structure. We have this built -in ability to 00:11:30.509 --> 00:11:33.190 tax the residents for the pond maintenance. Why 00:11:33.190 --> 00:11:35.769 don't we just expand its powers? Let's use the 00:11:35.769 --> 00:11:38.549 same corporation to maintain a community pool 00:11:38.549 --> 00:11:42.860 and a clubhouse. And the front date. And while 00:11:42.860 --> 00:11:45.580 we're at it, let's give it the power to regulate 00:11:45.580 --> 00:11:48.360 the aesthetics of the houses to keep sales prices 00:11:48.360 --> 00:11:51.019 high while we're still selling units. The pond 00:11:51.019 --> 00:11:53.559 was the Trojan horse. It was the legal anchor. 00:11:53.740 --> 00:11:56.360 Once the anchor is there, you can hang whatever 00:11:56.360 --> 00:11:59.629 rules you want on it. And that is why today it 00:11:59.629 --> 00:12:02.029 is almost impossible to buy a new construction 00:12:02.029 --> 00:12:05.370 home in the suburbs without an HOA. The developer 00:12:05.370 --> 00:12:07.870 physically cannot get the permits to build the 00:12:07.870 --> 00:12:09.990 neighborhood without creating a legal entity 00:12:09.990 --> 00:12:12.269 to manage the stormwater. That is absolutely 00:12:12.269 --> 00:12:14.129 fascinating. We're living under these vast private 00:12:14.129 --> 00:12:16.070 governments because of drainage engineering. 00:12:16.289 --> 00:12:18.470 It's the butterfly effect of bureaucracy. A rule 00:12:18.470 --> 00:12:20.929 meant to clean up rivers ended up reshaping American 00:12:20.929 --> 00:12:23.850 civil life. So let's dig into what this government 00:12:23.850 --> 00:12:26.250 actually looks like, because I think a lot of 00:12:26.250 --> 00:12:28.450 listeners might be not. along thinking yeah i 00:12:28.450 --> 00:12:31.330 pay my dues but if i buy a house i tend to think 00:12:31.330 --> 00:12:34.809 i own this it's my castle but if it's in an hoa 00:12:34.809 --> 00:12:37.549 that's not strictly true is it not in the way 00:12:37.549 --> 00:12:40.210 we traditionally think of ownership when you 00:12:40.210 --> 00:12:43.509 buy into an hoa you are doing two things simultaneously 00:12:43.509 --> 00:12:47.559 you are buying a piece of real estate yes the 00:12:47.559 --> 00:12:50.460 house, the plot of land, but you are also becoming 00:12:50.460 --> 00:12:53.179 a mandatory member of a nonprofit corporation. 00:12:53.779 --> 00:12:56.120 Mandatory being the key word. Mandatory. You 00:12:56.120 --> 00:12:58.759 cannot opt out. It is a condition of the purchase. 00:12:59.080 --> 00:13:01.360 And this goes back to that sticky note idea you 00:13:01.360 --> 00:13:04.039 mentioned earlier, the deed restrictions. Exactly. 00:13:04.059 --> 00:13:06.820 The governing documents are called the CC &Rs, 00:13:06.820 --> 00:13:09.500 covenants, conditions, and restrictions. This 00:13:09.500 --> 00:13:12.100 is the constitution of your little private nation. 00:13:12.299 --> 00:13:14.679 And because those CC &Rs are attached to the 00:13:14.679 --> 00:13:17.659 deed, the law says you have constructive notice. 00:13:18.000 --> 00:13:19.779 Which means... Which means it doesn't matter 00:13:19.779 --> 00:13:22.840 if you didn't read the 400 -page packet of documents 00:13:22.840 --> 00:13:24.899 at your closing. Nobody reads the whole packet. 00:13:25.039 --> 00:13:27.269 Nobody! You're signing 50 things at closing. 00:13:27.409 --> 00:13:29.169 Your hand is cramping. You just want the keys. 00:13:29.350 --> 00:13:31.389 But it doesn't matter. It doesn't matter if the 00:13:31.389 --> 00:13:33.789 realtor didn't explain it to you. By signing 00:13:33.789 --> 00:13:36.450 the deed, the law presumes that you have read, 00:13:36.590 --> 00:13:40.350 understood, and agreed to every single rule in 00:13:40.350 --> 00:13:43.070 that book. That's terrifying. And that is where 00:13:43.070 --> 00:13:45.789 the friction starts. Because people move in thinking 00:13:45.789 --> 00:13:47.669 it's a democracy. They think, well, if we don't 00:13:47.669 --> 00:13:49.549 like the rule about mailboxes, we'll just vote 00:13:49.549 --> 00:13:53.230 to change it. But an HOA is not a democracy. 00:13:53.610 --> 00:13:56.470 It is a corporation. OK, break that down for 00:13:56.470 --> 00:13:59.470 me. What's the real world difference in a civic 00:13:59.470 --> 00:14:03.009 democracy like your city or your state? The principle 00:14:03.009 --> 00:14:06.389 is one person, one vote. I vote. You vote. We're 00:14:06.389 --> 00:14:09.929 equal citizens. Right. In an HOA, it is a shareholder 00:14:09.929 --> 00:14:13.149 democracy. Voting power is based on property 00:14:13.149 --> 00:14:16.009 ownership. So if I'm a big investor and I own 00:14:16.009 --> 00:14:18.730 five houses in the neighborhood. I get five votes. 00:14:18.929 --> 00:14:21.549 Exactly. And if I am a renter living there for 00:14:21.549 --> 00:14:24.049 a decade, I get zero votes. Think about that. 00:14:24.129 --> 00:14:25.830 You could live in a neighborhood for 10 years. 00:14:25.889 --> 00:14:27.809 Your kids go to the local school. You walk your 00:14:27.809 --> 00:14:30.629 dog on the same streets. You are arguably a deeper 00:14:30.629 --> 00:14:32.889 part of the community fabric than the out -of 00:14:32.889 --> 00:14:34.889 -state investor who owns the house but has never 00:14:34.889 --> 00:14:37.309 even seen it. But I have absolutely no say in 00:14:37.309 --> 00:14:39.789 the rules that govern my daily life. The color 00:14:39.789 --> 00:14:42.169 I can paint my door where I can park my car. 00:14:42.470 --> 00:14:44.779 Nothing. You're a resident, but you are not a 00:14:44.779 --> 00:14:47.200 citizen. This creates a really weird class system. 00:14:47.340 --> 00:14:49.620 The residents versus the owners. And it gets 00:14:49.620 --> 00:14:51.980 even more skewed when the development is brand 00:14:51.980 --> 00:14:54.399 new. There's what's called the developer control 00:14:54.399 --> 00:14:57.440 period. Okay. When a developer is building a 00:14:57.440 --> 00:15:00.039 neighborhood in phases, they want to maintain 00:15:00.039 --> 00:15:02.799 absolute control over the look and feel of the 00:15:02.799 --> 00:15:04.440 place until they are finished selling everything. 00:15:04.799 --> 00:15:07.820 So they often write the bylaws to give themselves 00:15:07.820 --> 00:15:11.389 weighted voting rights. Weighted how? Like, how 00:15:11.389 --> 00:15:13.830 bad can it be? Oh, it can be a 3 to 1 or even 00:15:13.830 --> 00:15:17.070 a 10 to 1 ratio. It's common. For every lot the 00:15:17.070 --> 00:15:19.309 developer still owns, they get 10 votes. You, 00:15:19.389 --> 00:15:21.149 the homeowner who actually lives there, get one. 00:15:21.350 --> 00:15:24.289 So even if the neighborhood is 90 % full of actual 00:15:24.289 --> 00:15:27.289 residents, the developer who only owns the last 00:15:27.289 --> 00:15:30.789 10 % of empty lots might still be able to outvote 00:15:30.789 --> 00:15:33.620 everyone else combined. Easily. Correct. They 00:15:33.620 --> 00:15:35.139 can install their own employees on the board 00:15:35.139 --> 00:15:37.759 of directors. They can set the budget to be artificially 00:15:37.759 --> 00:15:40.519 low to attract new buyers. And they can basically 00:15:40.519 --> 00:15:43.080 run the place as a private dictatorship until 00:15:43.080 --> 00:15:45.340 the very last unit is sold. And then they just 00:15:45.340 --> 00:15:47.860 leave. And then they hand over the keys to a 00:15:47.860 --> 00:15:50.299 group of unprepared volunteer homeowners and 00:15:50.299 --> 00:15:53.539 say, good luck. And that transition period is 00:15:53.539 --> 00:15:56.220 often a complete disaster. I can imagine. The 00:15:56.220 --> 00:15:58.879 new homeowner board takes over and they open 00:15:58.879 --> 00:16:02.000 the books and realize, wait a minute, the developers 00:16:02.000 --> 00:16:04.840 set the dues at $50 a month to make it look cheap. 00:16:04.899 --> 00:16:07.679 But the actual cost to run the pool and mow the 00:16:07.679 --> 00:16:11.659 common areas is $150 a month. And suddenly everyone's 00:16:11.659 --> 00:16:14.240 dues have to triple overnight. And they all blame 00:16:14.240 --> 00:16:17.059 the new board. Or worse, they realize the developer 00:16:17.059 --> 00:16:19.360 did a shoddy job building the clubhouse and now 00:16:19.360 --> 00:16:21.480 the warranty has expired and there's a huge repair 00:16:21.480 --> 00:16:23.840 bill coming due. So we have this corporate structure. 00:16:23.879 --> 00:16:25.980 We have a board of directors who are basically 00:16:25.980 --> 00:16:28.159 just Bob and Karen from down the street. They 00:16:28.159 --> 00:16:29.820 are volunteers. They probably aren't lawyers 00:16:29.820 --> 00:16:32.240 or accountants, but they have immense power. 00:16:32.500 --> 00:16:35.639 They have what we call a fiduciary duty. which 00:16:35.639 --> 00:16:38.360 is a fancy legal term, but it just means they 00:16:38.360 --> 00:16:40.700 are legally required to act in the best financial 00:16:40.700 --> 00:16:43.440 interests of the corporation. But to enforce 00:16:43.440 --> 00:16:46.139 that, they have an arsenal of weapons. Let's 00:16:46.139 --> 00:16:47.639 talk about the weapons, because this is where 00:16:47.639 --> 00:16:49.639 all the horror stories come from. We all know 00:16:49.639 --> 00:16:51.679 about the fines. Your grass is two inches too 00:16:51.679 --> 00:16:55.120 long. Pay $50. But it goes way, way beyond that. 00:16:55.220 --> 00:16:57.360 The fine is just the first step. It's a slap 00:16:57.360 --> 00:17:00.399 on the wrist. The real power comes from the assessment, 00:17:00.799 --> 00:17:04.000 the power to compel payment. And if you don't 00:17:04.000 --> 00:17:06.440 pay, whether it's your monthly dues or fines 00:17:06.440 --> 00:17:09.990 or legal fees the HOA has tacked on. The HOA 00:17:09.990 --> 00:17:13.130 can place a lien on your property. And a lien 00:17:13.130 --> 00:17:15.490 means you can't sell the house. You can't refinance. 00:17:15.490 --> 00:17:17.990 It's a black mark on your title until the debt 00:17:17.990 --> 00:17:20.529 is paid. Right. But the final step, the nuclear 00:17:20.529 --> 00:17:23.269 option, is foreclosure. And I want to be very, 00:17:23.349 --> 00:17:26.730 very clear about this. In many states, an HOA 00:17:26.730 --> 00:17:29.250 can take your home. I think people hear foreclosure 00:17:29.250 --> 00:17:32.410 and they think of a bank. I didn't pay my mortgage 00:17:32.410 --> 00:17:34.769 for a year, so the bank took the house. That 00:17:34.769 --> 00:17:36.309 makes a certain kind of sense to people. It's 00:17:36.309 --> 00:17:38.700 a huge debt. But you're saying the HOA can do 00:17:38.700 --> 00:17:40.539 it, too, for what could be a much smaller amount. 00:17:40.779 --> 00:17:43.299 Yes. And in some states, like Texas, for example, 00:17:43.460 --> 00:17:46.519 they can do it via nonjudicial foreclosure. Nonjudicial. 00:17:46.599 --> 00:17:48.980 That sounds like without a judge. That is exactly 00:17:48.980 --> 00:17:50.740 what it means. They do not have to go to court. 00:17:50.839 --> 00:17:52.380 They do not have to stand in front of a judge 00:17:52.380 --> 00:17:55.059 and prove you actually owe the money before they 00:17:55.059 --> 00:17:57.299 sell your house on the courthouse steps. They 00:17:57.299 --> 00:18:00.200 just have to follow a specific notification process, 00:18:00.539 --> 00:18:03.279 sending letters. There is a story from your notes 00:18:03.279 --> 00:18:05.099 that I literally couldn't get out of my head. 00:18:05.759 --> 00:18:09.180 The soldier in Iraq. I think we need to tell 00:18:09.180 --> 00:18:11.759 this story in full because it illustrates just 00:18:11.759 --> 00:18:14.859 how broken the system can get. This is the case 00:18:14.859 --> 00:18:17.099 of Captain Michael Clower. This happened around 00:18:17.099 --> 00:18:20.579 2008, 2009. He was a captain in the Army Reserve 00:18:20.579 --> 00:18:24.029 and he was deployed to Iraq. He left his wife 00:18:24.029 --> 00:18:26.349 and kids back home in their house in Frisco, 00:18:26.470 --> 00:18:29.109 Texas. OK, so he is overseas serving the country, 00:18:29.190 --> 00:18:31.250 a combat zone. Right. And you have to understand, 00:18:31.329 --> 00:18:33.750 this house wasn't some underwater mortgage situation. 00:18:34.069 --> 00:18:36.049 They had paid cash for a significant portion 00:18:36.049 --> 00:18:38.890 of it. The home was worth about $300 ,000 and 00:18:38.890 --> 00:18:41.769 it was fully paid off. They had zero mortgage. 00:18:41.869 --> 00:18:43.950 They owned it free and clear. That's the American 00:18:43.950 --> 00:18:46.910 dream right there. A $300 ,000 asset, totally 00:18:46.910 --> 00:18:49.799 yours. While he was deployed in Iraq, his wife, 00:18:49.900 --> 00:18:51.700 who was at home with the kids, fell into a deep 00:18:51.700 --> 00:18:54.279 depression, which sadly isn't uncommon during 00:18:54.279 --> 00:18:57.529 these long deployments. She - just stopped functioning. 00:18:57.609 --> 00:19:00.109 She stopped opening the mail. Oh, no. And in 00:19:00.109 --> 00:19:02.809 that pile of unopened mail were notices from 00:19:02.809 --> 00:19:05.430 their HOA. They had missed a few dues payments. 00:19:05.789 --> 00:19:07.450 How much did they owe? What was the original 00:19:07.450 --> 00:19:10.609 debt? The original debt was roughly $800. $800. 00:19:10.990 --> 00:19:14.509 They have a $300 ,000 house free and clear, and 00:19:14.509 --> 00:19:18.269 they owe $800. Correct. The HOA tacked on late 00:19:18.269 --> 00:19:22.269 fees, then legal fees. The debt grew. They filed 00:19:22.269 --> 00:19:25.599 a lien. Then they initiated a nonjudicial foreclosure. 00:19:25.920 --> 00:19:28.480 They put an ad in the local paper and they auctioned 00:19:28.480 --> 00:19:30.319 off the house to collect the debt. So they actually 00:19:30.319 --> 00:19:33.140 sold the house for how much? This is the part 00:19:33.140 --> 00:19:35.880 that makes you gasp. They sold this $300 ,000 00:19:35.880 --> 00:19:40.420 home for approximately $3 ,500. Stop. $3 ,500. 00:19:40.640 --> 00:19:44.160 It's not even a typo. No typo. It was just enough 00:19:44.160 --> 00:19:46.140 to cover the debt, which had grown with legal 00:19:46.140 --> 00:19:49.720 fees, and the cost of the sale. The buyer, often 00:19:49.720 --> 00:19:52.140 it's investors who specialize in and prey on 00:19:52.140 --> 00:19:56.680 these auctions, got the deed to a $300 ,000 house 00:19:56.680 --> 00:19:59.619 for the price of a used Honda Civic. So the captain 00:19:59.619 --> 00:20:01.420 comes home from Iraq. He comes home from his 00:20:01.420 --> 00:20:03.799 tour, drives up to his house, and realizes he 00:20:03.799 --> 00:20:06.740 doesn't own it anymore. His family's home, their 00:20:06.740 --> 00:20:10.119 single biggest asset, their life savings had 00:20:10.119 --> 00:20:12.319 been completely wiped out. He had lost nearly 00:20:12.319 --> 00:20:16.779 $300 ,000 in equity over an $800 debt. That shouldn't 00:20:16.779 --> 00:20:18.690 be legal. I don't care what the contract says. 00:20:18.829 --> 00:20:21.130 That is fundamentally unjust. That is theft. 00:20:21.410 --> 00:20:24.150 It took a massive legal battle and national media 00:20:24.150 --> 00:20:26.789 outrage to get it fixed. He eventually got the 00:20:26.789 --> 00:20:28.710 home back, but largely because of a specific 00:20:28.710 --> 00:20:31.569 federal law, the Servicemembers Civil Relief 00:20:31.569 --> 00:20:33.710 Act, which gives special protections to active 00:20:33.710 --> 00:20:36.390 duty military against things like this. But here's 00:20:36.390 --> 00:20:38.390 the chilling part. What's that? If he had been 00:20:38.390 --> 00:20:40.509 a civilian, if he had been a plumber or a teacher 00:20:40.509 --> 00:20:42.430 who just got sick, had a medical emergency and 00:20:42.430 --> 00:20:44.730 missed the mail for a few months, he likely would 00:20:44.730 --> 00:20:46.490 have lost everything. There would have been no 00:20:46.490 --> 00:20:48.880 reason. course. That is absolutely haunting. 00:20:49.019 --> 00:20:51.480 The disproportionate nature of it, the punishment 00:20:51.480 --> 00:20:54.799 so vastly outweighs the crime. That is the power 00:20:54.799 --> 00:20:57.319 of the superlion that HOAs have in some states. 00:20:57.500 --> 00:21:00.180 The HOA debt can take priority over almost everything 00:21:00.180 --> 00:21:03.180 else. And while some states have reformed this, 00:21:03.359 --> 00:21:05.559 California, for instance, now has a threshold 00:21:05.559 --> 00:21:08.240 where you have to owe at least $1 ,800 or be 00:21:08.240 --> 00:21:10.440 12 months delinquent before they can foreclose. 00:21:10.660 --> 00:21:13.759 The basic mechanism still exists in many, many 00:21:13.759 --> 00:21:16.250 places. It really challenges this core. American 00:21:16.250 --> 00:21:19.390 idea of property rights. We think it's my land. 00:21:19.769 --> 00:21:21.869 But really, you're just a tenant with a very 00:21:21.869 --> 00:21:23.809 expensive buy -in fee. That's a valid way to 00:21:23.809 --> 00:21:25.970 look at it. And it's not just about the ultimate 00:21:25.970 --> 00:21:28.549 risk of losing the house. It's about your basic 00:21:28.549 --> 00:21:30.849 rights while you live there. We all learn about 00:21:30.849 --> 00:21:32.829 the Bill of Rights in school, freedom of speech, 00:21:32.930 --> 00:21:35.750 freedom of assembly. But those protect you from 00:21:35.750 --> 00:21:38.150 the government. Big G government. The state. 00:21:38.309 --> 00:21:41.349 Right. The Constitution says Congress shall make 00:21:41.349 --> 00:21:44.359 no law. It doesn't say the Maple Ridge Homeowners 00:21:44.359 --> 00:21:47.200 Association shall make no law. Since the HOA 00:21:47.200 --> 00:21:49.259 is a private corporation, a private contract 00:21:49.259 --> 00:21:51.599 you voluntarily entered, the courts have generally 00:21:51.599 --> 00:21:53.960 ruled that most constitutional protections do 00:21:53.960 --> 00:21:56.579 not apply. So if I want to put up a sign in my 00:21:56.579 --> 00:22:00.019 yard that says vote for Smith and the HOA rules 00:22:00.019 --> 00:22:03.359 say no political signs allowed, the First Amendment 00:22:03.359 --> 00:22:06.480 doesn't save me. In most cases, no. There was 00:22:06.480 --> 00:22:08.880 a famous case in New Jersey, the Twin Rivers 00:22:08.880 --> 00:22:11.259 case, where the state Supreme Court ultimately 00:22:11.259 --> 00:22:13.700 upheld restrictions on political signs. They 00:22:13.700 --> 00:22:15.740 said the private contract you signed outweighs 00:22:15.740 --> 00:22:17.880 your free speech interest in that specific context. 00:22:18.160 --> 00:22:20.539 Wow. There was another case, Lauren V. Sasser, 00:22:20.660 --> 00:22:23.359 where a court disallowed a challenge to a ban 00:22:23.359 --> 00:22:26.460 on for sale signs. They banned for sale signs. 00:22:26.720 --> 00:22:28.680 That seems completely counterintuitive if the 00:22:28.680 --> 00:22:31.150 goal is maintaining property values. The board's 00:22:31.150 --> 00:22:33.690 reasoning was that too many signs looked tacky 00:22:33.690 --> 00:22:35.410 and might signal that people were fleeing the 00:22:35.410 --> 00:22:37.769 neighborhood. And the court said, if you signed 00:22:37.769 --> 00:22:40.450 the deed, you agreed to the rule. Now, there 00:22:40.450 --> 00:22:42.650 are exceptions where the federal government has 00:22:42.650 --> 00:22:45.460 stepped in. Like what? The big one was satellite 00:22:45.460 --> 00:22:48.559 dishes. Oh, right. I remember this. In the 90s, 00:22:48.559 --> 00:22:51.400 everyone had those giant, ugly gray dishes on 00:22:51.400 --> 00:22:54.420 their roof. And HOAs across the country banned 00:22:54.420 --> 00:22:56.579 them universally. They said they were shittiest. 00:22:56.759 --> 00:23:00.319 But in 1996, the FCC passed a rule under the 00:23:00.319 --> 00:23:03.299 Telecommunications Act that specifically overrode 00:23:03.299 --> 00:23:06.339 those private bans. Why? They argued that access 00:23:06.339 --> 00:23:08.759 to broadcast information was a national interest. 00:23:09.039 --> 00:23:12.440 So they said an HOA cannot ban a satellite dish 00:23:12.440 --> 00:23:15.440 that's under one meter. They can have reasonable 00:23:15.440 --> 00:23:17.640 rules about placement. Like you can't put it 00:23:17.640 --> 00:23:19.640 in the middle of your front lawn, but they can't 00:23:19.640 --> 00:23:21.559 ban them outright. If I watch CNN, I just can't 00:23:21.559 --> 00:23:23.319 put a sign in my yard telling people what I watched. 00:23:23.579 --> 00:23:26.000 Effectively, yes. And then you have the landscaping 00:23:26.000 --> 00:23:28.759 wars. This is the new frontier of HOA battles, 00:23:28.980 --> 00:23:31.779 specifically xeriscaping. Which is using native 00:23:31.779 --> 00:23:34.200 plants, rocks, cactus stuff that doesn't need 00:23:34.200 --> 00:23:36.640 a ton of water. Right. In states in the West 00:23:36.640 --> 00:23:40.299 like Colorado or Arizona or Texas, you have massive 00:23:40.299 --> 00:23:42.839 persistent droughts. Water is a precious resource. 00:23:42.730 --> 00:23:45.089 resource. So residents want to tear out their 00:23:45.089 --> 00:23:47.210 thirsty turf grass and replace it with beautiful, 00:23:47.309 --> 00:23:49.869 water -saving native landscapes. Makes perfect 00:23:49.869 --> 00:23:53.569 sense. But the HOA says no. The bylaws, written 00:23:53.569 --> 00:23:56.730 in 1985, say you must have 75 percent of your 00:23:56.730 --> 00:23:59.390 front yard covered in Kentucky bluegrass. We 00:23:59.390 --> 00:24:01.589 demand you waste thousands of gallons of water 00:24:01.589 --> 00:24:03.390 so the neighborhood can look like an English 00:24:03.390 --> 00:24:05.710 countryside. Oh, exactly. And this has turned 00:24:05.710 --> 00:24:09.109 into a huge legislative fight. States are now 00:24:09.109 --> 00:24:12.630 passing laws to overrule the HOAs. Florida passed 00:24:12.630 --> 00:24:15.190 laws protecting Florida -friendly landscaping. 00:24:15.269 --> 00:24:18.029 Texas and Colorado have passed laws saying HOAs 00:24:18.029 --> 00:24:21.470 cannot ban xeriscaping completely. But it is 00:24:21.470 --> 00:24:23.549 a constant tug -of -war between the aesthetic 00:24:23.549 --> 00:24:26.589 control of the HOA and the environmental reality 00:24:26.589 --> 00:24:28.529 of the region. It seems like the core mission 00:24:28.529 --> 00:24:31.089 of the HOA is always to fight change and keep 00:24:31.089 --> 00:24:33.029 the neighborhood frozen in time. That is their 00:24:33.029 --> 00:24:35.490 mandate, preserve and protect property values. 00:24:35.690 --> 00:24:37.710 And the operating assumption, right or wrong, 00:24:37.769 --> 00:24:40.309 is that uniformity equals value. Okay, so if 00:24:40.309 --> 00:24:42.420 these things are such a headache, If they can 00:24:42.420 --> 00:24:44.740 take your house, silence your speech, and force 00:24:44.740 --> 00:24:47.140 you to water your lawn during a drought, why 00:24:47.140 --> 00:24:48.920 do they keep growing? Why doesn't the market 00:24:48.920 --> 00:24:51.339 just say, no thanks? Because the market isn't 00:24:51.339 --> 00:24:53.319 the only player here. And homeowners aren't the 00:24:53.319 --> 00:24:56.059 only customers. We have to talk about the economics 00:24:56.059 --> 00:24:58.460 of the city. If you are a mayor or a city council 00:24:58.460 --> 00:25:01.740 member, you love HOAs. They are your best friend. 00:25:02.599 --> 00:25:05.119 Why? I would think they'd be a constant source 00:25:05.119 --> 00:25:07.400 of complaints for the city to deal with. Think 00:25:07.400 --> 00:25:10.009 about the city budget. If a developer comes to 00:25:10.009 --> 00:25:12.910 you and wants to build 500 new homes, that's 00:25:12.910 --> 00:25:15.589 500 new families using the library, the schools, 00:25:15.829 --> 00:25:18.910 the police, the fire department. That costs the 00:25:18.910 --> 00:25:21.690 city money. Sure. More services are needed. But 00:25:21.690 --> 00:25:24.549 if those 500 homes are in a private HOA development, 00:25:24.990 --> 00:25:27.410 the developer builds the roads inside the community. 00:25:27.589 --> 00:25:30.089 The developer builds the sewer lines. The developer 00:25:30.089 --> 00:25:33.569 builds the park and the pool. And then the HOA 00:25:33.569 --> 00:25:35.710 takes over the maintenance of all that infrastructure 00:25:35.710 --> 00:25:38.519 forever. So the city doesn't have to send a plow 00:25:38.519 --> 00:25:41.019 truck to plow those streets in the winter. Never. 00:25:41.099 --> 00:25:43.519 The city doesn't have to pave the potholes. The 00:25:43.519 --> 00:25:45.680 city doesn't have to mow the park. The city doesn't 00:25:45.680 --> 00:25:47.680 have to pay the electric bill for the streetlights. 00:25:48.599 --> 00:25:51.759 But, and here's the key, the city still collects 00:25:51.759 --> 00:25:54.980 the full property tax from those 500 homes. Wait, 00:25:55.079 --> 00:25:57.599 let's do the math on that. I pay property taxes. 00:25:57.880 --> 00:25:59.920 A big chunk of that is supposed to be for public 00:25:59.920 --> 00:26:02.799 works, right? Maintaining roads and parks. Correct. 00:26:02.839 --> 00:26:05.559 That's a huge part of any municipal budget. So 00:26:05.559 --> 00:26:08.779 I pay my... say $5 ,000 in property tax to the 00:26:08.779 --> 00:26:12.079 city, but the city isn't fixing my road because 00:26:12.079 --> 00:26:14.240 it's a private road. So then I have to pay another 00:26:14.240 --> 00:26:17.980 $2 ,000 a year in HOA dues to a private fund 00:26:17.980 --> 00:26:20.640 to fix the road I actually live on. That is the 00:26:20.640 --> 00:26:22.980 double taxation argument in a nutshell. You are 00:26:22.980 --> 00:26:25.539 paying full municipal taxes for public services 00:26:25.539 --> 00:26:27.759 you aren't using because you live behind a gate, 00:26:27.880 --> 00:26:30.240 and you are paying HOA assessments for the private 00:26:30.240 --> 00:26:33.059 services you are using. So I'm effectively subsidizing 00:26:33.059 --> 00:26:35.319 the rest of the city. My tax dollars are paving 00:26:35.319 --> 00:26:37.299 the road downtown, but I have to pay out of my 00:26:37.299 --> 00:26:40.180 own pocket a second time to pave my own street. 00:26:40.319 --> 00:26:43.500 Yes. And cities are very aware of this. That 00:26:43.500 --> 00:26:45.779 is why many municipalities have changed their 00:26:45.779 --> 00:26:48.220 zoning codes to actually require new developments 00:26:48.220 --> 00:26:52.420 to be HOAs. It is a massive, permanent offloading 00:26:52.420 --> 00:26:54.759 of infrastructure liability from the public balance 00:26:54.759 --> 00:26:57.140 sheet to a private one. It's free money for the 00:26:57.140 --> 00:26:59.579 city. But this must do something to us socially, 00:26:59.740 --> 00:27:02.180 right? If I'm paying for my own private road 00:27:02.180 --> 00:27:04.299 and my own private security guard and my own 00:27:04.299 --> 00:27:08.559 private park, why would I ever vote? for a tax 00:27:08.559 --> 00:27:10.819 increase to fix the public park on the other 00:27:10.819 --> 00:27:13.240 side of town. You've just hit on the most profound 00:27:13.240 --> 00:27:16.259 sociological problem. It's called the privatization 00:27:16.259 --> 00:27:19.559 of the public realm. There was a major study 00:27:19.559 --> 00:27:23.200 in 2009 looking at California HOAs that suggested 00:27:23.200 --> 00:27:26.670 exactly what you fear is true. What did it find? 00:27:26.950 --> 00:27:29.609 It found that residents in these private governments 00:27:29.609 --> 00:27:32.250 are significantly less likely to support public 00:27:32.250 --> 00:27:35.109 services and public spending. They have, in effect, 00:27:35.269 --> 00:27:38.049 seceded from the broader civic contract. It's, 00:27:38.049 --> 00:27:39.869 I got mine, I built a gate, good luck to the 00:27:39.869 --> 00:27:42.150 rest of you. It fragments the community. Instead 00:27:42.150 --> 00:27:44.269 of being citizens of a town, we become members 00:27:44.269 --> 00:27:47.130 of dozens of little private clubs. But to play 00:27:47.130 --> 00:27:49.329 devil's advocate for a moment, we have to look 00:27:49.329 --> 00:27:52.150 at the financial upside for the homeowner. Because 00:27:52.150 --> 00:27:54.920 there is one. Okay, what is it? Statistically, 00:27:55.079 --> 00:27:56.859 the model works at what it's supposed to do. 00:27:57.019 --> 00:27:59.980 A 2019 study in the Journal of Labor Economics 00:27:59.980 --> 00:28:03.440 showed that homes in HOAs sell for a premium 00:28:03.440 --> 00:28:07.079 on average, about 4 % more. That translated to 00:28:07.079 --> 00:28:10.380 roughly $13 ,500 on the average home at the time 00:28:10.380 --> 00:28:12.400 of the study. So the property value argument 00:28:12.400 --> 00:28:14.839 is real. The market does reward that uniformity. 00:28:14.940 --> 00:28:17.519 It is real. The market values that predictability. 00:28:17.660 --> 00:28:19.799 It values the guarantee that there won't be a 00:28:19.799 --> 00:28:23.000 rusty car on blocks on the lawn next door. But 00:28:23.000 --> 00:28:25.259 the study also noted a very important correlation, 00:28:25.579 --> 00:28:28.099 that premium is highest in areas with higher 00:28:28.099 --> 00:28:30.559 levels of racial segregation and stricter land 00:28:30.559 --> 00:28:32.960 use regulation. So you're paying a premium for 00:28:32.960 --> 00:28:34.960 exclusion. You're paying for the gate, whether 00:28:34.960 --> 00:28:36.880 it's physical or economic. That's what the data 00:28:36.880 --> 00:28:39.539 suggests. Yes. But even if the value stays high 00:28:39.539 --> 00:28:42.400 on paper. There is a huge amount of financial 00:28:42.400 --> 00:28:45.720 risk inside the HOA. We talked about foreclosure, 00:28:45.819 --> 00:28:47.920 but I want to talk about mismanagement because 00:28:47.920 --> 00:28:50.140 these boards, as we said, are volunteers handling 00:28:50.140 --> 00:28:52.660 millions and millions of dollars. Oh, the financial 00:28:52.660 --> 00:28:55.740 risk is massive and it's often invisible until 00:28:55.740 --> 00:28:58.559 it's too late. Everyone focuses on the monthly 00:28:58.559 --> 00:29:02.769 dues. Can I afford $200 a month? But they forget 00:29:02.769 --> 00:29:05.809 to ask about the special assessment. The dreaded 00:29:05.809 --> 00:29:08.150 special assessment. Imagine you live in a high 00:29:08.150 --> 00:29:11.329 -rise condo building. The roof is 30 years old. 00:29:11.390 --> 00:29:13.990 It starts leaking. The engineers come out and 00:29:13.990 --> 00:29:16.490 say it needs a full replacement. The cost is 00:29:16.490 --> 00:29:20.950 $1 million. Okay, a big number. A well -run HOA 00:29:20.950 --> 00:29:23.950 has something called a reserve fund. They should 00:29:23.950 --> 00:29:26.130 have been doing a reserve study every few years 00:29:26.130 --> 00:29:28.089 to predict this. They should have been saving 00:29:28.089 --> 00:29:29.990 a little bit of money every single month for 00:29:29.990 --> 00:29:33.069 30 years so that when the roof inevitably fails, 00:29:33.269 --> 00:29:35.390 the million dollars is sitting there in the bank 00:29:35.390 --> 00:29:38.029 ready to go. That makes sense. Like a savings 00:29:38.029 --> 00:29:40.029 account for the building. It is. But remember, 00:29:40.210 --> 00:29:41.849 board members are elected by their neighbors. 00:29:42.069 --> 00:29:44.089 Nobody gets elected by running on a platform 00:29:44.089 --> 00:29:46.349 of I'm going to raise your dues to save for a 00:29:46.349 --> 00:29:48.750 roof that we'll need in 2040. No, they get elected 00:29:48.750 --> 00:29:51.589 by saying I'll keep dues low. Exactly. So for 00:29:51.589 --> 00:29:53.910 20 years, they kick the can down the road, they 00:29:53.910 --> 00:29:56.109 underfund the reserves, and then the roof fails. 00:29:56.470 --> 00:29:59.549 The bank account is empty. The board has no choice 00:29:59.549 --> 00:30:01.650 but to levy a special assessment. They send a 00:30:01.650 --> 00:30:04.230 letter to every homeowner saying, we need $1 00:30:04.230 --> 00:30:07.150 million. There are 100 units in this building. 00:30:07.329 --> 00:30:10.309 Your share is $10 ,000. It's due in 30 days. 00:30:10.609 --> 00:30:13.710 Yeah. Can they do that? Just demand 10 grand 00:30:13.710 --> 00:30:16.519 with a month's notice. If it is necessary for 00:30:16.519 --> 00:30:18.619 the health and safety and maintenance of the 00:30:18.619 --> 00:30:21.480 property, yes. In California, for example, there 00:30:21.480 --> 00:30:23.400 is a rule that normally requires a membership 00:30:23.400 --> 00:30:25.579 vote for very large assessments, but there's 00:30:25.579 --> 00:30:28.589 a huge loophole. If it is an emergency related 00:30:28.589 --> 00:30:31.049 to safety and a failing roof or a broken sewer 00:30:31.049 --> 00:30:33.390 line is definitely an emergency, the board can 00:30:33.390 --> 00:30:35.190 often bypass the vote and just send the bill. 00:30:35.349 --> 00:30:37.390 And if you're a retiree on a fixed income and 00:30:37.390 --> 00:30:39.750 you don't have $10 ,000 sitting in your savings 00:30:39.750 --> 00:30:42.109 account. Then you are delinquent. Then comes 00:30:42.109 --> 00:30:45.009 the lien. Then comes the foreclosure. We saw 00:30:45.009 --> 00:30:47.269 this happen on a massive scale after the tragic 00:30:47.269 --> 00:30:49.869 Surfside condo collapse in Florida. Suddenly, 00:30:49.869 --> 00:30:52.250 every condo board in the country got terrified 00:30:52.250 --> 00:30:54.829 and started actually inspecting their buildings. 00:30:54.950 --> 00:30:57.180 And they found decades. of deferred maintenance. 00:30:57.519 --> 00:31:00.160 They started demanding huge assessments to fix 00:31:00.160 --> 00:31:02.440 structural issues they had ignored for years. 00:31:02.740 --> 00:31:05.160 People on fixed incomes were suddenly hit with 00:31:05.160 --> 00:31:09.200 bills for $50 ,000, $100 ,000 or more. It forces 00:31:09.200 --> 00:31:11.720 people out of their homes. It absolutely does 00:31:11.720 --> 00:31:13.880 and that doesn't even touch the issue of outright 00:31:13.880 --> 00:31:17.099 fraud. You have volunteer treasurers with little 00:31:17.099 --> 00:31:20.279 oversight managing these massive funds. The temptation 00:31:20.279 --> 00:31:23.160 is real. I assume they get audited, right? Like 00:31:23.160 --> 00:31:25.579 any business. They should. But most homeowners 00:31:25.579 --> 00:31:28.000 don't have the financial literacy to understand 00:31:28.000 --> 00:31:30.380 what they are looking at. When an auditor looks 00:31:30.380 --> 00:31:32.799 at the books, they issue an opinion. And the 00:31:32.799 --> 00:31:35.660 terminology is completely counterintuitive. You 00:31:35.660 --> 00:31:38.619 want to see an unqualified opinion. Unqualified 00:31:38.619 --> 00:31:41.640 sounds bad. Like you are unqualified to do this 00:31:41.640 --> 00:31:43.900 job. It is the exact opposite. In accounting 00:31:43.900 --> 00:31:46.480 speak, unqualified means without qualification 00:31:46.480 --> 00:31:49.079 or reservation. It means the books are clean. 00:31:49.220 --> 00:31:51.380 We have no complaints. That is the gold star. 00:31:51.539 --> 00:31:53.920 Okay. So unqualified is good. Got it. What you 00:31:53.920 --> 00:31:55.680 need to watch out for is a qualified opinion. 00:31:55.900 --> 00:31:57.660 That sounds reassuring, like, hey, this is a 00:31:57.660 --> 00:32:00.240 qualified professional. But in auditing, it means 00:32:00.240 --> 00:32:02.759 everything looks OK except for this one messy 00:32:02.759 --> 00:32:05.640 area we couldn't verify. It's a huge red flag 00:32:05.640 --> 00:32:07.819 and an adverse opinion is the worst. It means 00:32:07.819 --> 00:32:11.299 these books are a disaster. I would bet 99 percent 00:32:11.299 --> 00:32:13.779 of homeowners have never looked at their HOA's 00:32:13.779 --> 00:32:15.900 annual audit opinion. Most don't even know it 00:32:15.900 --> 00:32:18.680 exists or that they have a right to see it. The 00:32:18.680 --> 00:32:21.859 AARP, the seniors advocacy group, actually flagged 00:32:21.859 --> 00:32:24.559 this years ago. In 2006, they proposed a homeowner's 00:32:24.559 --> 00:32:26.700 bill of rights because they saw so many seniors 00:32:26.700 --> 00:32:28.880 losing their life savings in their homes due 00:32:28.880 --> 00:32:31.019 to rogue boards and financial mismanagement. 00:32:31.279 --> 00:32:33.759 It is a consumer protection black hole. We've 00:32:33.759 --> 00:32:36.000 covered a lot of the heavy, scary stuff, the 00:32:36.000 --> 00:32:38.420 racism, the foreclosure, the financial ruin. 00:32:38.539 --> 00:32:41.119 I want to pivot now to the almost philosophical 00:32:41.119 --> 00:32:44.480 side of this, this idea of the common good versus 00:32:44.480 --> 00:32:47.140 individual liberty. And there is a famous legal 00:32:47.140 --> 00:32:51.059 case that involves cats. Ah, yes. Narset v. Lakeside 00:32:51.059 --> 00:32:54.369 Village Condominium. Association, 1994. This 00:32:54.369 --> 00:32:56.910 is the bedrock case for modern HOA law, especially 00:32:56.910 --> 00:32:59.490 in California, but its influence is felt everywhere. 00:32:59.809 --> 00:33:03.049 Tell me about Mrs. Narstedt and her cats. So 00:33:03.049 --> 00:33:05.869 Natura Narstedt moved into a condo in Culver 00:33:05.869 --> 00:33:09.309 City, California. She had three cats. The HOA 00:33:09.309 --> 00:33:12.049 had a very clear blanket restriction in its CC 00:33:12.049 --> 00:33:16.049 &Rs. No pets, no dogs, no cats, nothing. Seems 00:33:16.049 --> 00:33:19.259 clear enough. But she decided to fight it. She 00:33:19.259 --> 00:33:21.640 fought it. Her argument was very logical. She 00:33:21.640 --> 00:33:24.339 said, my cats are indoor cats. They never go 00:33:24.339 --> 00:33:26.740 outside. They never touch the common areas. They're 00:33:26.740 --> 00:33:29.619 quiet. They don't smell. They don't bother a 00:33:29.619 --> 00:33:32.740 single soul in this entire development. She argued 00:33:32.740 --> 00:33:34.740 that the restriction, therefore, was unreasonable 00:33:34.740 --> 00:33:38.220 as it was applied to her specific situation because 00:33:38.220 --> 00:33:40.480 her cats were causing absolutely no harm to the 00:33:40.480 --> 00:33:42.720 common interest. That sounds incredibly logical. 00:33:42.779 --> 00:33:45.059 It's the classic, if I'm not hurting you or your 00:33:45.059 --> 00:33:47.549 property. Why can't I do what I want in the privacy 00:33:47.549 --> 00:33:50.329 of my own home? It does. But the California Supreme 00:33:50.329 --> 00:33:52.710 Court disagreed with her. They ruled against 00:33:52.710 --> 00:33:54.849 her, and their reasoning is what set the precedent. 00:33:55.190 --> 00:33:58.049 They said that the reasonableness of a rule isn't 00:33:58.049 --> 00:34:00.750 determined by the individual case. It's determined 00:34:00.750 --> 00:34:03.049 by whether the rule in general serves a legitimate 00:34:03.049 --> 00:34:05.170 purpose for the community. So they don't look 00:34:05.170 --> 00:34:07.130 at the facts on the ground, just the rule on 00:34:07.130 --> 00:34:10.260 the page. Correct. And more importantly, they 00:34:10.260 --> 00:34:13.079 wrote that when you buy into a CID, a common 00:34:13.079 --> 00:34:15.639 interest development, you are consciously agreeing 00:34:15.639 --> 00:34:18.199 to sacrifice a certain amount of individual freedom 00:34:18.199 --> 00:34:20.519 in exchange for the predictability and stability 00:34:20.519 --> 00:34:23.940 of the collective contract. So they prioritized 00:34:23.940 --> 00:34:26.639 the sanctity of the written contract over... 00:34:26.880 --> 00:34:29.659 The actual reality of her situation. Precisely. 00:34:29.659 --> 00:34:31.760 They basically said, if we let you keep your 00:34:31.760 --> 00:34:34.400 quiet cats, then we open the door to having to 00:34:34.400 --> 00:34:37.099 investigate every pet to see if it's quiet. That 00:34:37.099 --> 00:34:40.860 is chaos. A blanket rule, even if it seems harsh 00:34:40.860 --> 00:34:43.219 in one case, is enforceable because it provides 00:34:43.219 --> 00:34:46.199 certainty for everyone. And that ruling is why 00:34:46.199 --> 00:34:49.099 we have the endless laundry list of seemingly 00:34:49.099 --> 00:34:52.360 absurd restrictions today. Yes. That is the legal 00:34:52.360 --> 00:34:54.460 principle that allows an HOA to tell you what 00:34:54.460 --> 00:34:57.159 color your front door must be. Or that your curtains 00:34:57.159 --> 00:34:59.239 have to be white on the side that faces the street. 00:34:59.420 --> 00:35:01.579 Or that you can't park a work truck in your own 00:35:01.579 --> 00:35:03.820 driveway. Oh, the work truck thing drives me 00:35:03.820 --> 00:35:06.719 crazy. I had a buddy, a plumber. He had a nice, 00:35:06.719 --> 00:35:09.000 clean, white van with his company logo on the 00:35:09.000 --> 00:35:11.530 side. The HOA said he couldn't park it in his 00:35:11.530 --> 00:35:13.349 own driveway overnight because it was a commercial 00:35:13.349 --> 00:35:15.829 vehicle. It's an incredibly common rule, and 00:35:15.829 --> 00:35:18.670 it's a class issue, honestly. It implies that 00:35:18.670 --> 00:35:21.429 the site of a working class vehicle is unsightly 00:35:21.429 --> 00:35:24.289 and lowers property values. He had to park his 00:35:24.289 --> 00:35:27.309 work truck, which contained all his tools, three 00:35:27.309 --> 00:35:29.630 blocks away at a shopping center, and walk home 00:35:29.630 --> 00:35:32.449 every single night. It's absurd. But under the 00:35:32.449 --> 00:35:35.429 Narset principle, it is perfectly legal. The 00:35:35.429 --> 00:35:37.929 community decided in their contract that they 00:35:37.929 --> 00:35:40.769 didn't want to look at logos. He signed the deed 00:35:40.769 --> 00:35:43.750 and so he agreed to it. It creates a de facto 00:35:43.750 --> 00:35:46.170 municipal government without any of the constitutional 00:35:46.170 --> 00:35:48.989 restraints. So is there any way out of this? 00:35:49.050 --> 00:35:51.349 Are there any alternative models being discussed? 00:35:52.039 --> 00:35:54.199 Or is this just the future of housing in America 00:35:54.199 --> 00:35:56.179 forever? Well, there are people trying to rethink 00:35:56.179 --> 00:35:58.920 it. It's not mainstream yet, but there is a concept 00:35:58.920 --> 00:36:02.239 called MTIP, multiple tenant income property. 00:36:02.360 --> 00:36:04.320 That sounds like an even more boring acronym 00:36:04.320 --> 00:36:07.019 than the last one we talked about. It does. But 00:36:07.019 --> 00:36:09.179 the concept behind it is interesting. It's essentially 00:36:09.179 --> 00:36:13.219 a great landlord model. Instead of breaking up 00:36:13.219 --> 00:36:16.099 all the common areas, the roads, the parks, the 00:36:16.099 --> 00:36:18.860 pool, and giving them to a nonprofit association 00:36:18.860 --> 00:36:22.099 run by bickering neighbors. Right. The common 00:36:22.099 --> 00:36:24.679 infrastructure is owned and managed by a single 00:36:24.679 --> 00:36:27.820 professional company or a landlord who collects 00:36:27.820 --> 00:36:30.559 ground rent from everyone. So it's more like 00:36:30.559 --> 00:36:33.659 a high end apartment complex model or even a 00:36:33.659 --> 00:36:35.949 mobile home park model. But for single family 00:36:35.949 --> 00:36:39.110 homes. Exactly. The argument is this. An HOA 00:36:39.110 --> 00:36:41.829 board is made up of transient volunteer neighbors. 00:36:42.210 --> 00:36:44.530 They might be petty. They might be incompetent. 00:36:44.530 --> 00:36:46.610 They might have a personal vendetta against you 00:36:46.610 --> 00:36:48.329 and they might move away in two years. They have 00:36:48.329 --> 00:36:51.409 no real long term incentive to be good at customer 00:36:51.409 --> 00:36:53.369 service or asset management. Right. Their goal 00:36:53.369 --> 00:36:56.789 is to wield power or keep costs low for the short 00:36:56.789 --> 00:36:58.949 time they are there. But a professional landlord. 00:36:59.579 --> 00:37:01.579 a professional owner who wants to collect rent 00:37:01.579 --> 00:37:05.099 for the next 50 years. They have a powerful financial 00:37:05.099 --> 00:37:07.880 incentive to keep the residents happy, to maintain 00:37:07.880 --> 00:37:10.300 the property well, to respond to complaints. 00:37:10.820 --> 00:37:13.960 They treat the residents as customers they want 00:37:13.960 --> 00:37:16.900 to retain rather than subjects they need to control. 00:37:17.099 --> 00:37:20.260 So you trade your vote, which, as we've established, 00:37:20.440 --> 00:37:22.860 isn't worth much anyway in many cases for better, 00:37:23.000 --> 00:37:25.159 more professional customer service. That's the 00:37:25.159 --> 00:37:27.909 theory. But it hasn't really caught on for single 00:37:27.909 --> 00:37:30.550 -family homes yet. The ownership myth is just 00:37:30.550 --> 00:37:33.150 too strong in the American psyche. People want 00:37:33.150 --> 00:37:35.739 to believe they own the dirt. Even if that ownership 00:37:35.739 --> 00:37:38.860 is heavily, heavily restricted. It is a powerful 00:37:38.860 --> 00:37:41.019 myth. Yeah. So let's try to land this plane. 00:37:41.179 --> 00:37:43.960 We have moved from 19th century racial covenants. 00:37:44.019 --> 00:37:47.219 To post -war FHA policies that encouraged suburban 00:37:47.219 --> 00:37:49.840 sprawl. To, of all things, environmental laws 00:37:49.840 --> 00:37:52.099 that forced us to build retention ponds. Which 00:37:52.099 --> 00:37:54.260 created the corporate structures that now govern, 00:37:54.420 --> 00:37:57.199 what, 25 million homes and counting? It is a 00:37:57.199 --> 00:38:00.610 massive self -perpetuating machine. And it does 00:38:00.610 --> 00:38:02.730 create value. We have to admit that. The lawns 00:38:02.730 --> 00:38:05.250 look nice. The pools are generally clean. There's 00:38:05.250 --> 00:38:08.070 a predictable order to it. But the cost is a 00:38:08.070 --> 00:38:10.789 fundamental surrender of rights. It is a shift 00:38:10.789 --> 00:38:13.329 from public government with its checks and balances 00:38:13.329 --> 00:38:16.409 and constitutional protections to private government, 00:38:16.530 --> 00:38:21.159 which is often authoritarian, arbitrary. It makes 00:38:21.159 --> 00:38:23.039 you look at those little gatehouses at the front 00:38:23.039 --> 00:38:24.960 of subdivisions differently. It's not just a 00:38:24.960 --> 00:38:27.260 security feature. It's a border crossing into 00:38:27.260 --> 00:38:30.000 a different legal territory. It is. And I think 00:38:30.000 --> 00:38:32.400 the big provocative question that listeners need 00:38:32.400 --> 00:38:35.360 to ask themselves is this. We are seeing a trend 00:38:35.360 --> 00:38:38.000 where municipalities are offloading more and 00:38:38.000 --> 00:38:40.800 more of their traditional responsibilities. Roads, 00:38:40.800 --> 00:38:43.199 parks, sewers, sometimes even trash collection. 00:38:43.619 --> 00:38:46.539 If this trend continues, are we witnessing the 00:38:46.539 --> 00:38:48.639 end of the public neighborhood as a concept? 00:38:54.000 --> 00:38:57.280 And personally, for you, the listener, ask yourself 00:38:57.280 --> 00:39:00.940 this. If your neighbor, just the guy next door 00:39:00.940 --> 00:39:02.719 who got elected to the board because nobody else 00:39:02.719 --> 00:39:05.320 wanted the job, has the legal power to take your 00:39:05.320 --> 00:39:07.719 home and sell it for $3 ,500 without a judge 00:39:07.719 --> 00:39:10.880 ever being involved, is it really your home? 00:39:11.000 --> 00:39:13.079 Or are you just a shareholder in a corporation 00:39:13.079 --> 00:39:15.119 that grants you the privilege of sleeping there? 00:39:15.280 --> 00:39:18.380 Wow. I am definitely going to go home and check 00:39:18.380 --> 00:39:20.860 my mailbox for violation notices. This has been 00:39:20.860 --> 00:39:22.639 a true deep dive. Thanks for listening, everyone.