Like many newer developments, Antiquity Cornelius is governed by a homeowners association, as well as local laws. (David Boraks/DavidsonNews.net)

By CHIP DAWSON
DavidsonNews.net

Jim Lane once faced foreclosure on his Huntersville town home, after a dispute with his homeowners association over a flower-bed full of pansies. Now he is on a mission to change North Carolina law and limit the powers of homeowners associations (HOAs).

Mr. Lane manages a website at NCHOAlaws.org for a group called the North Carolina Coalition for Homeowner Rights. The coalition is a loose-knit group representing thousands of homeowners in HOA communities across the state. Their objective: To change what they see as the excess powers of HOA boards and management companies. The website is filled with graphic stories of HOA power run amok.

Jim Lane

The Huntersville resident works in real estate and consults on property management operations. He also runs the Center for Natural Leadership in Huntersville—a consulting group that works with organizations in transition.

He offers his story as an example of the battle between home owners and the organizations that rule their neighborhoods.

THE CASE OF THE ILLEGAL PANSIES

Mr. Lane’s mortgage payments were current. His taxes were paid. But he says he ultimately became a casualty of the community board and its enforcement practices.

His crime: Jim planted pansies in a neglected common-area flower bed as part of his personal beautification effort. The HOA slapped him with a $100 fine. He thought it was a joke, but the board was serious. The fine and legal fees totaled $9,000. He paid to stop legal proceedings; but the experience lit a fire under him.

For Mr. Lane, the situation in his 430-home community keeps getting worse. He recently sued the HOA and some directors. The legal filing is filled with charges of mismanagement of funds, excessive assessments, neglect of common areas, intimidation of residents, manipulation of elections and a flood of violation notices (1,800 in the past year by his count).

He knew the rules, so why did Mr. Lane plant flowers in the common area? “Rules are rules” said one person we talked with about this article. The question raises the age-old issue of what you do when the rules don’t make sense. A look at the history of HOAs can help.

In the 1960s, reports from the Urban Land Institute, FHA guidelines, urban renewal, interstate highways, mortgage insurance rules, suburban growth and environmental sensitivity combined to foster the idea that new homes could be grouped in neighborhoods that had clustered housing, open areas, parks and a set of architectural standards that ensured consistency.

Storm water retention—part of new environmental rules—created ponds and small lakes within the community that needed to be managed. Local governments liked the idea of growth and the taxes it brought, but didn’t want the expense of caring for all the new amenities. Homeowners associations had seen limited use before this, but now government saw them as a way to let builders build everything the community needed and pass on the cost to the home buyers.

In North Carolina, and many other states, legislatures passed HOA regulations that gave developers extraordinary powers to create model neighborhoods and pass along to buyers the costs not only of the homes, but all the other amenities. Local governments found it a wonderful solution—they got the new taxes, but not the infrastructure expense.

Developers were able to add enticing features to the neighborhoods such as pools and parks and community buildings that buyers saw as attractive additions. Reality didn’t hit for most buyers until after their purchases when they found that they were paying local property taxes that did not go to neighborhood maintenance and HOA fees that had to cover all the amenities and essentials such as streets.

The North Carolina Planned Community Act, Chapter 47F of the General Statutes, provides the enabling legislation for the creation of HOAs. It is not optional. If there are more than 20 lots in a planned community, there must be an HOA. The act specifies the powers of an owners’ association. They generally boil down to two: (1) manage the common areas, and (2) enforce the covenants.

COVENANTS AND RESTRICTIONS

Every HOA must have a set of covenants, conditions and restrictions, or CC&Rs. They are created by the developer before work is begun on the project and detail the rules of daily life in the community – such as landscaping, paint colors, yard maintenance, outbuildings, signs and flags, parking and traffic. A rule against planting in the common area is what first got Jim Lane into trouble.

Good CC&Rs, well written and reasonably applied, can ensure an attractive community and a positive culture or community spirit, and often maintain or increase property values. But things easily can go wrong. The rules and covenants are written by the developer or his lawyers. There is no assurance that 400 families buying into a community will agree with what one developer or one attorney thought was a good idea.

The CC&Rs get no review before implementation. Cornelius Planning Director Karen Floyd says that the town neither requires nor reviews covenants. Once written and filed with the county registrar of deeds, they become part of the legal closing package and run with title to the land from then on.

The rules can be changed by the developer, or the HOA Board, but there is no requirement that the changes make it into the residents’ package of legal documents. In total, CC&Rs, architectural guidelines and by-laws may run well in excess of 100 pages of legal wording and the first time the typical buyer sees them is at closing. That is hardly the time to say “wait a minute, I don’t agree.”

[Beginning Jan. 1, 2012, the N.C. Real Estate Commission requires that prospective buyers receive a new four-page disclosure form with information about property owners associations affecting properties for sale. The new rule applies to single-family detached homes as well as to townhomes and condos. Download a copy of the form (PDF).]

Many people believe that flying the American flag is a patriotic right, but CC&Rs can even limit that. Because the HOA is a non-governmental entity, there is no infringement of free speech if “for sale” signs are banned. CC&Rs can require that you park in your garage, but if you want to make your garage into a storage locker or a “man cave,” you’ll be in violation.

Covenants in many neighborhoods mandate that grass be kept watered and green; but a local drought may bring governmental watering restrictions—and an HOA violation notice. If you prefer a lush garden in front rather than grass or you want a purple house, CC&Rs generally say “no.” As a general rule, CC&Rs are more restrictive than municipal codes.

This is America. We like our freedom and individualism. Listen to the pols and hear constant arguments about how much government we want—or need. Do we really want five neighbors on an HOA board telling us we can’t paint our house any color we want?

POWER TO THE DEVELOPER

HOAs typically pass through two phases. The initial phase is during development. The developer—known as the “declarant” in the law and the covenants—has exclusive control during this phase. The declarant appoints the HOA board, sets and modifies the rules, determines the HOA fees, hires a management company (if one is needed), determines when common areas will be transferred to the HOA and has the authority to determine or overrule any decision recommended by the HOA board.

The declarant’s authority continues until most of the community is built. In some cases, that can be until the declarant has sold every parcel of land or transferred it to the HOA. For most people buying into an HOA, the optimum situation would be to find a developer who is a benevolent dictator—a reasonable person who wants to do the right thing and build an attractive, workable community using his rules.

If the developer is short on money, lacking in taste, tired of the project or has some other characteristic that allows the project to muddle along, the only recourse for property owners is to go to the courts. Local government usually cannot help—the state has given all the power to the developer.

During this initial stage CC&Rs get little attention. Developers want to move the project along. They want the buzz on the street to be positive—”great place to live, nice people”—everything looks rosy. Penalizing a resident for painting his front door, installing a swing set, parking in front of her home or flying a flag won’t sell houses. Some people want the rules enforced, others don’t care, and the developer-run HOA board takes the path of least resistance—do little.

The second phase brings quicksand. There are an estimated 18,000 HOA-led communities in North Carolina. Nation-wide, the Community Associations Institute (www.caionline.org), an industry trade group, puts the number of HOA governed homes at 24.8 million with 68 million residents.

There are no estimates on the number of HOAs that work—or don’t work—but horror stories cross every state line. One of the worst: A Texas National Guard officer deployed to Iraq got a call from his wife, in tears, saying that they had lost their home. She had overlooked two HOA dues payments and their HOA had foreclosed on the $300,000 home. By the time he got back, the house had been sold for $3,200 and the buyer had flipped the home for $135,000. The home was fully paid for with no mortgage and the officer was protected by the Servicemembers Civil Relief Act, but the HOA marched right ahead. Recent reports say that he has recovered the home, but only after much legal trauma and emotional distress.

RESIDENTS TAKE OVER

Once the developer is out of the picture, residents do run the HOA—often with the help of a professional management company. The HOA board has additional protections in North Carolina from incorporation as a non-profit under Chapter 55A.

Section 47F, combined with Section 55A, allows board members to dictate all the rules, including those for succession and election to the board. A board can perpetuate itself year after year and use the CC&Rs and weight of law to block any opposition.

The absolute authority to fine up to $100 per CC&R violation (even planting one flower in a common area), to compound that fine on a daily basis and to ultimately foreclose on a property without government or judicial review is a power even government uses sparingly and only with a variety of checks and balances.

The New Jersey Department of Community Affairs (DCA), in addressing HOA board misconduct in that state, reported:

“It is obvious from complaints that homeowners did not realize the extent association rules could govern their lives. In a disturbing number of instances, those owners with board positions use their influence to punish other owners with whom they disagree. The complete absence of even minimally required standards, training or even orientation for those sitting on boards and the lack of independent oversight is readily apparent in the way boards exercise control.”

The DCA continued: “Perhaps most alarming is the revelation that boards, or board presidents, desirous of acting contrary to law, their governing documents or to fundamental democratic principles, are unstoppable without extreme owner effort and often costly litigation.”

Mr. Lane says the laws are so stacked in favor of HOA boards that trying to change how things are done is extremely difficult—and costly. It costs a minimum of $5,000 to start a battle with an HOA Board, he warns.

The battle has become the problem, he admits. So many residents are in some stage of frustration with his HOA board that his community has developed a reputation. Mr. Lane, the real estate professional, says that sales agents have nearly stopped bringing potential buyers into the neighborhood because of the problems. In fact, the Jan. 1 change to the North Carolina Residential Property and Owners’ Association Disclosure Statement now contains a full page of questions about the HOA and how it is functioning. Accurate answers from sellers are mandated and accurate answers have the potential to drive any buyer away when the HOA problem is a serious one.

UNEVEN ENFORCEMENT

Another problem typical of the homeowner control phase of an HOA is selective enforcement. A board may overlook 10 violations and then decide to make an example of number 11. Or the sweet, deferential mother of three may get a pass on play equipment in the yard, but someone else down the block who demands that having play equipment is his right will get hit with a fine.

With no outside accountability, a board or individual members with a vendetta or an exaggerated sense of power or importance or simply ignorance can use their power for bad simply because they have it.

There are examples of HOAs that work well. I’ll tell you about one later. But even a few HOAs that make life miserable for residents are enough to question the process and attempt to drive change.

Mr. Lane does have some solutions—and so do others. Here’s what he and his organization are suggesting as changes to the North Carolina laws:

• When the development phase ends, make the CCRs null and void and create a new set of rules with broad community representation.
• Modify state law to eliminate the need for an HOA to be a non-profit entity and drop the requirement for incorporation.
• Provide for a reasonable process for conflict resolution other than a group of neighbors, such as a mediator or small claims court

LEGISLATURE TAKES A LOOK

The North Carolina House Select Committee on HOAs held a public hearing in Raleigh last week as it considers whether changes are needed in state law. Mr. Lane believes the legislature is finally getting the message that HOA regulations must be modified.

The American Association of Retired Persons (AARP) has zeroed in on HOAs nationwide. By AARP’s estimate, at least half of all residents in HOA communities are over age 50. AARP has published a homeowners bill of rights, which includes the right to security against foreclosure without judicial review, alternative dispute resolution without litigation, the right to full disclosure of rules and changes, the right of oversight and the right to a homeowner ombudsperson. The full list can be found at AARP.org (PDF).

The St. Alban's neighborhood in Davidson won an award in 2007 as one of the top HOAs in North Carolina (David Boraks/DavidsonNews.net)

ST. ALBAN’S NEIGHBORHOOD: A POSITIVE EXAMPLE

A well designed and responsibly run HOA is in our backyard. The “New Neighborhood In Old Davidson,” also known as St. Alban’s Square, is located a little more than a mile east of downtown Davidson on the north side of Concord Road. In 2007 it was named the top HOA in North Carolina among medium-sized, mixed-use neighborhoods. Property values dropped in the recession, but it remains one of the most desirable neighborhoods in the area.

Doug Boone

A walk around the community tells the story. Parks are everywhere, trash cans are hidden, few cars are on the streets and residents you meet express great pride of place. Started in 1998 by Davidson developer Doug Boone, it quickly evolved into a tight-knit neighborhood of bridge clubs, book groups and a dinner group that draws dozens of people to area restaurants each month.

The 82-acre site was built using the principles of the new urbanism movement—small lots, pedestrian-friendly, mixed residential and commercial uses, open space and a gathering place (in this case, St. Albans Episcopal church).

In many HOA run neighborhoods, the common areas are a source of concern and conflict. In Old Davidson all the parks, 13 acres of them, are town parks managed by the Town of Davidson. They are accessible to everyone. They were built by the developer but turned over to the Town to complete the Davidson master plan for parks in that area.

Residents give most of the credit to Mr. Boone—a dedicated visionary—citing his close attention to detail and steady effort to make sure everything worked. Boone says the detail “about did me in.”

“Architecture starts the process,” he says. “If it’s attractive, values stay high.” To help get the design right, he called a community design charrette and invited residents and local elected officials. That turned initial opposition around and provided valuable ideas. One, for example, was the “New Community in Old Davidson” name. A long-time Davidson resident told him “don’t name it … that separates neighborhoods.” It’s become the St. Alban’s Square neighborhood, but only after it was integrated into the older section of the town.

With a new design approach, Mr. Boone realized that the HOA process needed to be forward thinking, as well. He wanted documents that talked about governance and good leadership that were not dictatorial. To achieve this, he sought out Atlanta attorney Wayne Hyatt to write the CC&Rs in lay language with the focus on small and neighborhood and stewardship. The HOA board is known as the Council of Stewards. Hyatt was excited about the project and created 68 pages that look nothing like the typical CC&Rs. They are interesting and helpful.

Mr. Boone had early control of the HOA with a weighted developer vote, but he brought new residents onto the board as development progressed. By the time the project ended he had seven experienced residents in charge. “I didn’t need to use the veto part,” he said, it was a smooth process from the start. “There is a sophistication in the documents that anticipated the varied roles and respected them,” Mr. Boone says.

Long-time resident and board member Tom Fischer says “a good amount of contact between residents” helps as does a good newsletter that keeps everyone informed. The street layout promotes a walking neighborhood and that facilitates communication—and friendship—he adds.

Mr. Fischer says the Council of Stewards has worked to bring in new members with each election to give more people an opportunity to experience the stewardship process. Multiple committees work to address specific issues and that allows the Council of Stewards to stay focused on the leadership role. If something comes up that gets the neighborhood talking, the entire neighborhood works together to find a solution.

Great design, empowering documentation, close-knit community and attention to detail. Those are the basics from one of the best HOAs. It’s not only doable, but it’s highly satisfying. For more on the New Neighborhood, see the Oct. 12, 2007, post in DavidsonNews.net.

It is easy to become disenchanted, damming all community management law. But first study new urbanism communities (www.newurbanism.org) such as the New Neighborhood. Well known models are Seaside, Fla.; Celebration, Fla.; Radburn, N.J., San Antonio, Texas, and Santa Fe, N.M.

These communities have become Meccas for architects and urban planners who trek from around the world to study why they work so well. In spite of financial trends elsewhere, these projects nearly always out pace investment return. Real estate values continue to skyrocket even in times of recession. Magazines tout them; they garner every award for design and people clamor to visit and often yearn to live in such places.

The rules in these communities are as stringent as any, but they are based on concepts harvested from historic success—respect for the environment, cooperation of residents to achieve an agreed upon greater good, and dedication to the highest level of design (think “the Steve Jobs of Urban Planning”).

Government at every level must be involved and equally committed to living and design standards that transcend mere tax collection. The roots of success are in knowledge.

Chip Dawson lives in the Antiquity neighborhood of Cornelius, and is a regular contributor to CorneliusNews.net and DavidsonNews.net.

RELATED LINKS

Jan. 31, 2012, WFAE.org, “Charlotte Talks” special program on HOAs and North Carolina law

July 8, 2011, WCNC.com, “HOAs fine members over lawns, landscaping.”

NCHOAlaws.org – Jim Lane’s website urging reform of HOA laws in N.C.

North Carolina Planned Community Act, Chapter 47F of the General Statutes – the law that allows creation of HOAs.

N.C. Real Estate Commission – includes information about the new disclosure statements that are require to inform potential buyers that a property is part of an HOA.

June 29, 2010, NPR.org, “No So Neighborly Associations Foreclosing on Homes.”

Community Associations Institute (www.caionline.org)