For the past six months we have been encouraging our investors to stay away from purchasing single family income producing residential properties in the following cities, Buckeye, Maricopa and Queen Creek. Even though, there are still some pockets in these towns that we might consider at the right price.
Here are the areas we have been recommending:
North of I-10: Surprise, Avondale, Goodyear, Litchfiled Park, North of Glendale, Peoria north of I-10, West Wing Mountain, Deer Valley area.
South of I-10: Avondale within 1/1/2 miles south of I-10 and Estrella Mountain Ranch
EAST VALLEY: On the edges of Gilbert, Central Chandler, Ahwatukee and some new homes pockets in Mesa, Scottsdale South East of 101 freeway.
NORTH VALLEY: Anthem and North Phoenix
ACTIVE ADULT COMMUNITIES: Sun City Grand
Home Prices in Scottsdale North of 101 have not hit the bottom yet, wait till November and December.
Cities of Buckeye and of Queen Creek are on the verge of Bankruptcy. City of Maricopa seems to be the best of the three.
HOA groups in Arizona cutting services, raising fees
Homeowners associations facing own crisis amid foreclosures
by J. Craig Anderson - Aug. 29, 2010 12:00 AM
The Arizona Republic
Thousands of vacant properties and millions of dollars in unpaid dues are taking their toll on Arizona homeowners associations, and homeowners are paying the price.
Over the past 18 months, an estimated 10 percent of the state's million-plus HOA members have abandoned their homes or been forced out by foreclosure, based on data from Arizona's largest community-management firms. Without payments from those members, many HOAs have been forced to raise dues, crack down on late payers and cut back on services.
As a result, the remaining homeowners have become secondhand sufferers in the foreclosure crisis, experts said.
In the most troubled master-planned communities, generally those in recent high-growth areas such as Buckeye, Maricopa and the Hunt Highway corridor near Queen Creek, delinquencies have reached alarming proportions, placing some HOAs under serious threat of bankruptcy.
Should an HOA go bankrupt, prospective homebuyers would not be able to obtain title insurance on the community's homes, making them nearly impossible to buy or sell.
With no contingency plans and little help available from cash-strapped cities and towns, homeowners associations are likely to face money problems for years to come, market analysts said.
"Associations are not designed to have 38 percent delinquencies, or even 20 percent," said Amanda Shaw, president of HOA management firm Associated Asset Management of Phoenix. "They're designed to have a 2 percent to 5 percent delinquency. They are designed to be successful."
Arizona's estimated 9,000 HOA-managed communities range in membership size from a few dozen homeowners to thousands. Most require homeowners to follow detailed rules. But what they lack is a set of effective instructions telling HOA leaders how to manage when members don't pay.
Until about 15 years ago, HOAs were mainly for condominium projects and retirement communities. But beginning in the mid-1990s, homebuilders began applying the HOA model to nearly all new development on the metro area's fringes.
The HOA model proved useful to developers, he said, allowing them to offer more recreational amenities and maintain strict aesthetic control while they continued to build and sell new homes.
Under state law, each association has the ability to enforce its own rules, known as "covenants, codes and restrictions," which generally require homeowners to keep their property's exterior clean and uniformly decorated and their property free of excessive noise and vehicle traffic. The HOA covenants set regular monthly dues and grant HOAs the ability to raise money for extraordinary expenses through one-time fees known as special assessments.
The covenants also cover procedures for enforcing the rules, which usually begin with written warnings, followed by fines and, in the most extreme cases, home foreclosure. But foreclosure is useless against owners with no equity in their home; the lender receives all sale proceeds, leaving the HOA with nothing.
A recent study by online home-sales portal Zillow.com suggested that two-thirds of Arizona mortgage holders in the second quarter were "underwater," meaning the remaining balance of their loans exceeded the home's market value.
One thing HOAs still can do is pursue delinquent members via bill collectors and the court system, but Chandler resident and HOA member Liz Murray said it doesn't always go as planned.
"Our association went after one of our neighbors to collect $2,700," said Murray, a resident of the 2,100-home Southridge community.
"They won a judgment in court, but then she filed for bankruptcy," Murray said, leaving the HOA at a net loss because of legal expenses.
The more vacancies in a community, the more aggressive an HOA must become to collect money.
At Johnson Ranch, a 6,000-home community along Hunt Highway, southeast of Queen Creek, vacant properties have become so prevalent that it's costing the community $18,000 a week to keep up with the problem, said Debra Campbell, who manages Johnson Ranch Community Association.
So far this year, Johnson Ranch is on pace to see about 1,500 homes change hands because of foreclosure or short sale, up from 1,058 transactions in 2009. Campbell said the HOA has turned that "churn" into a source of revenue.
The association recently introduced a new fee that is assessed every time a home is sold. The $174 fee, known as a "working-capital fee," is charged to both buyer and seller, which means the association gets almost $350 for every turnover.
Campbell said the fee has kept Johnson Ranch's HOA financially viable.
Several Phoenix-area HOA communities have added similar transactional fees, much to the chagrin of real-estate agents.
A law that took effect July 29 may challenge the use of such fees, though industry experts expect a court will need to determine how it applies.
Aside from property-transfer fees, Campbell said, Johnson Ranch has worked to reduce its delinquencies by tracking down current and former members who owe the association money.
Experts said many Phoenix-area HOAs have adopted tactics similar to those used in Johnson Ranch, which include the use of professional bill collectors, process servers and attorneys to track down debtors.
When necessary, Campbell said, her association has been using the courts to garnishee current or former homeowners' wages.
Some residents of the community described the association's tactics as cold-hearted and extreme, given the economic hardship many households are facing because of layoffs and repayment of predatory loans.
"I have been living in Johnson Ranch for five years, always paid my dues and cannot believe the constant harassment from the association," Johnson Ranch resident Michael Masters said. "Do we really need this in this economic hard time? This is the time we need to stick together and look out for each other."
HOA attorney Penny Koepke said it isn't fair to compare HOAs' current collections strategies to those of the past.
"Before, there weren't really that many people who were getting foreclosed on, so there's nothing you can really compare it to," said Koepke, of the Scottsdale-based law firm Ekmark & Ekmark LLC.
Community managers have to hold HOAs together financially, she said, and steep revenue declines have left many managers with limited options.
"We've had some communities where the delinquency rate was 50 to 60 percent and they had to stop providing certain services," Koepke said. "We've had some that have closed the pools, emptied them, because they just couldn't afford them."
Although there are no recorded instances of Arizona HOAs declaring bankruptcy thus far, the home-vacancy problem is widespread enough to cause serious concern, said Steve DeLaveaga, vice president of sales and marketing at Fidelity National Title in Tempe.
"There are over 25,000 homes in our state that are just empty, vacant," DeLaveaga said.
If an HOA did go bankrupt, the most serious consequence would be the inability of prospective homebuyers to obtain title insurance, required for any home purchased with a mortgage loan, he said.
"Title insurers cannot insure a home in an HOA that is bankrupt," DeLaveaga said.
HOA residents, boards and community managers have few resources to fall back on other than themselves.
West Valley resident Dustin Jones, an attorney who has been working with HOAs and the city of Goodyear on projects to reduce neighborhood blight, is one of thousands of Valley residents who have participated in volunteer efforts to pull weeds and clean up trash and debris inside what Jones called "zombie subdivisions."
"There's like three or four homes in there, and the rest of it is just dead," said Jones, who lives in Litchfield Park.
Johnson Ranch's Campbell, having confronted the problem and developed solutions, is now one of a handful of community managers visiting other developments to teach what she has learned.
At a June meeting organized by Chandler officials, Campbell explained to a group of HOA board members and residents how the Johnson Ranch association's financial situation has improved even though its foreclosure problem has worsened.
Chandler officials at the meeting said they were trying to support HOA communities in various ways, such as by hosting neighborhood meetings featuring speakers like Campbell, in addition to offering limited city resources such as landscaping and cleanup tools.
But with budget deficits of their own to contend with, most cities can't offer what HOAs need most: money and manpower.
"With a $16 million budget shortfall, we're really not able to do all of the things that we'd like to do," said Jennifer Morrison, director of Chandler's neighborhood resource division.
The Arizona Association of Community Managers, the industry group representing management firms, also has committed time and resources since the problems began, including the coordination of a cleanup effort inside the Higley Park community in Gilbert that involved 500 volunteers, industry spokeswoman Laura Zilverberg said.
Campbell said that her firm has organized many "self-help" maintenance groups made up of residents and that management staff have gone beyond what's expected to keep the community safe, even trespassing if necessary to eliminate safety hazards in vacant backyards.
Shaw said associations will continue to do what it takes to help their communities survive until Arizona's economy and job market recover.
Some municipal officials also are trying to figure out how to prevent future HOA meltdowns.
Gail Bosgeiter, Goodyear city code compliance manager, said city leaders are looking into possible new regulations that would keep future HOAs more financially stable.
Linda Lang, CEO of the Arizona Association of Community Managers, said officials probably will have a few years to figure it out.
"Homebuilders are saying the development isn't going to come back until 2013 or 2014," she said.