Cookie Cutter Covenants: Regulation-Induced Homogeneity of Homeowners Associations

Abstract

Several authors have argued that homeowners associations (HOAs) constitute an ideal institution for implementing Buchanan and Tullock's Calculus of Consent. HOAs provide collective goods and mitigate collective action problems. Developers offer constitutions ready-made, economizing on the decision-making costs which render unanimity infeasible. Competition will constrain real-estate developers to offer exactly those constitutions which consumers themselves would have crafted. However, critics of HOAs have voiced a variety of criticisms. For example, they allege that HOAs often suffer from a high degree of conflict and consumer dissatisfaction. I argue that government regulation – especially FHA mortgage underwriting – has homogenized HOAs, reducing the scope for competition and product differentiation. Developers often adopt legal boilerplate, lifting their HOA contracts from government handbooks. This reduced competition undercuts the economic justification of HOAs. To some degree, the flaws and shortcomings of HOAs may owe themselves to regulatory-induced homogeneity.