By Deborah Goonan, Independent American Communities deborahgoonan@gmail.com
If you’re looking to buy a home or condo, you may find that most, if not all, homes in your price range are governed by some type of homeowners’ association. This post provides 10 tips to check out the HOA, helping a home buyer determine whether a home or condo in a particular HOA-governed community is a good fit or a risky bet.
1. Determine what property you will personally own, and what will you own in common with HOA members.
If you have never owned an HOA-governed home, your assumptions about what’s personal property and what’s community property may be wrong.
It’s very important to know the different levels of ownership and maintenance responsibilities. There are several different levels that may be present in any common interest community governed by the HOA.
- Property that you will own and maintain yourself, typical for detached single family home communities
- Property that you own, but that is maintained by the HOA. Common for townhouse associations that provide landscape and exterior maintenance services.
- Property that you will own in common with other condominium unit owners, and for which you pay monthly condo fees for maintenance and repairs.
- Property that is owned and maintained exclusively by the HOA. Generally, this includes private roads, stormwater infrastructure, common grounds and recreational amenities in planned communities
- In larger communities, you may have two or more HOAs governing your home. For example, a condo association plus a Master homeowners association.
Depending on the size of the community and its amenities, your rights, responsibilities, and out of pocket costs will vary considerably. If you’re looking for a more affordable HOA option, opt for a smaller community of detached homes or separately-owned townhomes. Look for one with relatively simple (but well-built) infrastructure, and minimal common property to maintain.
Fee simple vs. condominium: general guidelines
In general, in a planned community, you will own a single family detached home and the lot that surrounds it. The HOA owns, manages, and maintains the ”common areas,” which could include recreational amenities such as a swimming pool, a tot lot, a pocket park, or a walking trail.
In some larger subdivisions, the HOA also owns all of the roads, as well as any security gates or gatehouses. In private resort style communities, HOA amenities might include elaborate and impressive amenities, such as recreational lakes with boat launches, private airplane hangars in fly-in communities, or exclusive golf courses. You may have to pay additional separate membership fees to enjoy some of the perks (such as swimming, boating, or golf). Or, if it’s an all-inclusive community, you will be obligated to pay mandatory HOA fees to cover the cost of managing, insuring, and maintaining all of the common recreation amenities — even if you rarely or never enjoy using them.
In a condominium, you will typically own the space inside your unit, the surface finishes on the walls, floors, and ceilings, and any attached fixtures, cabinetry, or in-unit heating or cooling equipment. Condo owners also share maintenance costs for all the common elements and areas of each building (common walls, hallways, exterior walls and roof, foundations). This will include any shared utility lines, exterior surfaces (which may or may not include windows and doors), parking lots, and open space within the community.
High-rises and luxury buildings may have roof decks, swimming pools, elevators, elaborate entrance lobbies, and possibly even hotel-like services, such as a doorman or concierge. The taller the buildings, and the more amenities, the more you will pay in condo fees.
Keep in mind, that, even in simple, bare-bones communities, there may exist some less-obvious common property. For example, nearly all HOA-governed communities own at least one element of stormwater management infrastructure. Shared community infrastructure could include one or more wet retention ponds, dry drainage basins that temporarily hold water following wet weather events, or a system of swales, drainage ditches, or pipes meant to deter flooding of private properties and streets.
These are general guidelines, and they might not hold entirely true for the home you plan to buy. During your home inspection period, ask for clarification by carefully reviewing the HOA or condominium governing documents. It’s a wise move to hire a good real estate attorney to review the documents and represent your interests up to the close of sale.
A caution about townhomes and site condominiums
Sometimes things can get complicated. For example, a townhouse community could be set up as an HOA planned community, in which you own your individual lot. This is also known as ”fee simple” ownership. But the townhouses in the community could also be organized as a condominium association. In that case, everything except the interior of your unit is owned in common with other members, including what what be ‘your’ yard and driveway. You will have exclusive use of a front and back yard, but it’s still considered common property.
In some parts of the country, detached homes and attached townhomes can be also be classified as “site condominiums.” At first glance, these communities look like typical planned subdivision with fee simple homes. However, in this situation, you own the interior and exterior of the dwelling itself, but all outdoor spaces are owned in common, and usually — but not always — maintained by the condo association.
One important consideration: your mortgage financing options will be significantly more limited, and more expensive, for condominium ownership vs. fee simple ownership in an HOA-governed community.
Also, in comparison to an HOA that enforces restrictions on single family homes, a condo association will generally impose more restrictions on your home’s exterior appearance, as well as how you can use those outdoor living spaces. Don’t assume that you can have a fire pit, an elaborate playground for your children, a privacy fence, a dog house, or a shed in the back yard. Carefully read HOA and condo restrictions to see what’s permitted, and what will need advance approval from the association’s architectural review committee.
2. Find out how much you must pay in HOA fees, and what, exactly, you will be paying for.
Be sure to ask the HOA for the amount and purpose of all HOA fees. As previously noted, the more elaborate the community, and the more property that is owned in common, the more you are likely to pay.
Ask for a breakdown of how the HOA fees have been set by the board of directors. Depending on the nature of the community, and the level of services, HOA and condo fees can be used to pay for any of the following. This is not an exhaustive list!
- Lawn, tree, and shrub maintenance
- Snow removal or after-storm cleanup of debris
- Street or parking lot maintenance and repair
- Stormwater drainage system maintenance and repair
- Insurance of structures and common property
- Directors and Officers, Liability insurance (to protect board members from lawsuits)
- Exterior maintenance and replacement (roof, siding, decks)
- Common interior maintenance and replacements (lobbies, elevators, stairs, hallways)
- Keeping plumbing, electrical, heating and air conditioning systems in working order
- Maintenance of recreational areas and amenities
- Security lighting and cameras, gated entry systems
- Trash and recycling services
- Utility bills (water, sewer, heating and cooling, and possibly even cable and internet services)
- Management company fees
- Legal fees
- Administrative costs
- Reserve fund contributions and special assessment installments (see next twp sections)
Once you obtain the breakdown of fees, determine whether you think those HOA fees are appropriate, too high, or too low. HOA fees may seem reasonable and affordable today, but, think about whether or not you can afford an increase in fees of 10 to 20% or even more. Read on for details.
3. Does the HOA have a reserve fund to cover future repairs and replacements?
A reserve fund is essentially a community savings account, where a portion of HOA fees is set aside for inevitable repair and replacement of common elements or common property.
Reserve fund needs are going to vary considerably, depending on the age and size of condominium buildings, townhouse maintenance services, and general community infrastructure that is maintained by the HOA.
Another important factor is the condition of the property. Has the HOA responsibly maintained buildings and infrastructure from the time of construction? Or has the association done minimal upkeep, in order to keep fees artificially low?
Caution: Although it is relatively easy to uncover deferred maintenance of a single family home, or the interior of a condo unit, it is more challenging to determine the condition of condo buildings or community infrastructure. A typical home inspection only includes a visual inspection of the property you will personally own. It generally won’t include an inspection of commonly-owned exterior elements or any part of the common grounds or HOA amenities.
It’s best to take a very close look at the entire community outside of home or unit for sale. Do you notice peeling paint, mold and mildew stains on the roof or siding, cracked or crumbling roads, murky retention ponds? Even if you don’t see any noticeable signs of deferred maintenance, however, you must also examine some important official records of the HOA, to help determine its financial health.
4. Is the reserve fund adequately funded?
Ask to see a copy of the annual HOA operating budget, as well as a copy of the most recent reserve study and summary report. A reserve study should be updated every 3 to 5 years, and a report should include a list of all significant common property and infrastructure elements. Each line item in the report should note the common element’s age, expected remaining useful life, and a projected date and cost to repair or replace.
For example, a parking lot might be 10 years old, have an estimated remaining useful life of 5 more years, and might be scheduled for repaving when it reaches 15 years old. The reserve study should list the expected cost for that project, and how much the HOA should set aside each year toward that savings goal. If the amount of money set aside for this project is lower than it should be, you can expect to be billed for the difference in cost at the time the lot is repaved.
Caution: Unless the community contains minimal common property, if the HOA doesn’t have a reserve study, or hasn’t had one in more than five years, you might want to reconsider your purchase.
What do the reserve and budget report numbers tell you?
With the reserve study and a copy of the operating budget in hand, ask yourself, for each item on the list:
Do you think the common element can remain in good repair, and be serviceable, until its scheduled repair an replacement date?
Is the HOA following the reserve study recommendations for fully funding repair and replacement of essential infrastructure? Or is the HOA setting too little money aside for inevitable construction projects?
Exercise extreme caution when reviewing any reserve report. Consider the source of the reserve study. Was it prepared by board members with little to no knowledge of construction or finance? Or was is prepared by a Reserve Study Specialist affiliated with the management company or its construction vendors? The first indicates the reserve study may have skewed funding recommendations too low, the latter indicates possible conflicts of interest, skewing funding recommendations too high.
Also, look to see if the HOA has transferred reserve funds to the operating budget, to pay for normal maintenance, utility bills, administrative costs, or legal fees. If so, this is a big Red Flag, because reserve funds should only be spent for repair and replacement of major common property infrastructure or amenities. If the HOA is robbing the reserve fund to pay for its ordinary monthly bills, it indicates that the HOA is mismanaging its money, and setting up owners for one or more future special assessments.
What is a special assessment? How much can it cost?
A ’special assessment’ is necessary when an important repair must be done, but the HOA does not have enough money in reserve to pay for the project. In that case, the HOA must send a special assessment invoice to each owner, demanding your share of the cost within a few weeks or a few months.
The special assessment can vary, depending on the needs of the Association. It could be a few thousand dollars, or the HOA could demand tens of thousands of dollars from each homeowner. (Do a keyword search on ”special assessment” on this website to view examples of homeowners stuck with suddenly high, unaffordable, HOA fees.)
The special assessment may be due in one lump sum, or the HOA might allow you to make monthly installment payments over several months or years. If you have sufficient equity in your home, you may be able to get a loan to pay the special assessment, but don’t count on it. There is a short supply of lenders willing to offer home equity loans for HOA repairs, especially in condominiums.
5. Read all the covenants, restrictions, and rules — at least twice. Can you live with them?
Many homeowners skip this important step during the home inspection period. HOA covenants and restrictions, regulations, and community or house rules can be lengthy and downright boring to read. Read them anyway.
Make a note of anything in the documents that makes you uncomfortable. You may find some of these rules to be a deal breaker. For example, a condo association might have a 25 pound weight limit for your pet. That won’t work if you’ve got a Golden Retriever.
Another example: the HOA of a planned community might not allow any vehicles to be parked on the street overnight — even a public street. The rules say that all residents must park in the garage, and guests must park in the driveway. Will that work for you and your family? Will you have room to park all your vehicles in the garage? If you park vehicles in the garage, where will you store your tools and outdoor equipment?
6. How open and transparent is the HOA board and its management agent(s)?
This is a very important consideration, because one of the most common complaints I hear from homeowners is that HOA board doesn’t keep them informed of important issues, and isn’t providing open access to financial records or copies of minutes for past HOA meetings.
If, as a potential homebuyer, the HOA balks and drags its feet on providing you with a copy of the governing documents, operating budget, and reserve study, you can assume the HOA is also keeping homeowners in the dark. You must reconsider your tolerance for the risk of buying property in any HOA that is not willing to openly disclose important records.
But, even if the HOA is cooperative about providing disclosure documents for home buyers, it would also be wise to talk to some current owners and ask them if their HOA is open and transparent. While you’re at it, introduce yourself to some of your future neighbors. Find out what they like or dislike about their community, its HOA board, and the management agent, if there is one. (Small communities may not have an onsite manager.)
What you learn may be eye-opening, or it may reassure you that the community is well managed.
7. Ask to attend an HOA meeting, or at least read the minutes of meetings in the past 6 – 12 months.
This is a request that will be filled by relatively few HOAs. Generally, if the HOA welcomes a potential buyer to attend a meeting and to read past meeting minutes, it indicates that the board and management is confident in the condition of the HOA, and actually wants to take the opportunity to impress you.
The typical response to this request will be “no, we only allow owners to attend HOA meetings.” In some states, the law does not require that HOAs allow owners to attend their board meetings. In that case, carefully review 6 to 12 months of past board meeting minutes.
Do the minutes provide sufficient detail, so that a reader can know what was discussed, and what actions the board agreed to take? Note the date of the minutes. How long ago was the last meeting? Were there more recent meetings, for which no minutes are available?
Remember, in the long run, what you don’t know about the HOA-governed community can hurt you.
8. Check public records to help you determine the owner-occupancy rate in the community
Owner-occupancy rate refers to the percentage of home or condo owners that actually live in their dwellings year-round, or at least a majority of the year.
Why is this important? It depends on how you intend to use your property after your purchase it.
Owner-occupant perspective
Be aware that lenders tend to shy away from underwriting mortgage loans in HOA-governed communities with less than 50% owner-occupancy rates. The reason for this is because, when more than half of homes or condo units are owned by occasional residents or investor-landlords, there’s an overall higher risk of deferred maintenance and HOA fee delinquency rates.
As a group, and although there are exceptions, owners who don’t live in the community tend to be less concerned about keeping the community attractive, quiet, and safe. After all, out-of-town investors do not have to live with daily disruptions from residents who create nuisances in the neighborhood, particularly in the case of short-term rentals.
Parking difficulties, noise disturbances at all hours of the day and night, an increase in crime, and accumulation of trash can be serious problems in communities with low owner-occupancy rates. Unfortunately, some investor-owners are irresponsible landlords, who don’t pre-screen their tenants, and who fail to pay their share of HOA fees.
Non-owner-occupant perspective
On the other hand, if your plan is to rent out your home or condo, on either a short-term or long-term basis, you will want to be confident that HOA restrictions and/or a vocal majority of owner-occupants will not prevent you from doing so.
For example, if your’e buying a second home in a resort community, or an area that is a popular vacation destination, but you only plan to visit the property occasionally, then you may want to have the right to rent the property to offset your carrying costs.
Many community governing documents put a cap on the percentage of rental properties within the community. If the HOA covenants set the cap at 25% of all homes, and public records show at least that many homes are not owner-occupied, then you may never be able to legally rent out your home or condo as intended.
Be realistic about the makeup of the community, and don’t attempt to change the prevailing majority’s mindset on rental restrictions.
9. Do a search of court records on the HOA
There’s no doubt about it. HOAs can be litigious environments. You want to make sure you won’t be buying into a community where the HOA is notorious for suing homeowners, or where owners are suing the HOA.
Search public court records, and be on the lookout for lawsuits involving the HOA. Examples include HOA liens and foreclosures filed against property owners, homeowner suits alleging the HOA fails to maintain the common property, lawsuits involving disputes over covenants and restrictions, violations of fair housing laws, or allegations of harassment.
If you see evidence of corrosive legal activity, steer clear of the community.
10. How much will it cost you to insure your home or condo?
Rising insurance premiums, high deductibles, and policy cancellations are a growing problem for HOA-governed communities nationwide.
During the inspection period, or even before you look at a property, explore your home or condo insurance options. Find out how much you will have to pay for premiums, how high your deductible will be, and take careful note of policy exclusions.
Also, ask the HOA to provide you with a copy of the declaration pages for its current insurance policies. Note what the community does and does not cover, and the size of the deductible. If the HOA has a high deductible policy, homeowners will be on the hook for paying substantial costs out of pocket, even if the HOA is responsible for covering the cost of repair or replacement.
Look for court records involving HOA lawsuits involving insurance companies, too. This could indicate big problems for homeowners and borrowers.
Following these 10 tips to check out the HOA will help you be an informed buyer
Bottom line: before you fall in love with a single family home or condo, and commit to a purchase, it’s wise to carefully check out the nature of the community and the HOA that governs it.
You will be sharing expenses for maintenance and upkeep of common property, and you will be expected to abide by the same property covenants, restrictions, and community rules as everyone else.
The10 points highlighted in this post will help you decide if you will be able to comfortably afford HOA fees as they rise in the future. You will also obtain important information to decide whether you will be able to fully enjoy your home and condo, according to your dreams and expectations.
Happy HOA-governed community house hunting!