Content of the material
- What Is A Homeowners Association?
- 6. Conflict Management
- 8. Compliance with the HOA
- Managing HOA Fees
- Average HOA Fees
- HOA Benefits
- A Few Other Considerations
- Will the Association’s First Board Be Appointed by the Developer?
- 2 – Check the homeowners association fees and where the money goes
- Are HOA fees tax-deductible?
- How to Determine HOA Fees
- What is an HOA fee?
- Seven Ways HOA Dues Affect Your Finances
- HOA Dues Can Change
- The Dues Don’t Cover Everything
- HOAs Can Affect Your Credit
- You Pay for Things You Might Not Use
- You Probably Won’t Save on Taxes
- You May Need to Pay Dues at Closing
- You Still Need Insurance
- The Bottom Line: Paying HOA Fees Is Just As Important As Paying Your Mortgage
What Is A Homeowners Association?
Before we get into fees, let’s discuss what a homeowners association actually is. Homeowners associations, or HOAs, are organizations that manage master-planned communities on behalf of the community’s developer. HOAs often govern communities of single family, detached homes, though you can find them in condo communities as well.
HOAs have a few intended purposes: to keep shared spaces within a community maintained and to create rules that prevent a single homeowner from making a change to their home that lowers the property values of the community as a whole.
6. Conflict Management
As in any community, disagreements arise within a planned development, sometimes over certain residents bending or breaking the rules. Before you buy, explore how rules are set and enforced and what penalties are imposed against rule-breakers.
Sanctions can be strict.In some HOAs, the outcomes may include being fined or sued or having the HOA place a lien on your home. Pay particular attention to whether the HOA can foreclose on your property for nonpayment of HOA dues or nonpayment of fines resulting from CC&R violations.
Ask about the process for resolving any conflicts, as well as how the HOA manages additions to or amending the rules.
Request a list or other accounting of conflicts and rule violations the association has had to resolve. If that information doesn’t detail lawsuits, ask about those. Be sure to check for any past, present, or pending lawsuits in which the HOA is involved. Also, review the outcome of any such cases.
8. Compliance with the HOA
Don’t rely on being properly alerted to any lingering issues between the association and the current owner of a house that interests you. Failure to ask about these problems in a timely way could result in you inheriting them when you take possession of the property.
Some potential issues may be obvious, such as dead or overgrown landscaping or flaking paint. Conversely, has the owner made exterior improvements or other changes to the property without getting HOA approval? If these changes are not in compliance with the rules, what could happen to you if you owned the property? You may be able to force the owner to fix the problems as part of the sale agreement or provide cash at closing.
Managing HOA Fees
HOA fees can be a dreaded expense, but it’s important to remember that these association fees cover many things that help improve the quality of life in the community you’re part of. Your homeowners association works hard to improve the community so that those who live there have a positive experience and high home values.
As with anything that provides a specific benefit, these things come at a cost. That’s where your contribution comes in, in the form of association fees. As stated above, many homeowners associations choose to hire a management company to handle the more complicated aspects of running a community.
- The Pros And Cons Of Low HOA Fees
- Are HOA Fees Tax-Deductible?
- What Happens If You Don’t Pay HOA Fees?
Average HOA Fees
HOA fees can vary quite a bit—from a couple hundred dollars a month to a few thousand— depending on the type of development in which you live. The average cost is more than $300 per month, although fees in some states are much higher, such as New York, which averaged about $570 per month, according to a study by Trulia, a real estate website.
For example, a small townhome development might require just $200 to $300 per month in fees to keep up with lawn and exterior maintenance. A higher-end development that provides exclusive services such as a valet and a fitness center would charge much more. Some HOAs might even cover cable TV and utilities.
But HOA fees are not static. Like taxes, they can go up each year or every few years, depending on the needs of the association.
After you reach a purchase agreement with the seller and before you finalize the deal, you’ll want to review documents—including financial disclosures and board meeting minutes—to learn details about the HOA’s finances, such as:
- How much it has in reserve, which can help you determine whether the HOA can pay for major, planned repairs as well as unplanned ones without hitting everyone with a special assessment or higher ongoing fees
- Whether the HOA is facing legal trouble
- How frequently it has raised rates in recent years
- Whether the HOA has made any special assessments on homeowners in addition to HOA fees
- Consistency helps property values. If you love the look of an HOA-run neighborhood, then it’s likely it will stay that way for years to come. A well-run HOA will ensure that homes and common areas are well kept and should preserve property value and overall quality of life.
- You can avoid maintenance. If you’re not a fan of mowing your lawn, keeping up the yard and shoveling snow, an HOA might be for you. Add up the money and time you would spend keeping up a yard and you might find that an HOA fee pays for itself.
- More amenities. If you want to live in a neighborhood with exclusive access to a pool and fitness center or you want to live in a gated community, you might welcome the fees and regulations that come with an HOA.
A Few Other Considerations
Be sure NOT to count any leftover money (surpluses). When making your budget, do so like there was no money left over from the year before. While an HOA is a not-for-profit organization, taking retained earnings into account for your coming year’s budget can spell disaster in the long run. Your operating funds might come up short in the end.
Also, don’t forget to consider owner delinquencies. If your community has quite a few, you might have to add an extra income allowance so you don’t come up short on income that will cover the reserve and expenses. In this case, your assessments might have to be higher.
Will the Association’s First Board Be Appointed by the Developer?
Here’s something to pay particular attention to within the bylaws: If you are buying into a newly constructed development, the first board is likely (for practical reasons) to be controlled by the developer (sometimes called the “declarant”). In fact, it will probably include the developer and the developer’s employees.
This can cause difficulties, because the developer’s interests might conflict with those of the owners. For example, a developer-controlled board may choose not to investigate problems that crop up with a common element such as a pool or clubhouse. Although taking action would be in the best interest of the homeowners, it might not in the financial interest of the developer (who could be responsible for fixing the problems).
After a certain percentage of the property in the development has been sold, state laws or the CC&Rs will require the developer to turn over control of the board to the members. The bylaws typically describe election procedures.
2 – Check the homeowners association fees and where the money goes
Homeowners associations fees, usually charged as annual dues, pay for insurance, new roofs, lawn mowing and other communal expenses. Find out if they’re capped and how often they can be raised.
It’s also important to check the association’s financial reserves, especially in a condo, says Paul Licata, director of business development for Seacrest Services, a property management firm in Florida. Licata suggests checking if the reserves are fully funded and if there’s enough money for emergencies.
Related to that, you also want to know where your money goes, he says. Is the association up to date on maintenance work? When was the last time the concrete was restored? When were the windows last checked?
Ask for a copy of the budget to make sure line items are properly funded. “If they are not you will see assessment fees go up year after year because costs are not being covered,” Licata says.
Are HOA fees tax-deductible?
IRS regulations can be a little complicated, but in general, HOA fees are not deductible if the property you own in the community is your primary residence. However, if you rent it out, your HOA dues may be deductible as a rental expense. HOA special assessments are not deductible.
How to Determine HOA Fees
Bottom line: Nobody is excited about having to pay higher assessments, even board members.
So, you have to first look at the association’s budget areas: Expenses, income, and reserves. You must make sure your HOA is covered in each of these areas for the next year.
A homeowners association has a responsibility to maintain and repair all common areas within the community. Maintenance and repair services don’t come free. The board needs to get that money from somewhere. And while the HOA can have other fundraising activities, its main source of income is the HOA fee.
When planning your budget, it’s important to take everything into account. What type of vendor services do you need this coming year? Do you expect to pay more or less than before? The usual items to consider are:
- Maintenance and repairs
- Employee salaries
- Vendor services
- HOA management fees
- Reserve funds
You’ll then want to calculate the overall income needed from your homeowners so you can calculate HOA assessments. So, you’ll add up total budgeted expenses, the total contribution to the reserve, and all miscellaneous income.
Then, to determine how much each owner will pay per month, take the total in assessments you calculated and divide that number by the number of homes in your association. Then divide that number by how many assessments there will be (such as 12 for each month of the year).
Some associations use an HOA fees calculator based on the size of the property. For instance, a resident with a larger property may pay more than a resident with a significantly smaller property. Others divide the assessments equally. Make sure to check your bylaws to know how you should divide HOA dues.
What is an HOA fee?
An HOA fee is a regular fee (usually monthly or quarterly) assessed by the homeowners association to pay for the services that it provides. If you live in a condo, you may pay a similar fee to the condo association.
If you plan to buy a home in an HOA, it’s important to understand how HOA fees work. The HOA uses the money it collects to help maintain or improve the quality of life in the community. These fees are paid on top of your mortgage, property tax and homeowners insurance payments. Even if your mortgage is paid off, you’ll have to continue paying HOA fees.
Seven Ways HOA Dues Affect Your Finances
Before you commit to a home with an HOA, there are a few things you should know about HOA fees.
HOA Dues Can Change
HOA dues can go up or down. If that happens, you may have a hard time paying your home loan. HOA fees will rise when projects need funding, and they also may increase due to automatic inflation adjustments.
Ask about the HOA’s history of raising fees, and find out about any planned projects or other changes in the works.
As you prepare to buy a home with an HOA, you and your lender should evaluate the home's HOA dues to determine whether you can afford both the loan and the dues.
The Dues Don’t Cover Everything
Your HOA covers routine and planned costs. Often large projects and emergency repairs need immediate funding. In those cases, you may need to pay an additional special assessment. These assessments can cost several hundred dollars to several thousand dollars or more.
HOAs Can Affect Your Credit
When you buy into an HOA, you agree to pay HOA dues. If you don’t pay, you will owe the HOA money, and the HOA can send your past-due account to collections. The HOA can also put a lien on your property. Skipping HOA fees can even lead to foreclosure in some cases.
Collection accounts and public records may appear on your credit reports, making it harder for you to get other loans or find housing in the future.
You Pay for Things You Might Not Use
HOA dues cover costs for common areas around your property, but you might not enjoy or even want all that you’re paying for. That’s a tradeoff of living in a shared space. For example, you might not use the pool or rooftop, but you need to pay for them anyway.
You Probably Won’t Save on Taxes
HOA dues are typically not tax deductible for the home you live in. If you own a rental property and pay HOA fees, you could get a tax break. The home office deduction might also provide some relief if you have an office in your home.
Check with a CPA or tax preparer to find out whether you can get any tax savings for your HOA payments.
You May Need to Pay Dues at Closing
When buying a home with HOA dues, be ready to pay for every day you own the property, starting on day one. You may see a line item on your closing papers showing HOA dues.
HOAs keep a reserve fund, which can help absorb large expenses and surprises. View HOA financial statements, and look at how much the reserve fund is before you buy a home with an HOA. A low reserve fund is a sign that dues may increase soon, and assessments are more likely when there’s no rainy-day fund.
You Still Need Insurance
HOA dues pay for a master insurance policy. But those policies typically don’t cover your personal property, the home you live in, the inside of your unit, damage that comes from your unit, or your personal liability.
Speak with an insurance provider to determine what your risk is, and find out what type of policy makes the most sense for you. Price those policies before you buy an HOA-managed property so you have a clear picture of your future costs.
The Bottom Line: Paying HOA Fees Is Just As Important As Paying Your Mortgage
If you’re seriously considering joining an HOA community, make sure you factor HOA fees into your monthly budget. If you can afford it and love the lifestyle, an HOA comes with serious benefits – just don’t forget the extra costs.
Ready to buy a home within a homeowners association? Take the first step by applying for preapproval online today.