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A Home Owners Associations (HOA) manages property for the collective owners of a real estate community. Depending on how the HOA is managed can determine whether your investment becomes a nightmare, or a dream come true. We explain how in this article.
HOA is an acronym that stands for homeowners association, a legal and governing body of certain subdivisions, condominium and townhome communities, and planned neighborhoods. The purpose of an HOA is to enact and enforce rules for all the properties that belong to the HOA.
Typical HOA concerns are making sure homes are maintained and that common areas, such as pools, parking lots, tennis courts, hiking trails, and parks, are kept up. People tend to either love HOAs or hate them. Read on to find out why and to learn more about how these organizations work.
A property you buy might offer a voluntary HOA community. You are under no obligation to join a voluntary HOA, but you can join if you want to. Note that this is not how a traditional HOA works; a voluntary HOA is an ad hoc group that forms for a certain cause or reason, such as blocking a huge development coming to the area or organizing holiday parties for all residents.
Most HOAs are mandatory, so if you buy property governed by an HOA organization, you must join. If you don't want to join the HOA (or at least that particular HOA), then you need to look for another property.
When you buy a house in an HOA community, you are automatically an HOA member. You are required to pay dues -- which could be yearly, semiyearly, quarterly, or monthly -- and follow any rules mandated by the HOA, called the Declaration of Covenants, Conditions, and Restrictions (CC&Rs) . If you don't pay your dues, the HOA can put a lien on your home. If you don't abide by the CC&Rs, the HOA can fine you or file a lawsuit if you don't fix the violation.
The biggest distinction among HOA communities is whether you own a single-family detached home in an HOA community or whether you own a unit in a shared building.
HOAs for condominiums, for example, provide more amenities and typically charge higher fees than HOA organizations for comparably priced detached homes do. The reason is that when you buy a condo, the HOA is usually responsible for everything outside the walls of your unit, which are the common areas. So exterior repairs, such as replacing the roof, maintaining the landscaping, painting the building, and trash removal, are generally part of your HOA dues. The dues also cover any amenities offered, such as a fitness center, pool, and clubhouse.
You are typically responsible for landscaping, exterior repairs and maintenance, and trash removal when you own a single-family home in an HOA subdivision. Your HOA dues cover any common areas for the subdivision, such as a clubhouse, pool, and common grounds.
HOAs are run by a board of directors. One duty of the board is to prepare a yearly budget, which determines the fees members must pay. Budget items generally include property and liability insurance, legal fees, property management, landscaping, pool maintenance (if there is a pool), and other expenses the particular HOA has. Based on what the HOA paid the year prior, it forecasts what the fees will be for the next year and divides that cost by the number of HOA members.
HOAs also must determine long-term costs, such as replacing the roof on the clubhouse and repairing the parking lot, which they put into a reserve fund. HOAs usually call in an expert to conduct a study on the long-range costs the HOA should prepare for. The study typically provides for a 20-year schedule, which is broken down into an annual amount each member must pay. This cost is added to the annual dues. Having money in a reserve fund is a sign of a well-run HOA and is something you should look for before buying in an HOA community.
To determine whether fees an HOA charges are fair, check with similar developments in the area to see what they charge. Keep in mind that fees differ for every community depending on amenities, number of members, and how well managed the HOA is. Ask the HOA if you can see the history of the dues record for the past five or 10 years. That will let you know how much you can expect the increases to be each year and whether there might be a special assessment.
California has 5 out of the top 10 cities in the U.S. with the highest median monthly HOA fees ranging from $285 - $315, according to a May 13, 2015 article by Ralph McLaughlin of Trulia.
If the HOA doesn't have enough money put aside in a reserve fund, the members are subject to a special assessment, an emergency fee, to pay for that new roof or whatever it is that needs to be done. Because a special assessment comes as a surprise, many homeowners have difficulty paying it. Knowing what the HOA fees are ahead of time and budgeting for them is one thing; being hit up for an emergency special assessment is another.
Well run HOAs can usually avoid issuing a special assessment altogether, so it's important for you to review an HOA's financial statement before you buy the property. You also want to ensure that all the common areas are well maintained. If not, it's a sign that the HOA isn't collecting enough money to care for its amenities, meaning that a special assessment could be on the horizon. Also note the percentage of HOA members that are delinquent in paying their dues. A well run HOA won't let that number get higher than 15 percent without acting to rectify it.
Tip: Ask your real estate agent to get a copy of the HOA financial statements and the Declaration of the Covenants, Conditions and Restrictions (CC&R's) to review with you before you are fully committed to buying the property.
Perhaps the most important action you should take before buying into an HOA community is to review its CC&Rs, its rules. If you see a deal breaker, you'll want to find a different property, but if you agree with the rules and like them because they help maintain your property's value, then you should have no problem with them. Each HOA has its own set of rules. Here are some rules HOAs might implement:
As we mentioned earlier, people tend to either love or hate HOAs. If you wish to live in a planned development with certain amenities, maybe in a gated community, then an HOA neighborhood is for you … but it comes at a price. If you won't ever use the amenities and if you can't stand the idea of someone telling you what you can and cannot do with your own property, then you should avoid HOA communities.
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