HOA Basics & What to Look For When Buying in an HOA
Home Owners Association (HOA) Basics - The Documents.
Every single HOA is unique because each set of documents is written particular to a builder/developer's project. The documents that are recorded "run with the land" and are submitted at the same time as the subdivsion map.
Typical Association Documents are:
1. Articles of Incorportion - This documents names the HOA and it is typically formulated as a non-profit 501(c)3. This is a recorded document.
2. By-Laws - This document sets up how the HOA will be governed, the Board of Directors, the meeting frequency and how the voting of the membership will work. This is a recorded document.
3. Covenants, Conditions and Restrictions (CCRs) - This gets into the nitty gritty of the property details. By nature of it's name the CCRs restrict what you can do on your property. This is a recorded document and runs in perpetuity unless rescinded (voted out) by majority of the ownership. You will also hear this called the "governing documents" of the Association.
4. Rules and Regulations - These are rules of the Association that are a catch-all for things the By-laws and CCRs don't cover. The rules and regulations may need to be revised from time to time. For example, a Rule may be that no one can go into the common area pool between the hours of 8 AM an 9 PM. Rules and Regs aren't necessarily recorded documents.
5. Design Guidelines - These are guidelines for new home construcion, additions and what the community will allow. (Sometimes wording around design work, paint color, height restriction, etc is included in CCRs or in Rules and Restrictions and the Association does not have a separate Design Guideline document). If the Association has Design Guidelines, they are not necessarily recorded.
What to Look for When Buying in an HOA
I'll discuss this in terms of concepts instead of too many details.
1. What is the financial health of the Association?
If the Association is not in good financial health, you may reconsider purchasing in that particular community. The good and bad of living in a HOA is that the ownership as a whole pays for the upkeep of the elements (or more specifically, what the particular documents say the owners need to cover).
You'll want to read the financials of the community, including the liabilites and delinquencies, making sure there are enough funds to cover basic operational expenses.
You'll want to review the Reserve Funding/Reserve Study. A Reserve study will show what projects will need to be done and what funds will be needed to replace or repair community property (usually big projects like roofing or siding). The higher the % funded, the better. Reserve funds are intended to prevent the need for special assessments.
You'll want to see if a special assessment has been approved or any large loan taken out by the Association. If there is a pending assessment, you may alter your purchase offer to reflect the assessment or simply divert your investment elsewhere.
You'll want to review what funding has been approved in the Annual Meeting minutes as well as recent board meeting minutes.
2. What will your HOA dues cover?
HOA dues can cover everything or nothing - and everything in between. It all comes down to what is required of the membership (owners) in the documents. HOA dues can cover: utilites (both common and property specific), property taxes (usually only on the common area taxes), reserve funding, property management fees, and road maintenance, for example. This is by no means a comprehensive list.
3. Will I be able to build/change what I want to in this community?
If you are purchasing a vacant lot or already existing home, you will want to review the governing documents to see what construction guidelines you must follow. For example, there may be a height restriction that will prevent you from making the changes you want or a minimum square footage requirement that may end up being too costly. (Tip - you'll also want to check with the county you are building within. HOA's can make things more restrictive, but you have to see if it is allowable with the municipality you will build in as well.)
Also, depending on the community you build in, you may have to have your plans reviewed by the board of directors or a committee that the board appoints called an Architectural Committee or Design Review Committee. Typically, this is a process which includes review fees and a cash or construction bond to ensure compliance of the design guidelines.
4. Rental restrictions?
If you are planning on renting your home out, the documents will tell you things like: if you can have a vacation rental, the minimum time a home can be rented for, what percentage of the community can be rented out (called a rental cap) and/or if the property can be rented out at all.
5. Will my lender lend on the HOA I am buying into?
If you are buying a property with conventional loan, usually everything will work out. But, if you are buying a condo with an FHA loan, for example, the HOA must actually be approved. Conversely, sometimes the lender will not allow a loan on a property - in most cases that I've seen it's because the lender didn't like the type of insurance that the HOA had. Reach out to the Association and/or your lender to discuss in further details BEFORE you put in an offer on the property.
If you have a hiccup with the HOA or the lender mid-transaction, you have to change lenders, but you will need seller's approval for that. Changing lenders mid-transaction can cause delays - and depending on the circumstance - it could result in a penalty for the buyer of some sort (ex. making the earnest money non-refundable or charging a per diem for days extended past original closing date).
6. Is the community professionally managed?
If you buy a home in a condo or planned community, it may be in your best interest purchase one that hires a professionally managed property/HOA management company. A management company is an agent of the board of directors and implements the guidelines set forth by the board.
The purpose of a good management company is to advise the board of directors on issues like community maintenance (both immediate and long term), compliance of the documents, and adherence of state and local laws.
Other Interesting HOA Facts:
1. No one entity "owns" the owners association. It is set up as a non-profit entity. There may be a majority share or a Declarant (usually developer starting the building project) may have all voting rights - but it's not owned.
2. Speaking of voting rights, you may own a single property in an Association, yet have a weighted vote. Owners may have varying shares or percentages of their vote, even if each person owns just one property. It'll be spelled out in the governing documents.
3. When you purchase a home in an HOA, your property has an implied lien on the property.
4 . If you don't pay your HOA dues or you are out of compliance, in some cases, the HOA can actually foreclose on your property.
HOAs can get a bad rap. But they can actually be quite important to increase the value of your property.
Kristin Bushnell is Designated Broker of Bushnell Real Estate Solutions and Co-owner of Bushnell Craft Brewing Company in Redmond, WA. Check out my profile here.
If you are ever interested in chatting about real estate, contact me at firstname.lastname@example.org or call me at 425-559-1355. I'll buy you a beer (or non-alcoholic beverage, if you prefer!), and we can chat about real estate until your heart's content.