SERIES 1: What You Need To Know About Selling in an HOA
Do you own a property, home or condo in a HOA?
You might be surprised to find out that one of the biggest reasons that real estate transactions don’t go through is because of an HOA. Our brokerage has seen multiple problems in the real estate transaction that at minimum causes delays to the house closing to loans that can’t be funded due to the HOA.
It sounds crazy because - you as the current owner of the property were able to buy your home without a hitch. And then in the middle of selling your home, you come to find out you’re at risk of not closing and getting your hard earned equity.
Before you put your home on the market, let’s review these highlights to ensure there are no hiccups in the sale of your house.
SELLING in an HOA
1. Is your HOA professionally managed?
HOA’s can get a bad reputation, but they actually help keep the value of your home up, believe it or not. Not all HOAs are created equally, and the are definitely not manage equally. So if your HOA is professionally managed - where the board hires a professional company to advise the board and manage day to day operations - you have many advantages over situations where the HOA is “self” managed. Self managed HOA boards do not know what they do not know. For example, there is one community where the owners are in the process of suing the HOA because the self managed board of directors had too many owner occupied homes and the HOA didn’t have the proper insurance. They had put all the homeowners into a strange conundrum where they couldn’t sell their homes due to buyer’s lending issues created by the HOA. Sellers in that community had real monetary losses because they couldn’t sell their homes.
However, the most common example of a real estate transaction delay in a self managed HOA is that they are notoriously difficult to get a hold of. When real estate transfers from one property to another the escrow company or attorney must get involved to clear the balance of one home owner as a new homeowner enters.
Finding out the best contact at the HOA, and speaking to the HOA about your upcoming sale will be the most helpful for your real estate agent or broker. Your agent broker should know how to take it from there.
2. Are there financial reasons a buyer wouldn’t buy my home?
When you own a property in an HOA, you are one of multiple owners that is paying for all that it takes to keep up the community as a whole, both short and long term. Think everything from common area landscaping, pools, gyms to eventually replacing a roof.
To prepare your home to be on the market, you need to know the following:
What are the monthly dues and what do they cover? HOA dues are often indicative of how much an HOA will cover. $100 annual HOA dues versus $1000 monthly dues have two entirely different structures.
Is the community operating within its means? Each HOA has a budget with operational expenses that the HOA members are paying. Is the HOA in the black or in the red? Are the members paying their dues? Are the expenses of the community out-matching the income the HOA is receiving?
As a current owner, you can review the HOA budget, and the HOA financials which will show you the actual expenses vs budgeted expenses. You can ask for a budget, a profit/loss statement, a variance report and those will give you insight on how the HOA is performing.
Does the community have long term financial planning? Most HOAs are required by law to complete something called a Reserve Study.
A Reserve Study should be done every 3-5 years, and is a 30 year plan to replace items in the HOA.
Reserves are funded at 0-100%, with 100% being funded at the highest amount. The closer the reserves are to 0% funded, the more at risk you are to getting additional assessments (see special assessment).
What is the remaining useful life? If the Reserve Study says you are 29 years into the useful life of a 30 year replacement - it could be cause for concern, especially if there are multiple line items that are at the end of their useful life and they are big ticket items.
Is there a special assessment or is a special assessment coming?
Special assessments are issued when the current assessment level just doesn’t cut it - when the expenses for daily operations or major replacement expenses exceed how much money the HOA has. It’s an extra assessment you will need to pay on top of your regular assessments.
If a special assessment has already been issued, depending on the current market conditions, you may have to pay that out of your net proceeds of the sale of your home in order for the buyer to purchase your home. The buyer may not want to continue the purchase into a community that isn’t funded well or doesn’t have a plan to fund well - as it may be a recurring theme that they will have to pay more.
If a special assessment hasn’t been issued, but there are indications from the Reserve Study and the financials (balance sheet, profit/loss statement, Actual vs Budget reports), ask for the meeting minutes from the board meetings to get more insight.
We’ll tackle the rest of this blog in our next series so stay tuned!
Kristin Bushnell is a Designated Broker/Owner of Bushnell Real Estate Solutions in Washington and Arizona states. Kristin has a 25+ year career in real estate with comprehensive knowledge to help you with your real estate needs or your real estate career. Contact Kristin here at email@example.com or call 425-559-1355. You can also click here to set up a time to chat.