What You Need To Know About Buying in an HOA Part 1
Are you thinking about buying a property, home, or condo in an HOA?
Let me share some high-level points that you and your real estate agent/broker will want to be aware of before you write that offer. Each HOA is so individualized, it’s like its own little company with its own people, its own rules, and its own budget. No two HOAs are alike.
BUYING in an HOA
When you buy a home in a Home Owners Association (HOA) or sometimes known as a property owners association (POA), you first need to know you’re automatically agreeing to be part of everything the HOA’s documents set forth - and also that there’s already a lien put on your home as part of the real estate transaction. It sounds scary, but if you go into a purchase of a home prepared, there should be no worry on your part - or at minimum, you go into the purchase with eyes wide open.
1. Can I live with the HOA restrictions?
Read the HOA’s “governing documents.” The governing documents are the guidelines for the community and they spell out the restrictions you will need to abide by. Some of these documents are recorded and will be part of the title search, and some of these documents are living documents can that aren’t necessarily recorded, can be amended much more readily and you have to ask the HOA directly for them.
Articles of Incorporation - formulate the structure of the HOA (recorded document)
Bylaws - spell out the board structure, the board officers, the board of directors, and the voting rights of the membership (recorded document)
CCRs (code covenants and restrictions) - this is what it sounds like - these are some of the nitty-gritty rules you’ll need to follow (recorded document)
Rules and Regulations - usually set forth common area rules. For example, quiet hours, hours of the pool or gym, rules around pets on a leash, etc. (usually not recorded)
Design/Architectural Guidelines - some communities have very strict guidelines on what you can and cannot do on the outside of your home (and in some HOAs the INSIDE of your home). If the community you’re buying in has these guidelines, you will have to have to submit for approval anything from construction plans to the color you want to paint your home (usually not recorded)
2. Are there any financial risks if I buy into this HOA?
When you buy a property in an HOA, you will be 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 about everything from common area landscaping, pools, and gyms to eventually replacing a roof. You need to understand the financial health of the HOA.
What are the monthly dues and what do they cover? You’re going to want to know what you’re paying each month and what those dues 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 black or in red? Are the members paying their dues? Are the costs of the community out-matching the income the HOA is receiving?
As a buyer, 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, and 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 of 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, that could also spell an additional assessment to you as the future owner (see special assessment)
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 want to negotiate with the seller to have that paid at closing. You may also want to decide if you want to continue the purchase into a community that isn’t funded well or doesn’t have the plan to fund well - as it may be a recurring theme that you will have to pay more. And that problem will follow you when you go to sell your home later.
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.