I want to talk about HOAs or Homeowner Associations. I’m going to discuss what they are, some pros and cons, and things to consider if you’re thinking of purchasing a home or investment property that is part of an HOA. Then you can decide if it makes sense for you.
First of all, what is an HOA. Well according to Investopedia a homeowner’s association is, “an organization in a subdivision, planned community, or condominium building that makes and enforces rules for the properties and its residents. Those who purchase property within an HOA’s jurisdiction automatically become members and are required to pay dues, known as HOA fees. Some associations can be very restrictive about what members can do with their properties.”
An HOA typically has a board of directors that are elected by the association membership to enforce and oversee the HOA’s rules and regulations, and oversee the HOA management that runs the operations that maintains the common areas, amenities, and facilities.
Ok sounds pretty straight-forward right? Well there are a lot of nuances involved in HOAs that can make them complex and maybe not so cut-and-dry. Here’s the good, the bad and the ugly about associations. Let’s start with the negatives:
First of all, there will be inefficiencies. You will not get a dollar for dollar return on your HOA fees, that’s known fact. Typically, for condominium HOAs you have a property management company that will run the operations so they need to be compensated. HOA board members are usually volunteers and may not have the wherewithal needed to manage real estate. Besides operations and management inefficiencies, another disadvantage is that you have specific rules, called Covenants, Conditions and Restrictions (or CC&Rs) and House Rules that all members need to follow. Some people don’t care to be told what color to paint their home. Other’s hate the fact that any time they want to do a maintenance or improvement project they need to get HOA approval. Also, whether you use the amenities or not, you have to pay your HOA dues.
On the positive side, those CC&Rs and house rules could be viewed as a good thing, as you have set and enforced community rules. These aspects of HOAs can actually maintain the property value of the community or condominium. Another positive is all the amenities you may get without having to maintain them. Having a pool, barbeque, tennis courts, reading room all a stones throw away can be quite enjoyable and make life so much better for you if you appreciate those things.
Ok so here are some things to consider about HOAs:
Understand the rules, CC&Rs, and House Rules up front: Make sure you know what you’re getting into. Take the time to read the documents mentioned and talk to HOA members past and present to see what they have to say about the association.
Also understand what is included in your HOA dues. I sometimes here complaints from condo owners who say that their HOA fees are too high and a waste of money. I remind them that the maintenance, upkeep and cost to insure their building structure is included in their fees. I had to paint the outside of my house a few years back and it costed me $5000. The cost to replace a roof on a single family home could be upward of $20,000, and structural replacement insurance is thousands of dollars every year.
My point is, although yes, there are inefficiencies in these fees, HOA members are getting benefits. So looking at HOAs with my investor hat, I do not necessarily avoid condos because for the HOA fees, I keep in mind that when I’m running my proformas, I can keep a smaller reserve estimate for repairs and maintenance because a lot of those costs are captured in the HOA fees.
And that’s perfect Segway to my last consideration. The cost to operate an HOA typically increases over time. As the buildings, facilities and amenities age, they need more maintenance and eventually need to be replaced. As such your association fees will change and will probably go up. Although last year, I received a letter from my HOA that my fees were going to go down $100, that made me really happy, but that was the first time that it has ever happened to me in my 18 years of belonging to HOAs.
HOAs can issue what’s called special assessments to members if they determine that the association does not have adequate reserves to cover upcoming projects. When you are in the process of purchasing a property that has an HOA, review the HOA buyers packet that includes financial statements, budgets, recent board meeting minutes, and very important, review the reserve study to determine if the HOA has been appropriately monitoring and building up reserves to adequately fund future deferred maintenance projects.
Well, I hope this article has given you a new perspective on Homeowner associations. Feel free to reach out to me if you have any questions I can help you with.
