Understanding Homeowners Associations (HOAs), Fees, and Rules

What is an HOA?

HOA stands for Homeowners Association.
HOAs are legally recognized organizations that manage the rules, restrictions, and operations of a group of residential properties.
This could be a standard residential neighborhood, a group of townhomes, single family villas, or a condominium development.
Participation in some HOAs are voluntary while others have required fees and rules.
A well organized and managed HOA can help improve and maintain the quality of life and preserve home values for members of a community.

Buying a Home in an HOA

If you are buying a new home it is important to understand what an HOA is, if it is voluntary or required, the costs, and the benefits of belonging to an HOA.
The costs and benefits of an HOA can very greatly.
It is also important to understand that HOAs can be different from the covenants and conditions that accompany new residential developments.
HOAs are popular in today’s real estate market to help maintain, improve, and provide lifestyle benefits to its members.
Home buyers of all ages are taking advantage of HOA communities.
In the guide below I will examine the costs, benefits, rules, restrictions, and requirements of buying a home in a HOA.

HOA Covenants and Bylaws

The rules that determine how the HOA is organized and ran are called the Bylaws.
This includes the rules holding meetings, the officer requirements and election process, and other operating guidelines.
Covenants are the rules and obligations that govern the properties in the association.
The required dues and the benefits provided to the homeowners will be outlined in the covenants. These documents are sometimes called the Covenants, Conditions, and Restrictions (CCRs).
Members of the HOA are elected homeowners, often volunteers, that make up a board of officers. An outside management company is sometimes hired to handle the daily operations.
The voting rights defined in the Bylaws allow each homeowner to have a say in electing the officers and the application of the rules and benefits.

Why Review Financial Statements?

Prior to purchasing a home, villa, townhome, or condo in an active HOA it is very important to review the Bylaws, Covenants, as well as recent financial statements.
If those documents aren’t available prior to writing an offer, it is good practice to insert a clause in the purchase agreement making the offer “contingent upon satisfactory review of the Bylaws, Covenants, and financial statements”.
Many mortgage lenders will also require careful review of all HOA documents prior to approving financing for the purchase of a home.
New guidelines published by Fannie Mae and Freddie Mac are catching many HOAs off guard leaving sellers in difficult situations.
Home buyers with mortgage a pre-approval will also need to verify the HOA fee does not affect their loan eligibility.

Common Benefits of HOAs

Homeowner associations provide various services and amenities intended to enhance the living experience for participating homeowners.
An underlying premise of an HOA is to ensure that all properties are uniformly maintained at a high level of condition.
These standards lead to one of the most significant advantages in that it can protect or increase your home’s overall value.
Another general benefit of an HOA community is to provide access to special amenities. These amenities can include the delivery of cost efficient services such as lawn and snow care, landscaping extras, exterior maintenance, trash pick, street and common area maintenance, security, community fencing, and group property insurance policies.
Luxury and specialty amenities can also be available for specific communities such as pools, clubhouses, sport courts golf course memberships, private park, lake, and recreational access.

Common Rules of the HOA

The rules of an HOA are known as Covenants, Conditions, and Restrictions or CCRs.
HOA rules are legally binding.
The goal of the HOA rules are to make the neighborhood a more enjoyable place to live. Rules and covenants establish a set of community standards and ensure property owners act responsibly.
Don’t underestimate how strict some of these rules can be.
Some HOAs can foreclose on your property or charge you interest if you don’t follow the rules and pay your dues on time, so you definitely want to understand as much as possible before closing day.
A significant number of rules can be described as property use and alteration restrictions. Homeowners are expected to maintain certain standards to spaces like the lawn, driveway, and the exterior appearance. Expect there to be restrictions on modifying the outside including the landscaping and paint color.
Other restrictions to the outside of the home might include fencing, pets, noise levels, sprinkler systems, holiday lighting, satellite dishes, parking cars in the driveway, RV or boat storage, and where trash bins can be stored.
Rules that apply to the inside of a home may include notifying the HOA of short term vacancies, how long guests can stay, and restrictions on offering long or short term tenancy.

Common Fees of HOAs

The disadvantage of buying a home in an HOA is, of course, the association fees.
HOA fees are commonly referred to as dues. HOA dues generally fund the operation and maintenance of the community amenities with the goal of keeping up the appearance, value, and overall enjoyment.
HOA dues are separate form property taxes, mortgage payments, and homeowners insurance.
By pooling resources homeowners can potentially reduce the overall costs of maintaining and improving community space and other HOA benefits.
Dues are typically paid monthly, quarterly, or annually and reassessed each year to accommodate any cost increases.
HOA fees can increase over time so you should factor in some flexibility into your budget and purchasing decision.
Common HOA dues cover the following: Insurance, utilities and trash collection, security, common space and fencing upkeep, lawn and seasonal care, property maintenance, operating costs such as legal filings, accounting fees, collections and enforcement, as well as amounts for reserves and special assessments.

What are HOA Reserves and why are they especially important?

Reserves are additional funds set aside for future maintenance or improvements.
Reserve funds are used to cover unexpected expenses or intermittent projects such as street improvements, exterior painting, roof replacements, or common space renovations.
Mortgage lenders and underwriters will require an HOA to have a certain percentage held in reserves for them to consider the HOA in a healthy financial position.
Fannie Mae and Freddie Mac have published new minimum requirements for HOA reserves that mortgage providers will review prior to approving a loan to purchase a home in an HOA.

What Are Special Assessments?

Special assessments are additional funds approved by an HOA board for a specific need.
The need for a special assessment is often unexpected such as storm damage or when the reserves are insufficient to cover a repair expense.
Larger capital improvements or infrastructure upgrades are other common special assessments.
Special assessments are typically calculated and assessed in the same manner as standard HOA dues.
Sometimes an HOA will offer homeowners the option of making a one time large payment or spread the expense over a number of months.
In the event there is a special assessment unpaid balance at the time of a sale, it is not unusual for a buyer and seller to negotiate who is to pay the remaining amount.

Frequently Asked Questions about HOAs

Are HOAs different for villas, townhomes or condominiums?

There are a number of ways to legally structure and manage an HOA, but the premise will always be the same- to improve and maintain the quality of life while preserving home values for the members of a community.

How Are Dues Calculated?

There are various ways an HOA can calculate the amount each homeowner is required to pay. The most common method used is a simple equal amount for each homeowner. Other methods include assigning percentages per the lot size, street front, lake front, or assessed value.

What happens if you don’t pay your HOA fees?

Any unpaid HOA dues are potentially subject to interest and penalties. The HOA could also take a homeowner to court for collection.

Can an HOA file a lien on property owners?

Yes. Legal remedies for HOAs to enforce the rules and payment of dues will be found in the HOA Bylaws and they often include property liens.

Can HOA Fees be deducted on your taxes?

In general, if you are a homeowner and the property is your primary residence, HOA fees are not tax deductible. You can deduct the HOA fees if the property is classified as a rental home. Please consult with a tax professional.

How much is HOA insurance?

Most HOAs will provide a general liability insurance policy of some degree. Individual homeowners would be wise to match their individual property insurance policy to eliminate any redundancies and take advantage of reduced insurance costs.

How much can HOA fees be raised?

Some states regulate the amount an HOA can increase standard fees but most CCRs will leave not restrict an increase to a specific dollar amount, only the reasons certain fees can be increased.

Can HOAs raise dues without a board vote?

Yes, in some circumstances an HOA board may have the ability to approve certain changes to the HOA fees without a general or board vote.

Does an HOA help or hurt your home value?

A well-run homeowners association will often help maintain or increase property values. Properties in a HOA are very popular in today’s real estate market.

Can you rent a home in an HOA?

There is no general rule that a home in an HOA cannot be purchased for rental purposes but jurisdictional or HOA guidelines with certain restrictions are permitted and common.

Are HOAs only for retired people?

Some communities can have age requirements such as a 55+ community but the appeal of an HOA community is not restricted to certain age groups.

Is buying or selling a home in an HOA different?

Selling or buying a home in an HOA is very similar to a standard single family home with the addition of carefully disclosing and reviewing the HOA documents and inspecting any common areas.

Where to find the HOA Covenants and Bylaws?

There are many ways to find the HOA rules but I can’t emphasize enough the need to reach out directly to the current board members to get a copy of the most current documents directly from them. Too often a title company or real estate agent will unknowingly provide homebuyers with an outdated or incomplete copy.

How to find neighborhoods with an HOA?

Many HOA communities often look no different than the typical surrounding neighborhood. Low turnover can also make identifying popular HOA communities difficult. Reviewing past sales can help identify potential neighborhoods.