Everything You’ve Ever Wanted to Know About HOAs

Fees from homeowners associations (HOAs) can play a significant role in the buying decision for homebuyers in some regions of the country. However, not many homebuyers know much about these common neighborhood and condo community associations, beyond the fact that there’s a monthly fee for living in an HOA community. Today, we look at what those HOA fees buy homeowners, and how these associations affect living in, buying, and selling a home that’s part of an HOA.

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A Brief History of HOAs

HOAs are a fairly common part of the housing landscape in the U.S. today, with as many as one in five Americans making their home in an HOA community. It wasn’t always this way. As the population boomed in the Post-War era, towns and developers looked for a way to build while keeping costs down.

Common Interest Developments (CIDs) were the solution, with what would become the modern HOA community growing from 500 CIDs in 1965 to 10,000 in 1970. According to the Foundation for Community Association Research, there are now more than 323,000 such community associations across the country.

HOA communities are concentrated in several high-population states, like Florida and California, which together account for 15 percent of all such communities. However, homeowners associations can now be found in all 50 states plus the District of Columbia.

Pros and Cons of HOAs

Proponents say that many community residents are satisfied with their HOA homeowner experience. The Foundation for Community Association Research points to a 2012 survey by Zogby International that found that 70 percent of homeowners described their experience as positive. Only eight percent said their experience was negative. Eighty-one percent of respondents said community benefits were a “good” or “great” return on their association assessments.

Those benefits often include buyer affordability, with many HOAs serving more affordable condo and co-op communities, market efficiencies, when it comes to infrastructure and services, and collective management, where many rules and regulations are governed by the association rather than by the local municipality.

The downsides can include sacrificing privacy, control, and freedom of choice, according to Bankrate. Community members do get added services like snow removal and amenities like community pools, but that comes with some tradeoffs, with rules governing the appearance of condo balconies, exterior house paint colors, and so on. While most homeowners don’t run into problems, there are occasional HOA management horror stories.

Homebuyers and HOAs

For homebuyers, a detached home or condo with an HOA could come with a high enough added cost in monthly association fees to force some into renting rather than buying. Forbes notes that while buying is generally still a better deal in all 100 of the country’s largest metro areas, the math can change when the cost of HOA fees are added into the equation. Under certain circumstances, the magazine found buying ended up costing more than renting for 29 out the 100 top metros.

Buyers should be aware that the price point of HOA assessments can vary widely. In 2015, the median monthly fee was near $600 in New York and more than $400 in Honolulu. However, fees were nearly negligible for Oklahoma City and Memphis, at $22 and $25 monthly, respectively.

In the middle or upper range of fees, buyers should be aware that HOA assessments could eat into how much house you can afford to buy. In one exploration of the question, The Mortgage Reports noted that a buyer with a monthly housing expenses budget of $1,500 could afford a $290,000 home. However, adding a monthly HOA fee of $250 to the mortgage principal and interest, property tax, and insurance costs would mean the same homebuyer could only afford a $250,000 home.

HOAs and the Industry

Of course, buyers aren’t the only ones affected by HOAs. The rest of the real estate industry also deals with HOA-related challenges, some of which are surprising. For instance, a recent article about the Las Vegas market revealed HOA fees can even affect what projects get built. While residential tower condos were indicative of the last Las Vegas building boom, such projects are absent in the latest boom. The reason being that the resulting luxury buildings’ soaring HOA fees would be out of reach for local buyers.

Because issues can affect the financials of a whole building or association-run neighborhood, lenders also have an interest in HOAs. According to Bankrate, Fannie Mae and Freddie Mac require master liability insurance for HOA homes. Meanwhile, when deciding whether to approve financing on an HOA home, both government and conventional lenders consider many issues, including any association member dues delinquencies, pending litigation, limited association cash reserves, and homeowner to renter ratios. Even sellers with good personal financials could face delays or cancellation of the sale if the HOA is having issues.

Buying or Selling an HOA Property

For the above reasons, both buyers and sellers should be aware of how a home’s HOA is performing. For sellers, it’s important to ensure an HOA is in compliance with any governing legislation, such as maintaining proper insurance coverage. Many lenders also require that fee delinquencies affect less than 15 percent of homeowners, that there is no pending litigation of $100,000 or more where the HOA is a defendant, and that 10 percent of condo fees be maintained as cash reserves.

For buyers, Investopedia outlines a few key considerations:

  • Firstly, consider your own temperament. Buyers who are easy going and don’t mind outside rules and regulations do best when it comes to living in an HOA community.
  • Next, fully investigate HOA fees. Each property’s fee structure will vary, and fees can be increased, or owners charged special assessments to top up reserves or pay for repairs.
  • Learn the HOA’s rules, often called corresponding covenants, conditions, and restrictions (CC&Rs). Rules can change, and violations can result in fines and possible foreclosure, so ask questions.
  • Make sure your potential new home is currently in compliance with the rules. Once you purchase the home, you become responsible for abiding by the HOA rules.
  • Lastly, consider attending an HOA meeting or ask for a copy of the minutes to get a feel for the community. Ask questions about how past conflicts were handled and be on the lookout for over- or under-management.

Like many other aspects of buying a home, HOAs come with both pros and cons. A condo or co-op purchase can be a great first step for many who want to attain the dream of homeownership thanks to these homes’ affordability. HOAs can take care of shared maintenance and service costs and provide amenities like pools, parks, and playgrounds. However, like any important financial decision, buying a home in an HOA neighborhood takes careful consideration, and buyers should make an effort to be well informed about the ins and outs of their new community.

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