When you’re considering purchasing a property in a building or neighborhood that has a homeowners’ association, there are some important things to find out. While a well-organized HOA can enhance the quality of the community, if an HOA is poorly run or short on funds, they can incur expenses that will be passed on to the homeowner. So here are the most important things you need to find out about the HOA before buying.
This is the most important question real estate investors need to ask. Even if this is going to be your primary residence, in a few years you may change your mind and decide to rent it out. You should find out if this is even an option. Also, some HOAs allow long-term renters but won’t allow homeowners to Airbnb the property. Find out what your options are at the outset.
It’s so important to know what you’re getting into with an HOA. Looking at the HOA binder is the best way to do that. It will contain the bylaws and the CC&R, which stands for the Covenants, Conditions, and Restrictions. The bylaws outline how the HOA board functions, while the CC&R lays out the rules for tenants and the penalties for violating the rules. It can include rules about property maintenance, fees, pets, parking, architectural restrictions, and information about dispute resolution.
First, find out exactly what the current HOA fees are and how often they’re increased. This information alone might determine whether or not your property will cashflow. Next, ask what you’re getting for these fees. In an HOA building, the fees commonly go toward maintaining common areas, such as swimming pools, parking lots, lobbies, elevators, and a community clubhouse. In a lot of HOA communities, the dues will cover water/sewer fees.
When there is a large repair that needs to occur, such as repaving the driveway or replacing the roof, an HOA will use their reserve funds to cover this capital expenditure. The HOA’s CC&R will specify their policy on reserve funds. The rule of thumb is that an HOA should have at least 70% of the depreciated value of all common areas at any given time. If an HOA doesn’t have enough cash on hand to cover large repairs, that expense will be passed on to residents in the form of a special assessment. Even if the property looks like it has enough reserves, it’s better to live in a community that has at least 100 units. In the event that there is a special assessment, it will be more manageable when over 100 residents cover the cost.
You could be looking at a property right as they’re about to do a special assessment. This is typically a sign that the HOA isn’t financially healthy.
Some HOAs allow everyone to vote and each vote is counted equally. Other HOAs do voting by proxy, which allows a small group of people to make decisions for the entire HOA.
This will give you a good idea of how the HOA operates and what types of problems the HOA experiences. It will also show you how issues can get resolved – or aren’t resolved.
Don’t let any of this scare you off from buying in an area with an HOA. HOA neighborhoods and properties are extremely common, and many of them do a great job of enhancing the quality of the community. But asking these questions at the outset will determine what type of HOA it is. If the HOA doesn’t want to provide some or all of this information, it’s better to keep looking.