Before Buying in an HOA
Buying in a Homeowners Association can be seductive. With all the amenities, manicured lawns and landscaping trimmed to perfection, HOAs lure in millions of unsuspecting home buyers each year. Be sure to do your homework before buying in an HOA.
For many families and retirees, homeowner associations can be a perfect fit for the lifestyle they are seeking. For other home buyers HOAs become one of the worst nightmares of their entire life. Yet more than 60 million Americans live in homeowner associations.
The HOA visual appeal, promises of a carefree lifestyle, security and amenities befitting royalty, can easy enamor and entrap you in a powerful membership organization, which you have little to no control over. If you are one of the millions of repentant timeshare owners, multiply the woes of owning an unsaleable timeshare unit by at least one hundred or one thousand times when buying in an HOA.
There are at least two major differences between owning a home in a homeowner association and timeshare units in that you probably can resell your HOA unit. It does have value and it can build equity.
Timeshare units and homes in a homeowner association also share a common expense. This is the never ending maintenance fees, which you must pay monthly or annually --even if you do not use the swimming pools, spas, tennis courts, golf range, club house or other attractive amenities that made you fall in love with the neighborhood.
Let's be candid, HOAs are not all bad, you just have to be certain you have considered the good, the bad and the ugly before plunking down your hard earned cash on a home in that alluring gated community.
There are tens, if not hundreds, of considerations to investigate before purchasing a home in an HOA.
You are not just purchasing a new home, you are buying membership into an exclusive association with at least four layers of laws, regulations and rules, which you must abide by when you move in. These are State laws, Covenants, Conditions and Restrictions, Bylaws and Rules and Regulations. Failure to comply with any portion of these controlling documents, can quickly and easily cost you real money in fines, fees and even liens or foreclosure on your home.
To be fair, each HOA is unique and many homeowners live happily in pristine, protected and well managed communities. That being said, it is worth noting the HOA horror stories reported in the media almost daily.
Here's the top 10 questions to ask before purchasing in an HOA.
1) How Much are the Total Monthly Assessments? Really!
All too often, Realtors and sellers misquote or low ball the amount of association fees you will be required to pay each and every month you own your home --whether you live in the house or not. HOA monthly fees contain two parts.
Part 1: The assessment to cover all operating costs for such things as landscape maintenance, pool service, painting, repairs and professional fees.
Part 2: Reserve Fund contributions which pay for major long-term projects. Nevada HOAs are required to hire a professional firm to physically review the association's common area and amenities to establish an expected life-span and to provide approximate replacement costs. Executive board members in a well run HOA also physically inspect and know what major repairs are due or will soon need maintenance.
Be sure to confirm the total monthly HOA fees with at least three sources: 1) an executive board member, preferably the president, 2) the management company and, when possible, 3) a current homeowner other than the seller. Get the amount in writing.
2) Are there Outstanding Loans Owed by the HOA?
Loans for major reserve fund repairs, such as street resurfacing, may sound good to keep association reserve fund assessments low and temporarily make homeowners happy. In reality most loans are a huge group liability and sometimes a means for cagey homeowners to sell their home at a profit after the work is done, while leaving the high debt for newcomers and long-term buyers.
If you are willing and able to live with the extra amount you will need to pay for the next several years to service the debt, it may not be a deal breaker, but look carefully at the loan terms and know your obligation.
In most cases, if a loan is proposed for your homeowner association, bite the bullet and pay a special assessment instead. There may be exceptions, but in general do not support borrowing for long-term neglected maintenance.
3) Are HOA fees buried, hidden or unrealistic?
When homeowner boards and management companies try to avoid the ire of homeowners monthly fees are frequently kept artificially low. Two of the most common tricks are 1) Postponing maintenance tasks and long-term projects, which merely kicks costs down the road and more expensive to repair later; 2) Sellers sometimes pay 12 months or more of HOA monthly fees out of the sale proceeds to make their home more attractive to prospective buyers. These buyers see "0.00" HOA fees for the first year and are all too often led to believe fees will come down next year, if they are mentioned at all. Remember fees and assessments are not going away. As long as you own your home, you must pay them.
An easy way to determine what monthly fees should be is to request a copy of the most recent twelve months of financial statements. Add each expense by category, then divide by 12. Finally total the list of expenses and divide them by the number of units. This will give you a good idea of how much you will be required to pay for operating expenses each month.
Watch for hidden expenses which are often excluded in projected monthly costs 1) bad debt --these are homeowners who are delinquent, are in bankruptcy or foreclosure; 2) pending lawsuits; 3) unpaid vendors --these are landscape, security, maintenance, etc. companies.
I have seen unpaid vendor accounts as past due as much as six months. Call at least three HOA suppliers and vendors and ask them if they are paid on time or at least within 30 days of billing.
4) Do the HOA Bank Accounts have Adequate Balances?
State law requires volunteer executive boards to make prudent management decisions in the best interest of all homeowners. This is to say each board member bares a legal and fiduciary responsibility to care for the affairs of the community with diligence and great care.
Operating Bank Balance
A simple rule of thumb is that the operating bank account balance should have at least three times the amount of monthly expenses on hand at all times. If not, this is a huge red flag. I worked with one homeowners association that had nearly zero dollars in their operating bank account and was borrowing money from their reserve account to survive. Possibly the most egregious fact was that the board treasurer was clueless about the crisis facing the community.
As in some poorly run HOAs, volunteer executive board members unanimously and erroneously blame the management company when things go wrong. In all cases, it is the board's responsibility to manage and ensure the welfare of the community.
Management companies, attorneys, collection agencies, auditors and others are professional services hired by the board to assist them with the management of the community.
Reserve Fund Bank Account
The second rule of thumb is that the reserve fund bank account balance should have at a very minimum 10% of the total estimated required reserve amount as designated in the association's reserve study. In simple terms, if the HOA reserve study states $2 million dollars is needed for long-term maintenance projects, the HOA reserve bank account should maintain a balance of at least $200,000 on hand at all times.
Avoid unfunded and under funded homeowner associations, unless you are willing to play catch up with higher monthly assessments in the future.
5) Are there Fines, Penalties or Pending Hearings?
Usually a call to the state agency or ombudsman's office in charge of HOAs or, in some cases, a review of their website can quickly determine if there are pending claims against management companies or board members. Something as small as a demand for documents from one or more board members can help you determine if there maybe larger underlying problems.
In one recent case, a management company had multiple fines in the tens of thousands of dollars and two of their community managers had had their license revoked, yet the HOA executive board continued to use their services. In this situation board members were in the process of producing documents demanded by the State, yet seemed oblivious to the serious problems facing their community.
These board members continued to blame all problems on the management company. Admittedly, the management company had failed in their capacity as a professional service provider. More importantly, the HOA executive board had failed the community by refusing to take their responsibilities seriously and merely basked in the useless fake-prestige titles of the HOA, while refusing to do any of the hard work of managing.
When homeowners finally woke up and became aware of the dire situation their community was in, more than $140 thousand dollars was missing, the state required community insurance had expired, vendors had not been paid for months, at least one homeowner had not paid dues for two plus years and the HOA was in jeopardy of being taken over by the state.
Unfortunately, this is not a unique situation. It is more common than most HOA homeowners realize.
Fines, penalties, state hearings and revoked licenses are red flags for home buyers and homeowners living in an HOA. All too often these signals are hidden from view and covered up by those in charge.
Be vigilant and always inform yourself, if you are considering buying in or living in an HOA.
6) What's the Date of the Most Recent Financial Audit?
It seems like an obvious and almost frivolous request, in that most states require an annual audit of HOA financial records. Sadly, some HOAs fail to have their finances audited for years at at time. Who knows if they are trying to save money, are reckless or just unwilling to follow up on this requirement.
More often than not HOA executive board members may not have read any of the community's governing documents or so much as skimmed the state laws regarding their community. This is unforgivable in that in most states, executive board members are required to sign a sworn affidavit stating that they have read and understand to the best of their ability all governing documents and HOA state law.
To not read and understand these documents is a tragic mistake and one reason why some board members do not insist on an annual financial audit of the community's accounting. Other's end up with fines or even jail time.
7) How Many Homes are Rental Units?
In some states and in many newer communities, restricting the number of rental units is prohibited by law.
Many older homeowner associations have clauses in their governing documents constraining the number of units that can be leased. These controlling documents in some states are grandfathered in and the restriction can be enforced.
Rental restrictions were put in place to help maintain or increase property values and to ensure non-resident investors did not gain control of the community.
In one HOA, the governing documents limited the number of rental units to 10%. This was very attractive to new home buyers in that it appeared to indicate the community would be stable, increase in value and long-term friendships might be possible.
A short time after purchasing and taking a quick survey it was revealed that more than 30% of the homes were rented and investors were using the community's collective hard work as a reliable source of income. In a worst possible case, one board member who had moved out of the community was renting their unit and still remained on the HOA board.
This was possible because board members did not do their management job and refused to enforce the governing documents, or perhaps, had not even read the documents. The love of community volunteer service and commitment to their neighbors had been replaced by greed and the desire for power.
However, it is not entirely fair to blame only board members. Homeowners had become complacent. The lack of community business transparency contributed to the near collapse of the neighborhood.
8) Are the HOA Board Members Residents in the Community?
I can think of nothing more frightening or more risky than living in a walled community controlled by outsiders.
When thinking of buying a home in a homeowners association, be sure to ask for a list of the board members by name and verify that all board members are residents of the community. In some cases, board member addresses and contact information are considered personal and protected by their management company. Don't be dissuaded.
HOA executive board members are quasi public figures and can be made to make themselves available. If you are deterred from meeting them at their home or from calling them, offer to meet them at the office of the management company. Better yet, submit your questions in writing and obtain a written response signed by the management company and at least one board member.
Investor board members have entirely different priorities and objectives than homeowners who reside in the community.
Should you move into a community where community residence is not a requirement for all board members, consider having this requirement added to the HOA bylaws.
9) Real Operating Costs vs. Volunteer Labor: What's the Difference?
Amongst volunteer HOA board members, there are always those who go beyond their call of duty.
Some board members with a professional or trade license freely give their time to make repairs and maintain the community.
So...let's state the obvious. It is not fair to expect these services from volunteer board members who spend countless hours responding to maintenance requests, homeowner violations, insurance claims, lawsuits, budget building, paying bills, reviewing ARC requests and security issues, as well as unreasonable selfish demands by those less reasonable neighbors.
In addition to placing themselves in an unfair situation where homeowners begin to expect HOA board members to perform manual labor, such as painting, electrical, landscaping, pool cleaning or any other task, these acts of kindness place the HOA at risk. Most of these tasks would cost hundreds and more often than not thousands of dollars, if the community were required to hire this work done.
As much as volunteer labor (and, frequently volunteer expenses) are appreciated. They create a false sense of 'getting more for less'. Future board members may not have these same skills or be willing to do the manual labor or spend out-of-pocket for community expenses.
These well-intentioned acts skew the facts and lower the real costs of operating the community.
This may not be a reason to avoid purchasing a home in an HOA, but it is a consideration that should concern board members and homeowners alike.
10) Who Runs the HOA?
The law is very clear. HOA Executive Board Members are to manage their community and not the management company.
Seemingly many homeowners and board members mistakenly believe the management company should manage their homeowner association. Unfortunately, many management companies encourage this false belief.
Board members frequently delegate the majority of their tasks to the management company. This is a recipe for community disaster and the undermining of their neighborhood.
To be clear:
- Most HOAs do not pay their management company enough money to be a full-time manager.
- HOAs are usually one of 20, 30 or even 100 other communities managed by the Community Association Manager or management company.
- If the HOA management company takes care of the bookkeeping, pays the bills and provide professional advice to the board, they are generally doing their job.
Board members who do no have time or are not willing to fulfil their legal and fiduciary role, should allow someone else to take their place.
Board members must be willing to constantly:
- Review, monitor and document community maintenance needs:
- Swimming Pools and Spas
- Tennis Courts
- Manage contractor performance, negotiate contracts and prepare requests for proposals
- Maintain community standards
- Enforce community governing documents
- Document homeowner violations with images and documents
- Serve on HOA committees
- Keep records, host HOA meetings and workshops
- And....so much more
Being a responsible HOA board member leaves time for little else and is generally a thankless job that goes unseen and unappreciated.
To be successful as an HOA board member, you need at least four strong pillars:
- A great management company
- A knowledgeable, 'take-no-prisoners' attorney
- An effective collection agency
- Software to simplify, record, coordinate and automate your management tasks