So you've narrowed down your search to a particular location and have started looking at homes there. You're open to several types of homes, including condos and townhouses with homeowners associations (HOAs). But how do you know if living in a place with an HOA is right for you?
Let's take a look at the pros and cons of an HOA... are they worth it?
What is an HOA?
Homeowners Associations (or HOAs) are organizations made up of property owners in a condo building, subdivision, or planned community. Owners' collective interests are represented through the HOA and owners pay dues that cover the costs of operation and for maintaining reserves.
The HOA members elect a board of directors from their membership that serves as the governing/managing body for the HOA. All condos have HOAs since they all have common areas that all owners and residents have an interest in maintaining.
What do HOAs do?
The full extent of what HOAs do is highly variable and dependent on the specific condo building, subdivision, or common interest development.
At the most basic level, however, all HOAs will set rules and regulations on what owners can or cannot do with their property, assess and collect fines for rules violations, and collect HOA dues.
Depending on the HOA, these dues can go towards things like paying for maintaining common areas (like landscaping for a shared garden or running a community pool), repairing exteriors and roofs, paying outside managers to administer the day-to-day aspects of the HOA on behalf of the board, paying vendors to provide services like window washing or private trash collection, purchasing insurance for common areas and association property, paying for members' utilities, paying insurance premiums, and contributing towards reserves.
HOA dues are commonly assessed based on a property's size (especially for condos and townhouses), but may also be a flat fee for all owners (more common in subdivisions and planned communities).
What are some pros of HOAs?
HOA amenities like pools, gyms, a community clubhouse, or landscaping can be ideal for convenience and may be cheaper than paying for these services individually
HOAs with active memberships can be more engaged as a community than neighborhoods without HOAs, improving neighborliness
HOA membership can give you a greater say in your community than if you were to live in a place without one
HOAs may provide secure services like security monitoring, a liaison with local law enforcement, and secured parking spaces
HOAs may place restrictions on what owners can do with the exteriors of their properties, which can be ideal if you prefer to live in a community with a cohesive look
HOAs can pay for the repair or maintenance of property elements, saving cost and effort compared to arranging for those repairs yourself
HOAs may cover the cost of some utilities in their dues
HOAs can provide a venue and standardized procedures to adjudicate conflicts with neighbors
HOAs can provide a strong collective voice in advocating for or against community-wide issues that can affect quality of life and/or property values such as new commercial or industrial developments
What are some cons of HOAs?
HOA dues can add significantly to the monthly cost of your home
HOA dues can rise significantly (up to 20% a year in CA without a membership vote), so even if the dues were initially affordable, several years later they may no longer be
HOAs may charge special assessments which can be significant to make up budget shortfalls or to replenish reserves
HOA rules and regulations can be highly restrictive in what you are allowed to do with your property or require lots of additional paperwork and approval from the HOA (for example, you may need to get approval to install a video doorbell, or may be prevented from installing solar panels)
HOAs can reduce your sense of privacy, as management may conduct occasional exterior inspections to find any rules violations
HOA dues may go towards amenities that you have no intention of using or rarely make use of
HOA rules may not always make it clear when you are responsible for a repair and when the HOA is
HOAs may become involved in litigation against vendors or even current or prior members, which may affect lenders' willingness to approve loans, and can also potentially be a risk for the association's finances
What should I look out for when evaluating an HOA?
Before you close on a home, you should make sure that you are given the opportunity to review the HOA documents by setting up a contingency. When looking through the documents, pay close attention to the:
CC&Rs (Covenants, Conditions, & Restrictions), which lay out what are HOA responsibilities and what are owner responsibilities. Read through and figure out - who is responsible for exterior repairs? What about interior repairs? How is responsibility for a shared wall or utility connection divided between owners? Are there restrictions on what an owner can do to make improvements to the interior or exterior of their property? What about rental restrictions? Short-term rental (Airbnb) restrictions?
Annual Budget Report and Financial Statements. Are there any planned dues increases? What about special assessments? How do the HOA's reserves look? Are there a lot of members who are delinquent on dues? Is the HOA spending more each month or year than they have been collecting? Has the accounting firm that reviewed the HOA's finances and produced the report flagged any potential issues or problems?
Rules and Policy Statements. Are there rules on solar installations? Electrical vehicle chargers? Holiday decorations? What are the pool or gym rules? Are there rules or limits on how many people can have copies of keys or key cards? How much time are you allowed to fix any violations? How much would you be fined for a violation? What are your options for paying your dues? Check only? Wire transfers only? Is there a website online where you can find association documents and communicate with the HOA management?
Insurance Disclosure. Does the HOA's master insurance policy (if they have one - Condos MUST have one) look like it has sufficient coverage?
Disclosed Litigation. Is the HOA involved in any litigation? What is the litigation about? Did the litigation reveal issues with construction defects? Do the HOA's lawyers think the litigation could be a risk to the HOA's ability to operate? (HOAs will have their lawyers prepare a letter to owners to summarize litigation so that it can be provided to lenders and potential buyers.)
Meeting Minutes and Newsletters. Have there been consistent safety or maintenance problems that haven't been resolved? Are members voicing security concerns often? Are there unpopular policies that members have voiced displeasure with? Were those policies changed?
If any of these bring up problems, you will need to closely think about whether the property and its HOA makes sense for you. Remember, the HOA is not optional- even if the property itself is perfect, a bad HOA or one with problems can mean a less-than-pleasant living experience, or difficulty reselling the property later.
So should I move into this place with an HOA?
That depends on your own personal preferences. Are you happy to make the cost and flexibility trade-off for access to amenities and services? Do you want to live in a cohesive community with agreed-upon rules, or would you rather live someplace where you have more of a say in what you can or can't do in your property? Could you absorb the HOA dues fees if they increased? The answers to those questions can help you decide whether to go through with the purchase of the $800/month HOA dues condo.
To ensure that the buyer (and lender) is paying a fair amount for the home, buyers insert an appraisal contingency, which allows the buyer the ability to walk away from the purchase without penalty if the appraisal returns a value lower than a set value (usually the purchase price). Aside from walking away, the buyer can renegotiate for a lower price with the seller, request that their lender make an exception, and approve their loan as if the property had appraised to match the purchase price or make up the difference between the purchase price and appraised value via their own funds. In most cases, if the buyer makes use of the appraisal contingency to walk away, they are likely to receive a complete refund of their earnest money. However, buyers must be cautious and include this in the contract to avoid problems at a later stage.
Marta decided to back out from the sale via the appraisal contingency after the home was valued below the purchase price.