How Does an HOA Affect Your Home Purchase?

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Updated on October 9th, 2020

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buying a home with an HOA For many prospective homebuyers, a homeowners association (HOA) is not top of mind. Certainly, it’s less sexy than floor-to-ceiling windows overlooking a skyline, or a master bathroom with a built-in Jacuzzi. But an HOA is an important feature of a home that deserves careful evaluation.

What is an HOA?

An HOA is a legal entity that manages a shared housing complex, whether it’s a condo building, a row of townhouses or a suburban housing development with shared space. Almost all townhomes fall under the jurisdiction of an HOA and every condo is part of an HOA. However, almost all single-family houses are “fee simple,” meaning that the buyer owns the home and all of the land associated with a purchase, and has no obligation to an HOA. If you’re unsure whether a home is part of an HOA, ask your real estate agent.

An HOA collects monthly dues from its members to fund its activities. When factoring in how much home you can afford, these dues are an important consideration.

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What do I get for my HOA dues?

Your HOA manages (and pays for) the common elements in your development, which can include things like a shared roof (in a condo building), landscaping, snow removal from sidewalks and parking lots, shared fencing, mailboxes and entry gates. It also includes things like paying for the development’s security, maintaining a shared swimming pool or playground and managing a shared septic system. An HOA should also have property insurance for the common areas, as well as liability insurance should someone have a slip, trip or fall on the shared property and decide to sue.

What your HOA covers depends on whether you have a condo, townhouse or detached home. The general rule of thumb for condo owners is that everything within the walls of your home is your responsibility, while everything outside those walls is the responsibility of your HOA. For townhomes and detached single family homes, you may be responsible for the exterior of your home and your yard.

How does an HOA work?

You automatically become a member of an HOA when you buy. While HOAs in smaller condo buildings are often fairly informal, an HOA still exists. Generally, all HOAs have a president, treasurer and secretary – or some other way to divide up responsibilities. In some cases, officers (and board members) will get paid a stipend, but often they’re simply volunteering their time. The structure of an association can vary, depending on the total number of members. Larger associations will also have elected board members, who are responsible for making decisions about the association’s activities. However, informal smaller HOAs (for example, a condo building with only four units) often don’t have a board and make major decisions by an all-member vote.

What are an HOA’s rights and rules?

An HOA is a legal corporation, registered with the Secretary of State. It has a formally filed charter and bylaws, as well as covenants, conditions and restrictions (CC&Rs). Some of these rules can directly affect how you live – for example, some suburban HOAs can require your grass to be cut to a certain length, or can require you to get the HOA’s approval before you choose a new exterior paint color on your home. And, often, if you want to do extensive remodeling in the interior of your home, you need to get the plan approved by your HOA, particularly if you’re living in a condo unit, where structural changes can affect the structural integrity of the building, and where the noise can affect your neighbors. Some condo HOAs will require you to have carpet, so that downstairs neighbors aren’t affected by the noise of your footsteps.

One CC&R to look out for is a rental cap. Condo buildings will often limit the number of units that can be rented out (usually a maximum of 20 percent) so that the building won’t turn into a de facto apartment complex. Some HOAs may have even require that all units be owner-occupied. So, if you’re thinking of upgrading and renting out after a few years, read the fine print carefully. Another important thing to consider is pet limitations. Condo HOAs often limit the size or breed of pets allowed.

The rules, restrictions and enforcement vary significantly by association – which is why it’s important to read the CC&Rs carefully before you buy. If there are certain restrictions that you know would bother you, you very well may decide it’s not worth it to buy.

What makes for a healthy HOA?

There are two things that make for an effective, healthy HOA: a lack of squabbling and plenty of money. Unfortunately, it’s not uncommon for disagreements between the association and an individual member to escalate to a lawsuit. If you see that an HOA has been involved in a series of lawsuits, this should be a significant red flag – you may be stepping into a litigious, contentious space by buying.

The other main sign of health is the amount of money an HOA has on hand, known as its reserves. An HOA needs enough money to cover regular expenses, as well as any emergencies and intermittent, larger maintenance costs. For example, if a series of townhomes has a shared communal garage and the roof of the garage needs to be reshingled every 20 years, the HOA should have planned for this and would have enough money on hand to pay for it.  

If the HOA is short on funds, it will either skimp on maintenance or, more likely, it will charge each member a “special assessment,” a one-time payment to cover costs. In other words, if your HOA doesn’t have its finances organized, it can directly affect your finances.

How much should an HOA have in reserve funds?

Larger associations will hire an outside accountant to do a “reserve study” to determine how much money they should have on hand. Before you buy, review this study to see how your potential HOA measures up.

Smaller associations often don’t conduct reserve studies, so it’s up to you to determine what’s reasonable. Before making an offer, ask about the HOA reserves to get an idea of what the association has. If your offer gets accepted, you’ll then gain access to the association’s meeting minutes, as well as its accounting documents. Double check: Is the HOA is collecting enough dues to cover its expenses? How much is going toward reserves each month? If you’re unsure whether an HOA is healthy, ask your agent.

What’s a fair amount for HOA dues?

It depends on what you get. If you’re in a condo building with a doorman, a swimming pool and a weight room, your dues will be higher – you need to pay something to get something. On the flipside, if your condo building has only a shared front yard and the common hallways to get to the units, your HOAs should be far lower – you don’t pay much, but you don’t get much. Similarly, if an association keeps relatively modest reserves with the expectation of occasional special assessments, your HOA dues should be lower than that of an identical association that chooses to keep significant reserves to avoid special assessments. If you’re unsure, ask your real estate agent what is reasonable. And if you’re searching Redfin.com for a home to buy, you can limit your search by maximum HOA dues.

Redfin agent Ali Donoghue
About Ali Donoghue
Ali Donoghue is a Redfin real estate agent in Chicago. She’s an expert negotiator who loves educating her clients about all aspects of the real estate process. In 2013, she was named a Top 1% Producer by the Chicago Association of Realtors. While she’s studied in London and speaks Italian, Donoghue is a lifelong Chicagoan who has enjoyed watching the Windy City’s neighborhoods transform over the years.

 

If you are represented by an agent, this is not a solicitation of your business. This article is for informational purposes only, and is not a substitute for professional advice from a medical provider, licensed attorney, financial advisor, or tax professional. Consumers should independently verify any agency or service mentioned will meet their needs. Learn more about our Editorial Guidelines here.
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Ali Donoghue

Ali Donoghue is a Redfin real estate agent in Chicago. She’s an expert negotiator who loves educating her clients about all aspects of the real estate process. In 2013, she was named a Top 1% Producer by the Chicago Association of Realtors. While she’s studied in London and speaks Italian, she is a lifelong Chicagoan who has enjoyed watching the Windy City’s neighborhoods transform over the years.

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