Homeowners associations have been around for many years and are designed to protect communities and neighborhoods. They are also important for real estate developers to keep specific properties at a premium price while trying to market, sell and manage residential homes and lots.
Many people might not be familiar with a homeowner’s association process or what purpose they serve. The following information will explain what they are and what they can do for real estate developers and residential property owners.
What is a homeowners association?
A homeowners association is known as an HOA. This is a private organization that has been formed by a real estate developer. The purpose of this organization is to manage properties.
Developers who form this organization have privileged voting rights and can lead the organization while it is still under their control. They are also responsible for the financial and legal activities of this group. Most real estate developers will transfer the ownership of a particular HOA to the homeowners after they have sold a certain number of lots and/or homes. Once the developer turns over the HOA to the homeowners, the homeowners typically elect a Board of Directors. Prior to the transition, the developer typically appoints the board members. The authority of the HOA is governed by state statutes and governing documents such as covenants, conditions, and restrictions (CC&Rs) and the corporate documents (articles and bylaws). Many HOAs are incorporated and this means that they have to adhere to state laws pertaining to non-profit corporations. Some states have more laws than others in terms of how this type of organization is to be operated.
When a person decides to purchase a property within a community that has a homeowner’s association, generally, they must become a member of that organization. Once they become a member of this association they must adhere to its rules.
Who is required to join an HOA?
Keep in mind that not all communities have a homeowner’s association. People that purchase properties in leased or gated communities typically have to join a homeowner’s association. There are lots of other developments with homeowners associations as they are very common.
Homeowners will be required to pay a fee for joining an HOA. Fees will vary by community and association. Remember that people who purchase a home within an HOA will usually have to sign a contract that legally binds them to a particular HOA. This contract (or clause within a contract) will usually be a part of the home purchasing process. You should also keep in mind, that fees can be increased
What are the rules for joining an HOA?
HOA rules will vary by community, neighborhood and association. However, there are some common features that most HOAs have for their members. They include:
- Paying regular dues.
- Adhering to special assessments of property. Do not forget that larger scale repairs and improvements are often needed for communities to maintain a certain standard. So, HOAs make a forecast about what will be needed for the future and they start to collect money now to be used for this future purpose.
- Being responsible for maintaining the grounds.
- Taking care of the common grounds for members that live within a shared community like setting.
- Follow rules about housing colors. This usually applies for people who want to paint their home a different color.
- There are also rules for the type of things a person can do in terms of hanging out laundry lines or setting up a satellite dish.
- HOAs can even set rules for pets that must be adhered to.
- Landscaping considerations are also present.
- Rules establish what types of vehicles can be parked in a driveway, garage, carport or on the street.
These are some common rules and regulations that pertain to all HOAs. Most HOA organizations enforce their rules through fines and in extreme cases, they can remove a person from a property if they are blatantly not following the rules and are posing a serious threat.
What are the pros and cons to buying a home with an HOA?
The pros can include the following:
- Maintenance and management services
- Amenities such as clubhouses and pools
- Insurance coverage
- Enforcement of appearance standards that can result in higher property values
The cons can include the following:
- Association Fees
- Restrictions on property use based on what is in the CC&R
- Potential issues with the HOA board
Who’s managing it and what kind of job are they doing?
Once a developer turns the HOA over, the homeowners have control of their community. At the time of turnover, the HOA should be in receipt of all items listed in the contract with the developer. At this point, the homeowners are entitled to elect the majority of the board. Depending on the percentage of homes that the developer still has for sale, he/she may still be entitled to elect one board member. During the turnover process, it is critical that the board ensure that all items are satisfactory prior to being given control. For example, the board will want to ensure that the developer has paid taxes on the common areas prior to being deeded over to the association. The board does not want the homeowners to be responsible for any back taxes etc. The board will also want to understand the funds and we recommend that the board have a CPA review the financial records. The board will want accurate accounting records of who has or has not paid their dues.
Once the homeowners are in charge of the board, they will decide if the HOA will manage itself or if the HOA will hire a professional manager.
Many HOAs elect to hire a professional manager especially if there are a lot of amenities to manage. Another reason is if the homeowners do not have time to manage the association or they lack the skills to do the work.
Some HOAs elect to have the homeowners manage the association. Often times the reason is that the homeowners do not want to add the additional expenses of paying a professional management company. In this case, it is best to ensure that the board consists of individuals with experience and skills in the following: finance, operations, law, public relations, and vendor management.
Lastly, some HOAs may split the work between the board and a professional management company. This allows the board to have the expertise of a professional management company but keep expenses as low as possible (by leveraging the board for some tasks).
Most HOAs appoint a manager to act as a main contact person. Often times, this may be the President of the homeowners association or a specific person at a professional management firm. This individual oversees the daily or basic operations that many HOAs entail. They should be knowledgeable and experienced with the different aspects of managing communities and neighborhoods.
Managers are the ones who enforce the rules, assist with board meetings, ensure that they are meeting with homeowners about their concerns and they help to provide maintenance to homeowners in need. Ultimately, they ensure that the HOA that they represent is operating according to plan.
When considering purchasing a home with an HOA, you should get a copy of the bylaws and read them to ensure that you understand the details. Additionally, you should attend an actual HOA meeting if possible. This will allow you to see the interactions of the homeowners with the board and potentially uncover any unknown issues or nuances. You want to avoid a nightmare in disguise if possible.
Additionally, when trying to determine if a particular neighborhood’s HOA is doing a good job, you should look for the following:
- The HOA has clear goals and good communication with the homeowners. For example, does the board feel that the community should be limited to current amenities or are they making an effort to constantly be improving the community? Do they listen to homeowners and respond in a timely manner? Does the HOA encourage homeowner’s feedback and can they challenge policy? Good HOAs will have clear goals and active professional communication with the individual owners. You can speak with multiple homeowners and get a read pretty quick on whether or not this is the case.
- Clear Rules. Does the HOA enforce the rules as they are outlined in the Covenants, Conditions and Restrictions (CC&R)? Are these rules interpreted loosely and do they enforce them consistently? Good homeowners associations will be consistent and ensure homeowners understand the rules.
- Checks and Balances for the HOA Financial Accounts. Good HOAs have clearly defined procedures and checks and balances to ensure that there is not financial mismanagement.
- Funds set aside for unexpected expenses. Good HOAs have reserves set aside for unexpected expenses to help minimize any assessments that may need to be assessed. Typically, your monthly HOA fees should consist of 2 parts. One part should be an amount to cover the current annual operations such as pool expenses, insurance, water and landscaping. The second part should be an amount that goes into reserves for long-term repairs and replacements such as roof replacements on clubhouses, road repairs or replacement and repaving of parking lots.
- The community looks good. If HOAs are doing a good job, you should be able to see that the facilities are in good condition and that homeowners are following the rules.
Typical Costs and What They Cover
Once again, HOA fees will vary by community, neighborhood and association. Fees can range between $200 and $20,000 or even more as they vary according to the amenities that are covered. People who live in very expensive neighborhoods (in the millions) could be a part of a HOA with much higher fees. The national average of HOA fees are between $200 and $1000 per month.
Remember each community is different and each community can offer different amenities. So, this is one reason as to why one HOA might be higher than another.
For example, does the development have a clubhouse and a pool that needs to be maintained? If so, this will be more expensive than a neighborhood that does not offer these amenities. In gated communities, you will likely pay for security staff to monitor the visitors and residents coming and going from the community along with other security staff that patrol the grounds.
HOA fees can cover things such as maintenance and communal area upkeep, city services, pest control service and insurance.
Transfer Fees and Working Capital
Transfer fees are also a part of the HOA process. They are used to pay for a manager’s work that is done in terms of running the organization. An HOA related transfer fee is usually charged when a person purchases a home within an HOA community. Fees could cost anywhere from $100 to $400. The national average for HOA transfer fees is $225 to $250.
Working capital or capital contributions are usually collected during the initial purchase of a home. These funds are often saved and used for future upkeep and repair work for a particular community. They are often applied to the assessment factor of HOAs. Working capital is very necessary for neighborhoods maintaining (or improving) their present appearance.
Assessments – What are they and what happens if I don’t pay?
It can be hard to predict all of the expenses needed in a community. Good HOA boards will make financial predictions on needed reserves and include this amount in your annual fees. However, sometimes, the board may need additional monies over and above what has been collected in reserves. In these cases, the HOA will need to collect an assessment from each homeowner. Examples could be that a clubhouse develops mold due to an unknown water leak and needs mold remediation. This an example of something a board cannot plan for and is unforeseen. If you choose not to pay an assessment from the HOA, the HOA will likely hold you accountable by enforcing the rules allowed by the CC&Rs. Usually, the CC&Rs will allow the HOA to put a lien on your property and in some cases, they may be able to foreclose on your property. They may also be able to fine you a penalty or late fee.
Enforcing HOA Rules
It was stated earlier in this article that homeowners who do not follow their HOA rules can lose their home. In most cases, they will be fined and have to correct any issue that they might have caused with a property. Most HOAs will not immediately force a person out of their home; unless an individual is doing something that puts the whole community or neighborhood into immediate danger or harm. Most HOAs will also give homeowners time to correct any problem they might have.
There are certain states that have more checks and balances within state statutes regarding HOAs. For example, some states such as North Carolina, require a due process hearing to be held before a homeowner is fined and limit the amount of the fine.
On the other side of the spectrum, some states such as Texas, will allow an HOA to foreclose on a home in order to collect assessments.
In addition to monthly or annual fees, HOAs can also bill for special assessments. In some cases, a board can fine you for assessments without a vote from the homeowners. Typically, there are restrictions on doing this and you can only bill for a small percentage of the annual budget without the majority vote of the members.
Ultimately, an HOA will protect a community from deteriorating. Neighborhoods that are not cared for will naturally fall apart within a few years. This could easily happen within any area where no HOA exists. An HOA just ensures that a community or neighborhood stays strong and vibrant.
Developers that sell properties within decent neighborhoods also need HOAs to ensure that these properties stay in good shape; since this is how they make their income. Once again, it is easy for any neighborhood to go into decline within a few years if the residents are not doing everything to care for them. HOAs might seem like an “unnecessary evil” but they truly help to ensure that a unique community stays protected, decent and profitable.