Often, homes, condos, and apartments are part of a Homeowners Association. Referred to as an HOA, this organization oversees the building or homes in the neighborhood and establishes rules and regulations that often determine what you can and can’t do to your home, the type of pets you can have or if you can have pets at all, the amenities offered, and more.
The oversight of HOAs varies widely with some laying out strict rules and handing out fines when residents are in violation and others being much more laid back, governing only the minimum, like keeping a tidy yard, for instance.
Understanding your HOAs requirements, what they offer in the way of amenities, HOA fees, and the penalties for violations is an essential step in the homebuying process.
It is always advisable to know as much as you can about the HOA before buying a new property.
What is an HOA?
An active HOA is common in gated communities, planned urban developments (PUDs), and multi-unit townhome or condominium buildings. HOAs are made up of community members elected after an appropriate selection and voting process.
These board members set governing documents that include bylaws, rules & regulations, and Covenant, Conditions & Restrictions (CC&Rs). Their role is to act in the community’s best interests and help in resolving complex problems amicably.
These board members can oversee the building themselves or they may hire a property management company when operations are large and cannot be handled by the board, but these property management companies do not govern the HOA.
The HOAs primary purpose is to enforce the CC&Rs, manage the financial accounts, and oversee upkeep and upgrades to the building or neighborhood. They provide access to amenities such as pools, tennis courts, and fitness centers at fractional costs, oversee the maintenance of shared spaces, and set regulations for the appearance and upkeep of homes, among other things.
The HOA will also approve and maintain a budget for how funds are allocated. The HOA’s primary source of revenue is the monthly assessment they collect from unit owners. In addition to monthly assessments, HOAs collect one-time fees, such as move-in/move-out fees and management fees, as well as additional fees when units are sold or payments are late and special assessments when necessary.
HOA maintains two financial accounts:
- Operating Account: This account is used for routine maintenance activities, improvements, and pre-approved expenses.
- Reserves Account: This account is held as a savings account to be used when larger capital expenditures are needed. For instance, if the HOA needs to replace the roof of the common area, it would utilize the funds from the reserves account.
Things to watch out for in HOA
As a first-time homeowner, the benefits of an AOA may seem appealing, but there are some things to watch out for. Even though HOA offers multiple benefits to its residents, owning a home within an HOA can be challenging. Here are some things to watch out for.
Special Assessments
Sometimes, the operating or reserve account funds are not sufficient to cover certain projects or repairs. In these cases, the HOA may levy a special assessment—a fee in addition to your monthly dues.
If the HOA lacks funds or there are unforeseen circumstances, they may levy a special assessment to cover the expenses. The following are examples of major expenses that may require a special assessment in case the HOA is lacking funds in the reserves account:
- Replacement of siding or roofing
- Replacement or renovation of a community clubhouse
- Addition of community amenities like a tennis court or swimming pool
- Repairs after a natural disaster
- To cover a reserve deficit due to poor financial management or failing to budget properly
Special assessments are meant to be non-recurring. The homeowners are required to pay the special assessment as a one-time payment or it can also be added to the monthly fees.
Rental cap & other restrictions
In a condo building or development, the HOA will determine the rental cap. A rental cap is the number or percentage of units that can be rented out at a given time. If you plan to rent out a property that’s part of an HOA with a rental cap and the rental cap has already been met, you must add your name to the HOA waiting list before you can rent out your unit.
Some lenders will only approve mortgages for condos if a certain portion of units in the complex you’re looking at happen to be owner-occupied units, so understanding the HOA’s rental cap policy is important before you apply for a mortgage.
In addition to a rental cap, HOAs can impose rental restrictions such as:
- Minimum Lease Duration
- Prohibition on hotel and transient purposes such as Airbnb
- Tenant screening process
Pet Restrictions
Each HOA is different and will have different pet restrictions, but common pet restrictions include:
- Maximum number of pets permitted per unit
- Size and weight limit
- Breed restrictions
- Pets registration as per HOA requirement
- Evidence of common vaccinations
Remodel Restrictions
Property value preservation is one of the primary purposes of architectural standards in a community set out by the HOA. The governing documents give the HOA the power to impose restrictions on a homeowner’s ability to alter or upgrade their home.
Often, HOAs are tasked with maintaining design continuity in the community. Because of this, remodeling is typically subject to the written consent of the Board. Remodels that require approval can include:
- Modifications to the exterior of the home, especially those that deviate from the community aesthetic or architectural standards
- Structural changes to the interior of the home such as removing or relocating load-bearing walls
- Exterior additions or changes such as building a fence, installing a pool, certain types of landscaping, etc
- Rewiring or modifying the electrical systems
- Flooring
Doing remodeling without the approval of the HOA could lead to fees and fines and, potentially, having to undo the work to return the home to its original state.
Active Litigations
If a problem arises between the HOA and a homeowner that can’t be resolved, many times lawsuits are used to resolve them. Both the homeowner and the HOA can use lawsuits to deal with a problem or failure to uphold or comply with the CC&Rs. HOAs can also be in litigation with different vendors who have worked or are working in the community. Most common homeowners association lawsuits are:
- Misuse of HOA funds
- Architectural request denials
- Failure to maintain common elements
- Pet disputes
- Violations
- Dispute with vendors
Sometimes, the resolution of these litigations goes against the HOA, thus, leading to additional expenses on the HOA in the form of settlement. This directly affects the HOA financials & could lead to special assessments as well. When applying for a mortgage, the lender will likely look at any pending or past litigation.
Eligibility for financing
If you’re looking for a condo, securing financing can be tougher than getting financing for a single-family home because the lender must approve the buyer as well as the condo project, which includes assessing its HOA. In some cases, lenders will only approve mortgages for condos if a certain portion of units in the complex are owner-occupied units. The number of condo owners behind on their HOA dues and the amount of commercial space in the building can also affect your mortgage approval. Some lenders even have stricter rules for credit scores for condo buyers.
Mortgages, regardless of the type, determine a debt-to-income (DTI) ratio that can be no more than a certain percent. For instance, a conventional loan’s DTI is no more than 36%. HOA dues are factored into your DTI which can mean you may not be able to borrow as much to purchase the home, apartment, or condo.
If you plan to purchase a home that’s part of an HOA, make sure you understand any additional lender requirements.
Making HOAs Simple – The Flyhomes Solution
Flyhomes offers a unique solution to all potential clients to help make the process of buying a home in an HOA go more smoothly.
The Flyhomes Research Team provides an HOA report that includes an HOA Snapshot. The HOA Snapshot shows the HOA health at a glance. It includes all the key parameters that a buyer should be aware of like current special assessment, risk of the future special assessment, rental cap, pre or pending litigation, and project eligibility for conventional financing. The HOA Snapshot is followed by a detailed HOA analysis highlighting the financing summary, pet restrictions, rental restrictions, and architectural & remodel restrictions.
This simplified report provides a clear picture of HOA complexities and highlights the red flags if any. It will help you gather all of the information you need to make an informed decision and give you the ability to negotiate with the seller when you make your offer.
To learn more, check out Flyhomes and see our radically different way to buy and sell for yourself.
