No matter how involved you are in real estate, chances are you have heard of homeowners associations at one point or another. In fact, you might have encountered an HOA at least once or twice during your time in the industry. However, how much do you actually understand about an HOA meaning? I am willing to bet few investors actually know about them in the detail that they should. How do homeowners associations work? Why do they exist? Better yet, what’s in it for the homeowner? The answers to all these questions, and more, can be found in the guide below.
On the FortuneBuilders Real Estate Investing Show, JD and Dan explain the differences an HOA property may have compared to traditional homes, as well as the strategies CT Homes used to successfully complete the deal. Listen to the podcast here:
HOA Definition
The definition of an HOA is simple enough: it is an organized group of homeowners within a particular subdivision, condominium, or planned unit development. Homeowners associations typically consist of a board of directors that local homeowners have elected to maintain predetermined rules and regulations. In other words, homeowners associations are nothing more than elected individuals tasked with maintaining an area’s status quo. However, the exact status quo is entirely dependent on the area in which a home resides—nonetheless, most HOAs focus on preserving and enhancing the homes within their jurisdiction.
However, it is worth noting that while HOAs can drastically improve neighborhoods through steady regulation, they come at a price. Those that buy into a neighborhood with an established HOA are automatically enrolled and forced to pay dues that typically support community improvements. Additionally, some homeowners associations are highly restrictive; they have a say in what homeowners can and can’t do to their own homes. Some HOAs, for example, will limit the colors you can paint your house or even require you to maintain an inherent level of curb appeal.
All things considered, homeowners associations typically add to the value of a neighborhood. If you can get behind the idea of letting an HOA regulate certain aspects of homeownership, the HOA fees that go into bettering the community may be worth the cost of admission. However, if you’d rather have the final say in what you can do to your home, it may be in your best interest to avoid communities with HOAs.
How Do Homeowners Associations Work?
Homeowners associations are relatively simple organizations. They are typically put in place by the original lots’ developer and eventually handed off to the homeowners after selling a predetermined number of lots. Generally speaking, subsequent buyers must become a member of the association — that is, if they want to call that specific location their home. Therefore, those who buy into a home governed by an HOA will be required to obey the governing documents and By-Laws. Also, homeowners must pay monthly or annual dues, which are typically reintroduced to the community in the form of improvements. So while there are fees to worry about, they typically improve living conditions and sometimes even increase nearby homes’ value.
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Why Do HOAs Exist?
Homeowners associations are typically formed by the same real estate developer who is responsible for the community in the first place; it’s a way for them to keep tabs on the community and ensure it continues to flourish. Even more, developers will introduce an HOA to their latest project as a means of marketing, managing, and selling homes and lots. homeowners associations are a way for developers to maintain a presence in a community once everything is built.
HOA, Community Associations, & Property Owner Associations
Whether you are touring properties for a new home or investing in your third passive income property, at some point, you may hear the term “community association” used. A community association is typically used as an umbrella word for homeowners associations and other property owner associations. While each of these organizations serves a similar function, they are designated differently under state and local laws. Additionally, property owner associations may include community members or other owners interested in that area’s real estate.
What Are The Pros & Cons Of An HOA
By now, you are likely starting to pick up on the various pros and cons associated with homeowners association requirements. Because every homeowners association is slightly different, it can be hard to consider whether they are universally helpful or hurtful. Additionally, the impact of an HOA on your bottom line will differ based on the deal at hand. Before buying, renting, or investing in a property within an HOA’s jurisdiction, I urge you to consider each of the pros and cons as they apply to your specific property.
Pros
The most obvious pro of a neighborhood homeowners association is the potential boost in property value from the neighborhood’s added amenities or aesthetic appeal. Property owners in an area with a homeowners association will typically find excellent curb appeal, well-maintained community spaces, and more. Each of these features can help market a property for sale and enhance the home’s value. Potential buyers should consider an HOA’s impact on listing prices by comparing similar properties outside of the neighborhood or community.
Another key benefit associated with homeowners associations is the ability of these organizations to set and enforce community rules. While these rules could be interpreted as a downside to some, for the most part, these rules are put into place for the benefit of residents. For example, those living in popular tourist destinations may find quiet hours essential. Similarly, rules regarding speed limits and parking regulations could make the neighborhood easier to navigate or safer.
Cliff Auerswald, President at All Reverse Mortgage, suggests some of the following pros: “HOAs reduce property upkeep responsibilities on homeowners; lawn care, snow shoveling, and the like are all taken care of. Community bylaws usually keep the community in good shape which stabilizes property prices. Some HOAs offer and maintain tenant-drawing amenities like pools, club houses, golf courses, that make it easier to attract interested tenants”.
Cons
Despite the numerous benefits, homeowners associations can present particular challenges to property owners. These challenges are often a result of HOA fees, which can be a burden depending on a property owner’s specific situation. If an investor purchases property within a homeowners association to rent out, they may find the HOA fees undermine some of their monthly cash flow. If they decide to then shift that cost onto potential tenants, they risk being able to market the property and keep it occupied. This is not always the case for investors, but it is something worth considering.
Furthermore, first-time homeowners purchasing a property within an HOA’s jurisdiction may find these additional monthly costs push their budget limits. To avoid this potentially costly scenario, always research whether there is an HOA in the area and consider the monthly costs when looking at financing. HOA fees do not mean you have to rule a property out; they should be considered part of the cost when moving into an area.
HOA FAQs
There are numerous factors to consider before buying a property under the jurisdiction of an HOA. Whether you are an investor or aspiring homeowner, read through the following frequently asked questions to learn more:
What Are Common HOA Rules?
In addition to maintaining the status quo, homeowners associations are tasked with establishing rules and making sure the homeowners within their jurisdiction abide by them. Otherwise known as “covenants, conditions, and restrictions” (CC&Rs), said rules are applied to any new homeowners within the community. At the time of their purchase, homeowners are even required to sign a contract saying they will follow the rules set forth by the HOA.
Not unlike HOAs in general, the rules enforced by each community will vary depending on individual priorities. That said, individual rules (or CC&Rs) can cover just about anything from types of mailboxes to whether or not you are allowed to have a dog. In fact, some HOAs will even prohibit certain dog breeds entirely. Generally speaking, however, most HOA rules will fall under one or all of the following categories:
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Fees: All homeowners associations will coincide with fees, and those that wish to live in an area with an HOA are expected to pay said costs. The fees go towards bettering the community and amenities.
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Noise Restrictions: A lot of homeowners associations have some sort of noise level restrictions. Besides limiting the noise you are allowed to make (whether it’s a party or power tools), most HOAs will enact quiet hours, meaning you can’t make too much noise after a certain time of the day.
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Decrease Clutter: HOAs are primarily concerned with the overall appearance of a neighborhood, so it stands to reason they will prioritize a home’s aesthetic appearance. They want your home to look good so that everyone else’s does, and to do so, they will most likely limit the clutter you are allowed to display. That means you need to be conscious about patio furniture, barbecues, and similar items that may be strewn about your yard.
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Pet Regulations: It is quite common for HOAs to enforce several pet rules, not the least of which include how many animals you can have, the type of animal and breeds, pet cleanup, leash laws, and noise levels.
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Maintenance Requirements: Most homeowners associations will require their individual homeowners to maintain an inherent level of curb appeal, meaning each home should conform to a certain standard. HOA maintenance requirements usually include lawn, siding, driveways, and walkways to be maintained regularly.
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Respect The Neighborhood: homeowners associations typically stress the importance of a family-friendly environment. That means many of the rules will focus on safety and keeping everyone on the same page.
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What Are HOA Insurance Responsibilities?
Insurance responsibilities are an often overlooked component when considering a property or unit with an HOA. Many HOA’s will hold insurance policies to protect against general liabilities, cover shared property, and safeguard against weather-related events. HOA insurance requirements are most commonly seen in condo or co-op buildings and neighborhoods with shared community spaces. Unit owners and homeowners are still required to insure their own spaces and belongings, with the understanding that the HOA’s policies will protect community areas.
HOA insurance coverage could include a general liability policy to protect shared spaces like hallways or elevators; or even social host coverage for events held in community spaces. Another common example can be seen in areas with frequent weather events, such as earthquakes or flooding. It is common for HOA’s to have catastrophe insurance to protect buildings against damage in these areas. The cost of these policies is paid for out of the homeowners association budget.
In certain states, such as Florida or California, there are laws regulating the type of insurance necessary for HOA’s. However, it is up to the HOA to decide which types of insurance (if any) to hold in most areas. HOA insurance is thought to be highly beneficial to residents and can go a long way in attracting new buyers. If you are considering buying a property with an HOA, always check what insurance coverage the organization provides and what it covers.
What Are The HOA Dues?
Homeowners associations will require the homes located within their jurisdiction to pay what are known as dues to maintain the local community. Otherwise known as fees, HOA dues are typically collected monthly or annually. On average, homeowners can expect to pay between $200 and $300 a month in HOA fees, but that’s not to say there aren’t outliers. Fees can be higher or lower depending on the home’s size and the services the HOA provides. For example, communities that offer shared amenities, such as a neighborhood pool or country club, will typically have higher fees.
What Do The HOA Dues Pay For?
HOA fees can pay for almost anything the HOA deems necessary for the betterment of the community. That said, most homeowners will know exactly what their fees are going towards, as the allocations are typically stated in the By-Laws and CC&Rs.
In almost all cases, homeowners association fees are distributed to communal amenities. It is quite common for the fees to cover the maintenance costs for local parks, pools, and other similar amenities. For example, if the neighborhood is gated HOA fees typically cover the costs of maintenance and security. Other homeowners association fees could be used for landscaping shared areas, such as the neighborhood entrance or any public green spaces.
On top of that, HOAs may ask for additional dues to cover emergencies or community projects. For instance, some HOAs will occasionally raise fees to replenish of build up emergency funds. These are typically earmarked for unexpected costs, such as water damage to a roof or to repair a community space. For the most part, homeowners should always be made aware of what emergency fees are being used for.
Who Else Is Part Of The HOA?
An HOA community consists of homeowners that have bought into the same development. In other words, anyone living with an HOA is, in fact, a member. If for nothing else, HOAs aren’t exclusive memberships. Participation is required by anyone buying a home in an area with one.
How To Get Rid Of Your HOA
An interesting point within the HOA definition is that they are not permanent organizations. Surprisingly enough, HOAs can actually be dissolved if certain conditions are met. If you find your HOA is simply not operating effectively (or at all), you can take steps to improve the situation. The following list outlines the process for getting rid of an HOA:
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Obtain A Copy Of The CC&Rs: The first step in improving or dissolving a homeowners association is to learn what you are working with. Obtain a copy of the CC&Rs either online or from a board member should be easy to access. The CC&Rs will outline what type of process must be followed to start the dissolution of the homeowners association.
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Check The State Laws: In some states, some laws will actually dissolve an HOA if the organization does not take proper steps to renew itself. While this is unlikely, it is still important to double-check before moving forward. If you find your HOA has failed to follow the state’s laws, the dissolution process will be much easier.
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Survey Other Members: Do you know of anyone else in your neighborhood or building who is frustrated with the status of your homeowners association? It is a good idea to join forces. Ask around (politely) to learn how many individuals feel the same as you. It usually takes a vote of 80 percent or more to get rid of a homeowners association.
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Make A Plan For Ongoing Projects: As you might expect, it will be tough to dissolve an HOA that is in the middle of a community project. If there are shared facilities in your neighborhood, you and the other members need to think about how they will operate without an HOA to oversee management.
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Work With A Lawyer: Believe it or not, getting rid of a homeowners association is actually a legal process—one that may require working with a professional. If other members want to help get rid of the association, this step may not be costly. However, anyone working alone to get rid of an HOA should start finding a lawyer and be prepared to pay legal fees.
Not all homeowners associations are ineffective. In fact, many agree that the vast majority work to improve the neighborhoods they serve. However, this is not always the case. If you live in a neighborhood with an ineffective HOA, pay attention to the above steps and see how you can improve your community organization. As you research, you may even find the HOA needs better leadership to run more smoothly.
Do Renters Pay HOA?
Renters can encounter homeowners association fees. Despite not owning property, renters who move into an area with an homeowners association will be required to follow the organization’s rules and, in some cases, pay the fees. Landlords could be responsible for the HOA fees, though this designation would be specified within the lease agreement. Landlords are also responsible for giving renters a copy of the CC&Rs upon move in, so they know the neighborhood rules. If renters have any questions or concerns about an HOA, they will often communicate with the landlord.
What Happens If You Don’t Pay Your HOA Fees?
There are various repercussions for not paying HOA fees. If you do not pay your HOA fees, you may be banned from using common areas. In more extreme cases, the HOA board may declare homeowners who do not pay fees delinquent and can place a lien on the property, or even file for a foreclosure on the property. Check your homeowners association bylaws for specific details on what happens when fees are not paid.
How To Avoid Paying HOA Fees?
Anyone living with an HOA will not be able to avoid paying the fees altogether. However, it is possible to have them lowered if the costs are not being used effectively. If you are unsure about where your HOA fees are going, request a copy of the budget to learn more. This will show exactly how the organization delegates funds and should reveal potential areas for improvement. For example, if you notice the HOA pays an increased rate for yard maintenance, it may be time to renegotiate the contract with the landscapers (or work with someone else).
If you find unnecessary costs in your HOA budget, you can either speak with a board member about what you have noticed or become a board member yourself. If you opt to join the board, you may have the opportunity to dig deeper into the annual budget. Look out for costs like insurance premiums, maintenance fees, and reserve contributions—which essentially builds up a savings account for unexpected costs. As a member, you may be able to vote to reduce the amount spent on these areas, either by finding new service providers or eliminating certain costs.
Can An HOA Raise Dues?
HOAs can raise dues periodically, though there are often specific guidelines within the CC&Rs must be followed. For example, most HOAs have rules regarding how frequently and how much HOA dues can be raised. Increases are often implemented to fund new neighborhood projects or cover extra maintenance costs. In some cases, HOA fees may increase to cover inflation or rising operating costs. If you are concerned about potential fee increases, be sure to consult the CC&Rs, and your state’s laws to better understand what to expect. Many states have additional laws set forth to protect homeowners from dramatic fee increases.
What Is A POA?
A property owner’s association (POA) is similar to an HOA, but it typically includes owners from multiple property types. For example, in a mixed use development there could be a POA between commercial and residential property owners. The purpose of these organizations is to improve the area. This goal can be accomplished by advocating for more local funding, investing in further development, or more. POA and HOA are often used interchangeably but they refer to two different types of organization.
Common HOA Mistakes
Despite the vast majority of HOA board members having never served on a board before, many of them are responsible for the most valuable assets in a given community. That said, HOAs are not immune to making mistakes. Most notably, there is a great deal of board members that neglect to collect fees on time. In doing so, the HOA is losing out on valuable funds and setting a poor precedent for its members. Inherently, erratic collections may lead to internal dissension. At the very least, poorly timed collections serve as an obstacle to the betterment of the community.
Remember, while mistakes may not be common, they can still happen. If you are looking at a home with an HOA, make sure it has a good track record. The last thing you want is to move into a new home with a poorly managed HOA.
Summary
At first glance, an HOA meaning could be something different to different home buyers or investors. For some, it can represent added neighborhood amenities or a sense of community. For others, an HOA might be unnecessary costs that push a property over budget. However, one thing that is always true about properties with an HOA is that they should not be a burden. Those looking for properties with an HOA should consider how it adds value to a neighborhood and if that value boosts their bottom line. HOA real estate is not for everyone, though it can represent several benefits in the right area.
Have you ever wondered how an HOA works? Did this guide answer the questions you had? If you have any other input on the matter, please feel free to comment below.
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