A Beginner’s Guide to Homeowner’s Associations (HOA)
The phrase “one size fits all” will never be true for Americans when it comes to purchasing a home. With an extensive range of choices in a variety of styles, sizes and neighborhoods, the domestic housing market has something for everyone—including those looking to buy an affordable home.
One housing option that's increasingly popular to individuals and families looking for a safe and secure place to live is the planned community. And many of those living in condominiums, co-ops, apartments and gated communities reside in planned developments under the guiding authority of a homeowner’s association or HOA.
According to recent data, well over half of newly constructed single-family homes and up to 80% of new homes in subdivisions are designed as part of an HOA. Clearly, HOAs are growing in popularity, especially for those homeowners who value neighborhood enhancement and are willing to pay an extra monthly fee for that privilege. But do required fees creep up over time and do the community-enforced regulations put a damper on individual freedom?
This article will try to provide some clear insight into the growing HOA trend as well as explore the benefits and limitations of purchasing a home governed by the rules and regulations of a homeowner’s association.
Definition of HOA
A homeowner’s association (HOA) is an organization in a planned community, subdivision or condominium building that creates, oversees and enforces various rules that govern the properties and its residents.
To put a finer point on it, a homeowner’s association offers residents professional-level upkeep and improved appearances, as well as continual enhancements to quality of life. For this privilege, you are required to pay scheduled fees.
While some might claim that certain restrictions within HOAs invite conformity, the fact is that homeowner’s associations are really here to help residents out, pooling money for beautification and maintenance purposes that ultimately lead to higher property values.
When thinking about HOAs, it can be instructional to break them into two related but distinct entities:
- The HOA board is an elected group of residential volunteers whose role is to govern the community and maintain quality of life and enforce HOA by-laws. They hold meetings, set agendas and collect fees.
- An HOA management company is a third-party vendor that works with the board to fulfill its duties and meet key objectives.
For the purposes of this article, we’ll be concentrating on how the HOA (the elected board) impacts homeownership.
While HOAs will certainly differ in scope and amount of available resources, generally speaking, they help to codify rules around residential appearances, zoning laws and upkeep as a means to maintain and improve the community and ensure optimal property value. HOAs are usually formed by the developer at the outset, and the requisite fees that support the HOA are commonly paid directly to the association on a predetermined, scheduled basis.
A little background on HOAs in America
While the history of homeowner’s associations goes all the way back to 19th century land developers, it wasn’t until the post-WW2 era that HOAs started to gather steam—and controversy. The latter was due to some communities using HOAs as tools of exclusion, a practice typically accomplished by including certain covenants that had the effect of discriminating against and denying access to African Americans and other minorities.
Fortunately, FHA (Fair Housing Association) Legislation in the 1960s cleared the way for more equitable and accessible residential communities, and in subsequent decades HOAs have continued to flourish, especially in the southern and western regions of the U.S.
HOA: How does membership work?
Even though the developer typically initiates the HOA, once a predetermined number of lots or units are sold, the HOA transfers to the newly minted association comprised of elected individuals who are voted into power by fellow members during the board’s annual meeting. The board is usually comprised of a president, vice president. secretary and treasurer. Once these positions are established, the board is responsible for running the HOA and receiving the fees.
Whether you’re the very first homeowner in the HOA or arrive years later, if you purchase within a community designated as an HOA, you have to join, you have to pay fees and you must abide by the rules. Most homeowner’s associations automatically enroll you during the final stages of the homebuying process known as closing.
Good real estate agents and mortgage professionals will always point out the existence of an HOA to prospective homebuyers well in advance of purchase, giving you an opportunity to weigh pros and cons. Some states even require a copy of HOA by-laws to be distributed to homeowners prior to completion of the sale.
If you’ve recently made an offer on an HOA property, now may be a good time to review documentation before you close the loan and move in. If you’re a first-time homebuyer, conversations around HOAs can be especially important and illuminating.
We’ll get to the core benefits of HOAs in just a moment, but first it’s important to go over what the typical costs for an HOA may be, and how these costs are structured.
As mentioned, it’s most common for homeowners to pay required HOA fees directly to the association. These fees are often referred to as assessments. While many lenders offer nuanced mortgage calculators that include HOA charges in order to give homebuyers a more holistic sense of future monthly costs, HOA fees are not typically rolled into your monthly mortgage payment.
The fees themselves can vary considerably, depending on the type of the residence, location and the kinds of amenities offered by the HOA. Monthly costs for some communities can be as high as $700, while others report fees in the $100 range. Overall, the average HOA fee is $200/month and this cost should be factored into your housing budget.
Furthermore, you may want to explore with the elected HOA board what exactly you are getting for your money. An itemized list of past projects, their efficacy and their corresponding cost is a nice place to start.
Benefits of HOA membership
OK, so we’ve established that a homeowner’s association will charge you a recurring fee to live in their condo, co-op, gated or common-interest community. But what are the key benefits residents receive from an HOA?
Suffice it to say, the most pronounced benefit is often accrued over the span of homeownership in the form of increased home value. HOAs often chalk this up to enhanced optics, excellent amenities and the safety and security of a harmonious community.
Let’s take a closer look at some of the key benefits of HOA membership.
- Community engagement
- Common area
- Settle disputes
This may seem like something you can muster on your own accord, but families and individuals who reside in neighborhoods governed by HOAs tend to be more connected. This makes sense. After all, there are common goals in establishing a consistent visual landscape, coordinating over common areas and attending homeowner’s association meetings and getting a sense for neighbors’ concerns and ideas for future improvements.
Differing opinions are common, but the shared goal of keeping the residential community safe, secure and visually appealing is almost always something members can rally around.
While there will always exist strong opinions with regard to what can and should be done with personal property, there is often much agreement when it comes to the amenities found in common areas. Depending on stated objectives of the HOA (and the size of the regular assessments) communities may offer nature trails, walking paths, swimming pools, recreational areas including tennis, squash and basketball courts and even barbeque pits and well-maintained park areas.
Not every HOA has such pronounced and attractive recreational amenities, but for those that do, this can be a compelling reason to move into an HOA-governed community.
Nobody likes a leaky roof, water in the basement or hallways without lights. While every HOA is different, and some of these everyday amenities may apply more to condos and co-ops than standalone houses, most HOAs have some kind of common area that requires upkeep.
HOAs will usually make a concerted effort to keep everything looking professional, functioning on a high level and stringently up to code.This means replacing lights, painting common areas, mowing lawns, paving streets, paying for private snow removal and even ensuring trees and gardens are regularly weeded, pruned and watered.
While some HOA homeowners might think the opposite; the truth is that having an established hierarchy in the form of a homeowner’s association enables disputes between neighbors to be settled clearly and convincingly. It’s standard operating procedure for HOAs to have a set of by-laws that can be consulted when property rights are contested between neighbor and neighbor or between a specific neighbor and the HOA itself.
It’s in everyone’s interest to obtain swift resolution to such matters. Furthermore, in some cases where discriminatory aspects are alleged, an HOA, according to FHA guidelines, has the responsibility to intervene to halt discrimination within the community. This is not an invitation to referee all conflicts; however, strong leadership at the HOA level can be instrumental in preserving social harmony within the prescribed community.
Common HOA concerns
New homebuyers who fail to conduct adequate due diligence when buying an HOA-governed home are often shocked and perplexed by how intrusive the homeowner’s association can be. Of course, one person’s intrusiveness is another person’s properly regulated community. Both sides have a point. Let’s look at some of the more frequently contested issues associated with HOAs.
Fees, fees, fees
Most new homeowners understand that they will be paying an ongoing, regular fee (assessment) for the privilege of joining the HOA and enjoying its numerous perks. That’s not usually an issue. What can be burdensome is any escalation of that assessment over time.
Unlike your fixed rate mortgage, HOA assessments are not “locked in” at a particular rate over the lifetime of homeownership. They may and almost certainly will rise in cost, potentially providing small financial headaches for those caught off guard.
There are many variables at play when HOA fee increases are issued; often it can be for very good reasons. Repairs and maintenance, local trash pickup, the price of building supplies, etc.—these are not typically static charges. That new workout room costs money to construct and operate and so do other capital improvements. While a well-run HOA often has cash reserves, it's not uncommon for some expenses to be passed on to members in the form of increased monthly fees.
The hope is that fee increases are few and far between, and that when they do occur, they are adequately explained. Failure to pay HOA assessments can result in fines, adding to payments already in arrears. In extreme situations, HOA boards can put a lien on your house or force you to foreclose on the property; however, these occurrences are extremely rare.
Unsurprisingly, the community spirit of homeowners’ associations often runs straight up against heated advocates of individual rights, especially property rights. Historically, this is where most of the friction lies.
Some individuals living in standalone homes—but within a qualified HOA community—automatically assume it is their legal right to do what they want with the exterior of their home and property. These individuals do not always react with peace, love and understanding when confronted with HOA stipulations as laid out in the association’s by-laws.
While most HOAs make every attempt to accommodate their members, there’s no denying that there exist numerous built-in restrictions that can be perplexing, even frustrating. Many HOAs place restrictions on pets, the colors your home can be painted, the size and scope of remodeling projects, what kind of trees you can plant in your yard and so on.
Additionally, HOAs frequently weigh in on such matters as what you can dispose of in community dumpsters, the viability of excessive Christmas decorations and how loud you can play your stereo. In many ways, typical neighborhood concerns, but unlike some developments, HOAs mean business.
Because homeowners typically sign an HOA agreement during closing, any legal language around the aforementioned restrictions is binding. In common language, this means that after all is said and done, if something is clearly stated in the by-laws, you will have to acquiesce to the prevailing rules of the association.
Most HOA members see this as a reasonable trade-off; one where you forego absolute property rights for the stability and security of living in a planned development whose value is almost certain to appreciate.
If you’re an enthusiastic homebuyer who’s just fallen in love with a new home on the market, your primary concern probably won’t be the existence of a homeowner's association. You’ll likely be too busy making an initial offer to the seller and coordinating with your trusted loan officer to expedite the mortgage process and close your loan as soon as possible.
But if you do choose a home under the jurisdiction of an HOA, it’s important to ask questions up front and demand clear answers—especially regarding assessments and major HOA rules and regulations. Transparency is key. Like the rest of the homebuying process, once you have reliable information, decisions are much easier to make.