Whether you’re thinking about buying and financing a condo or maybe you’ve got your eye on a home located in an area governed by a Homeowners Association, or HOA, beyond considerations such as price, location and other buying factors you need to know what you’re getting into. When buying real estate in what is referred to as a “common interest development” where the buyers own their home outright but share other areas equally with the other owners, you need to review the documents that outline the legal, financial and operational responsibilities of the HOA outlined in the “covenants, conditions and restrictions.” Why? There are several reasons, some more important than others, but without time to properly review the rules you must follow once you buy, you might very well get a bad case of buyer’s remorse.
If you’ve lived in a property managed by an HOA you’re probably familiar with the duties of property management but if you haven’t then you might be a bit surprised. For example, some units may not accept short-term rentals. If you’re of the idea that you can pick up some extra cash while you’re on vacation and list your home in Airbnb but the HOA says you can’t, well, you can’t. If you enjoy cooking out on your patio there might be a restriction that says you can’t do that. You might also be fined if you leave patio furniture out on the deck overnight. Typically such HOA guidelines aren’t that harsh but the rules listed here are not unheard of.
What about the financials? Each month when you make your mortgage payment you’ll also make an installment payment toward your annual HOA dues. These dues go to a contingency fund used to make unexpected repairs. But if the HOA has doled out funds to make more than a few repairs over the past year there might be an issue with the quality of construction. Too many expenses and the reserves get a bit too low and the property owners are hit for an unexpected special assessment. The financials will show you how much money is in reserves. How much should be put back each month?
Lenders typically require there be at least 10 percent of the annual budget saved away as reserves. There should also be adequate insurance coverage both for any property damage, common areas and a liability policy with at least $1 million in coverage. Note, you’re responsible for your own insurance coverage that protects the interior space of your condo or your single family home. The HOA policy covers the commonly owned areas. Past minutes of board meetings will also reveal any previous or current litigation between the HOA and a third party. When financing a property with an HOA, any current or pending litigation must be settled prior to the funding of any loan.
When there are deficiencies noted by the HOA a responsible association will remedy the issues needing attention. Negative issues affect property values and when a project is known to have structural issues, financial problems and is overly zealous as it relates to lawsuits. When you apply for a loan to finance a property in an HOA, take some time to read the rules governing the project. Before you make an offer, perform your own due diligence and ask the HOA for a copy of their CC&Rs. You might have to have your agent make the request for you and there may be a fee, but it’s a small price to pay knowing you’re buying in a responsibly managed project.