One of the most important and often irritating examples of this issue is the cost of homeowner’s association dues, otherwise known as HOAs. If you’re not careful and don’t ask enough questions about a prospective HOA when considering a home purchase, you may be in for a rude awakening when, year after year, the monthly dues continue to creep up and up and up until one day, your housing costs have inflated well beyond your monthly budget. So are these HOA fees worth it? Homeowner’s associations can certainly add a lot of value to a neighborhood by maintaining the community’s appearance and taking care of the day-to-day upkeep of public spaces and shared amenities. But they can also cause major financial heartache. Before purchasing a home in an HOA-managed community, it’s important to understand the ins and outs. (Your bank account will thank you later.)
What Is an HOA?
First things, first. A homeowner’s association (HOA) is an organization that makes or enforces rules for properties and residents who live in a subdivision, planned community, or even a condominium building. Those who purchase property within an HOA’s jurisdiction automatically become members and are required to pay dues or HOA fees. Generally, HOAs are run by a board that is made up of members who are residents of the community. These board members are elected by fellow homeowners. However, sometimes a community’s HOA may be run by a private, third-party organization.
HOA Dues and Fees
HOA dues are the fees a homeowner must pay each month to the association. These fees vary widely by the community and geographic location and can be hundreds of dollars per month. Depending on the association in question, the dues may simply pay for community-wide maintenance and landscaping, but in some cases, the money may also be used to maintain your home or condominium. Before making a home purchase, make sure you can answer the following questions.
Are HOA Fees Tax Deductible?
As much as you would like them to be, HOA fees are generally not tax-deductible. However, there is one notable exception to this rule. “HOA fees are tax-deductible if you use the home in question as a rental property, since they are part of your business expenses, but they are generally not deductible for a primary residence,” says Martin Orefice, CEO of Rent To Own Labs, an online resource guide designed to help consumers find rent to own homes.
How Often Does the HOA Raise Its Dues?
“The most pressing thing someone buying into an HOA community needs to know is whether the price tag going to change,” says Kevin Taylor, managing partner with financial advisory services firm InSight. “The rising cost of monthly HOA costs can affect the quality of life for an owner while they live there, and the resale value of a property when they want to leave—both positively and negatively.” Before making what for many people is the biggest purchase of their lives, you’ll want to ask about the track record of HOA due increases in a prospective community. This is easily one of the most fundamental and important questions to ask about HOAs. The answer can make a dramatic difference in your monthly expenses. “It may be a red flag if the HOA has consistently raised its dues over the last few years. That may mean that the same could happen to you as a resident there, and you may face increased dues each year,” says Andy Taylor, general manager of Credit Karma. “On the other hand, if it’s been a while since the HOA raised its dues, that may mean they could increase the dues in the near future.”
What Is the Dues Schedule Like?
You should have an understanding of the dues schedule, as well as a clear time frame for when they next expect to increase dues again, so you aren’t caught off guard by a much higher monthly rate shortly after moving in. “A home is a big investment, regardless of how long you plan to stay there, so it’s important to know how much you will owe the HOA each year,” says Bailey Carson, home expert at Angi. “Knowing for certain that HOA dues will increase by 3% each year is very different than unexpected increases of 10%.” “Knowing how often and why dues are increased is critical for you and the affordability of the home today and going forward, but also it is telling of the financial health of the HOA,” adds Betsy Ronel, a Compass realtor based in Westchester County, N.Y. “You’ll want to know whether the dues are increased at a set rate and what are the increases meant to address. Are the dues raised per project? And do we vote on things? If not, who makes the financial decisions, and are they involved in the HOA? Do they live in the community or are they an outside party?”
How Do HOA Fees Compare in Different Neighborhoods?
Answering this question is just basic benchmarking, says Kevin Taylor of InSight. “I would just want to know that the monthly cost of my HOA fees, standardized to the square footage of the property, was in line with other neighborhoods in my town and other buildings or communities of the same size and similar building types,” explains Taylor. “Nobody wants to overpay, and knowing the fees divided by the square footage is the best way to reconcile and begin comparing the cost of HOAs.”
Reserves and How They Are Used
A portion of the monthly HOA dues you will pay is generally channeled into the association’s reserve fund to cover future community repair, replacement, or emergency projects. Without an adequate amount of money in this fund, an HOA may not be able to cover such future needs. And here’s the key point, a lack of reserve funds, or a partially or inadequately funded reserve account when you purchase a new home, is a sign that HOA dues are likely to increase…and keep increasing until the association reaches its reserve funding goals. So be sure to ask your realtor or an HOA representative the following:
What Is the Target Reserve and How Much Is Funded?
“Ask how much the reserves are currently funded as a percentage of the HOA’s overall budget for repairs,” explains Roger Cummings, Reali’s broker of record. “This question helps to understand the financial solvency of the HOA and how well they maintain and monitor their budget.” If the answer is less than 30%, that’s not great news, says Cummings. Current reserve funding of somewhere between 30 and 60% of the association’s target is a slightly better answer. But ideally, you want the answer to be that the association’s reserve account is at least 60 percent funded, if not more. “Anything less than 60% could mean a near-term special assessment or dues increases if a large community repair or replacement is imminent,” explains Cummings. Many HOAs will periodically perform reserve studies, which inform the association regarding the appropriate range or level of reserve funds they should have on hand to cover unexpected emergencies, various replacement projects, or HOA improvements, adds attorney Ben Gottlieb, co-founder of Arizona-based MacQueen & Gottlieb.
Special Assessments
“Special assessments are additional expenses incurred by the homeowner outside of their normal monthly dues. Depending on the repair or replacement item, these can run from several hundred to tens of thousands of dollars,” explains Cummings, of Reali. “Sometimes the HOA can offer a loan or payments over time but if not well funded, this will usually come as a one-time payment out of pocket.” HOAs approach funding major projects and upgrades differently, based on their size, maturity, and philosophy, says Claire Hunsaker, CEO, of the personal finance website Ask Flossie. “How much they rely on special assessments can have a big impact on your finances as a member. A newer HOA may rely heavily on special assessments for planned improvements and unplanned repairs because they’re still building the reserve fund gradually out of HOA fees,” explains Hunsaker. “They might also rely on special assessments if they anticipate a faster average turnover among the units.” Ideally, you’ll want an HOA to tell you they’re not planning on implementing any special assessments and that they don’t rely on this approach to financing needs.
Amenities
Once you know the amount of the potential HOA dues and how often they may increase, you’ll want to understand what specifically the money is being used to pay for so that you can decide if the cost is really worth it to you. For instance, will the HOA dues cover the maintenance of a community pool or tennis courts? If so, are you willing to shell out what could be several hundred dollars a month on such dues if you have zero interest in using these types of amenities? If the answer is no, your money might be better spent elsewhere, such as in a community that does not have HOA dues, allowing you to use that extra money each month on other things. “If there are common areas available to residents, such as pools, gyms, tennis courts, or parks, find out what the HOA’s responsibility is to maintain them,” says Carson, from Angi. “Find out if they are responsible for snow removal, cutting grass, or maintaining sidewalks and roads throughout the community. Once you know what your dues cover and how much they cost, you can make a well-informed decision about whether the property is the right financial decision for you and your family.”
Staffing
The more operating costs the HOA has, the more you will be paying each month and year, so the number of full-time staff matters to the bottom line. “Typically, the more people they have on staff, the higher your HOA dues,” explains Andy Taylor, of Credit Karma Home. “The number of people on staff typically depends on things like the number of units on the property or the amenities on the property, especially those that need special attention, like a pool, or landscaping.”
Restrictions and Rules
By now, you should have a good handle on what your future housing costs will likely involve. But there are other things you want to know:
What Rules Are in Place?
HOAs can try to regulate a lot more than you think, especially when it comes to the exterior of your home. “Look at your lifestyle and make sure anything you wish to add or bring to your new home is allowed,” says Andy Taylor, general manager of Credit Karma Home. “For example, if you have a green thumb, are you allowed to plant flowers in a planter outside your window? If you’re a foodie, can you have a grill with open flames? If you’re a smoker, is smoking allowed? Even things like the paint color of your home or whether or not you can keep that extensive lawn gnome collection could be regulated by the HOA.”
Can an HOA Property Be Rented?
Make sure you find out whether the HOA limits your ability to rent out your home. This, of course, is important, should you plan to move in the future but do not want to sell the property. “Some HOAs have a limited percentage of units that can be rented, while others set a mandatory occupancy period such as one year before allowing conversion to a rental,” says Cummings. “Obviously, the fewer restrictions the better.”
Are Any HOA Rules Unenforceable?
HOAs can certainly be maddening and challenging to deal with at times. If you find yourself having a particular issue with your local HOA, it’s a good idea to do your research to find out whether or not the regulation in question is actually enforceable. Some HOA rules, for instance, are unenforceable—not because of the text of the rule, but because they were enacted or enforced incorrectly, says Orefice, of Rent to Own Labs. It’s not entirely unusual for HOAs to make headlines or wind up in the news because of their overly restrictive rules and regulations. “There are also laws in many jurisdictions governing what an HOA can and cannot regulate, especially when it comes to free speech, discrimination, and reasonable (if unsightly to some people) uses of your property, including putting up satellite dishes or clothes lines,” says Orefice. It’s a good idea to take the time to understand what you’re getting into when considering a property purchase with an HOA-governed community.
