Co-Authored by David Hosterman and Jonathan Edwards
Never heard of a Homeowner Association? Well if you are considering the purchase of a new home you will want to read this article because you might want to think twice before signing. While not all HOAs are entirely bad, Homeowner Associations and Common Interest Communities work differently than a traditional home not requiring membership in this type of entity. Here is how they work and what to be cautious of.
Let’s first define what these entities are and then how they work.
Common Interest Community also known as common-interest developments or CIDs, include condominiums, retirement communities, vacation timeshares, and other housing developments comprised of individually owned units, in addition to shared facilities and common areas.
A Homeowner’s Association or HOA is an organization in a subdivision, planned community or condominium that makes and enforces rules for the properties within its jurisdiction. The purchase of the property automatically makes the homeowner a member of the HOA. The homeowner agrees to abide by the rules and regulations of the community, and pay required dues, fees and assessments. *Definitions provided by Investopedia
If you are purchasing a home in an HOA or CIC you want to be aware that there is to some degree a governing body with additional rules and or by-laws that you will need to abide by. The HOA has the ability to place a lien on your property should you fall behind in the dues or fail to follow the rules. HOA dues can be monthly, quarterly or annual and can range from as little as $1 to tens of thousands of dollars. The HOA fees cover any number of things from annual Holiday parties to trash removal to landscaping, etc.
HOAs will typically have an elected body to hold regular meetings and uphold the rules as well as establish new ones. They will typically have at least a President and a Treasurer. For bigger and more complex communities there will generally be a property management company that is paid to run the association. When purchasing a home your lender will need certain information from the HOA including but not limited to covenants and by-laws, condo questionnaire, and Master Insurance policies.
All major lenders working with Fannie Mae, Freddie Mac, FHA, and VA guidelines will need specific information on the property. FHA and VA loans will need to have been previously approved. Fannie Mae and Freddie Mac have a specific questionnaire they use to collect specific information on a property. Some of the information they are looking for would be number of units that are owner-occupied vs number of units that are being rented, does the HOA have enough in their reserves to cover delinquent dues, is there any current litigation against the HOA, etc.
While HOAs present a certain risk to the owners of the homes they can provide very beneficial rules to help maintain home values and reduce crime. It is essential that you understand how they work and any rules associated with that particular association.
Some of the material used for the content of this article was derived from Episode 58 of the Mile High Mortgage and Real Estate Report on AM1690 KDMT.
This episode included special guest Rick Yerman with Keller Williams Realty DTC.