Talk to anyone about homeowner association fees (HOA) and you are usually met with a sigh. No one is particularly excited to pay an additional monthly fee, even when it goes towards shared amenities and the upkeep and maintenance of common areas. So how do HOA fees affect your buying power? And what does it mean for you as a buyer? We give you the heads up on all you need to know about HOA’s.
HOA fees are attached to the property rather than the homeowner. In legal terms, the HOA fees “run with the land” so that any future home buyer is bound to the same duty to pay fees. Fees *can be* higher for older buildings and homes, but there is no hard and fast rule. For single family homes, fees often run with the size of the property. Typically, the smaller the house or unit size, the smaller the HOA fee.
I’m thinking about buying a home with a HOA. What do I need to consider?
HOA fees are no small matter and require careful consideration. There are over 350,000 HOAs in the U.S, which makes up about 40 million households, and more than half of all homeowners live in an HOA.
It’s estimated that nearly $100 billion is collected each year by HOAs. These fees have been on the rise, outpacing housing prices and inflation rates.
Research the costs against what you can afford
It’s really important for buyers to research costs associated with HOAs and how they may affect buying power. The homeowner's association fees must be included as part of the monthly housing payment for qualifying for a loan which means that the same buyer could qualify for a significantly larger mortgage on a home without HOA dues.
Generally speaking, the qualifying requirement for each $50 per month in HOA dues is equivalent to qualifying for a $10,000 increase in loan amount (and this will change with mortgage rates as well!), although beware that individual homes have different HOA price policies.
Example:
Say you're looking at a San Diego home with a purchase price of $650,000, 20% ($146,000) down and monthly HOA dues of $400. Qualifying for that scenario is the same as qualifying for a single family home that costs around $702,000. That is over $50,000 in less purchasing power for the home with an HOA.
Beyond monthly fees, HOAs can tack on one-time fees such as capital improvement fees and transfer fees. Transfer fees cover the cost of placing the home in the new owner’s name, and improvement fees are considered “special assessments” that can be used to make a significant repair or necessary upgrade.
HOAs can even levy fees for homeowners that are not compliant with the covenants and restrictions, and if these fees or monthly dues are not paid, the HOA can create a lien against the property. Again, these liens “run with the property,” so any new home buyer would be required to settle the costs before acquiring title to the home. It’s wise for a buyer to consider what the transfer fee will be and if there are any potential capital improvement fees on the horizon.
If a home with a HOA catches your eye, be sure to ask for the HOA’s declaration or master deed, as well as answers to questions about the HOA’s financial status and whether the home you like has any outstanding debt, litigation or more.
I’m thinking about new construction - what’s the deal?
Planning to buy a new home? HOAs are very common for new construction communities where one developer is controlling the building of the homes. In these instances, the regulations outlined by the HOA will play a large role in determining what your new construction home can look like. In many cases, the rules of HOAs are in place to encourage uniformity among the homes in the neighborhood.
If you’re looking to build custom instead of building to spec, read the governing documents carefully and look for details about community aesthetics. This is where you’re most likely to find key details that will determine what the exterior of your home and landscaping can look like.
Again, research the HOA fees when you are planning your finances and also be prepared for potential California Mello Roos costs which also impact your buying power.
The bottom line
HOA’s are not for everyone. Membership also binds you to the association's covenants, conditions, and restrictions (CC&R). Those rules could end your desire to paint your house orange or park an RV in the driveway. (CC&Rs typically include stipulations about the appearance of your home and the vehicles you can park outside it.)
However, for most homeowners, the most persuasive and rewarding advantages to being part of an HOA are great amenities. Having exclusive access to swimming pools, walking trails, parks, playgrounds, fitness centers and clubhouses is well worth the cost of membership. They also give members a natural sense of community through planned activities like parties, clubs and events. Members feel a shared responsibility to maintain the integrity of the neighborhood, which creates a safer, more aesthetically pleasing environment for all residents.
If you are looking for convenience, HOA’s could be for you. Whether you live in a condo or a planned community of single-family homes, the HOA will take care of a lot of the exterior and landscaping upkeep, and take the load off you!
To HOA or not really depends on you! Review your budget, your lifestyle, and your personal preferences. While having use of a pool and clean nearby parks might hold strong appeal, remembering to pull in the trash cans or the kids’ bicycles by a certain time might be something you don’t want on your to-do list.
We hope this helps in clarifying some of the in’s and outs of HOA’s. Please don’t hesitate to reach out if you have any questions.