The dream of homeownership is an integral part of the American ethos, with a resounding 74 percent of Americans expressing their agreement, as per a recent survey by Bankrate Financial Security. For homeowners residing in communities governed by homeowners’ associations (HOAs), a host of benefits awaits, ranging from landscaping and lawn maintenance to access to swimming pools and sports facilities. The extent of services managed by an HOA can vary depending on the community type, covering responsibilities like maintaining common areas in high-rise buildings, lobbies, hallways, or an array of other amenities. As a member of an HOA, you will be responsible for paying HOA fees, which fund these services. The fee's value can differ widely based on the level of amenities offered within your community, and it can be influenced by external factors such as economic conditions or the geographical location of the community. Here, we delve into everything you need to be aware of before you decide to purchase a home within an HOA community.
HOA Fee Insights
• According to estimates from the U.S. Census Bureau's American Housing Survey, the average monthly HOA fee stands at $170. However, most HOA members pay less than $50 each month.
• A noteworthy 29 percent of the U.S. population, translating to 74.2 million Americans, lived within homeowners’ associations, condominium communities, or co-ops in 2021, as reported by the Community Associations Institute (CAI).
• These associations manage properties collectively valued at a staggering $11 trillion, as indicated by data from the CAI.
• In terms of sheer numbers, California leads with over 50,000 associations, closely followed by Florida with 49,420, per CAI's findings.
Understanding Homeowners Associations (HOAs)
A homeowner’s association, or HOA, is an entity within a community that establishes and enforces regulations governing the properties within its jurisdiction. These rules can encompass diverse aspects, ranging from the permissible colors for house exteriors to the number and types of pets allowed. Whether you dwell in a single-family home, condominium, or townhouse, if your community offers shared spaces or amenities such as swimming pools, tennis courts, or security gates, it's highly likely that the maintenance of these common areas is overseen by an HOA or condo association. Typically, the HOA is managed by a board of property owners who are elected by fellow property owners residing in the community. HOA fees are designed to cover the expenses incurred by these services.
The Pros and Cons of HOAs
Pros:
• Access to valuable amenities such as fitness centers, playgrounds, or pools.
• Maintenance responsibilities that can be cumbersome, such as lawn care or snow removal, are handled for you.
• Rules pertaining to property upkeep and aesthetics often ensure a visually appealing neighborhood and stable property values.
Cons:
• You are obliged to pay HOA fees, which can vary widely based on the community and may range from a mere $100 annually to over $1,000 each month.
• HOAs impose numerous restrictions and rules, potentially impacting how you can use your property. For instance, they often prohibit home-based businesses and rentals.
• Failure to pay dues promptly may lead to the risk of foreclosure, depending on your state's laws.
Deciphering HOA Fees
An HOA fee is a regular charge, typically assessed on a monthly or quarterly basis, which is collected by the homeowner’s association to finance the services it offers. If you reside in a condominium, a comparable fee might be paid to the condo association. Understanding how HOA fees function is crucial when considering a home purchase within an HOA. These fees are typically utilized to maintain or enhance the community's quality of life, and they are distinct from your mortgage, property tax, and homeowner’s insurance payments. Even when your mortgage is fully paid off, you'll continue to bear the responsibility of paying HOA fees. "HOA fees and dues managed by a homeowners' association can provide residents with quality-of-life amenities that an individual owner might not be able to enjoy on their own," says Candy La Monica, broker of the Candy La Monica Team at RE/MAX Executive in North Carolina. "If you find these benefits essential, you won't mind paying the fees or dues. However, be sure to work alongside your real estate agent to conduct proper due diligence before making a purchase. If these services and amenities are not of particular importance to you, you might find greater contentment in an area outside of an HOA."
What Do HOA Fees Cover?
The services covered by HOA fees can vary significantly and are contingent upon the amenities available in your community. Your HOA's governing documents should specify what these fees are designated for, which may include common services like grounds maintenance, landscaping, snow and trash removal, and electricity and pest control for shared areas. HOA dues might also be allocated to enforce HOA regulations. In general, these regulations aim to ensure that every property remains visually appealing and well-maintained, thereby helping to sustain property values and maintain a secure environment for all residents. It is important to note that the more services your HOA provides, the higher your HOA dues are likely to be.
Determining the Cost of HOA Fees
On a national scale, the mean monthly HOA fee stands at $170, according to census data. The amount of HOA fees can vary considerably based on the property's location and the array of amenities available to property owners. It is the HOA's governing board that determines the fees property owners must pay to cover the community's expenses. For instance, an oceanfront condo owner with an abundance of amenities may be subject to HOA fees of $1,000 per month, while a homeowner in a modest gated community situated ten miles inland might pay only $150 monthly. It is not uncommon for larger residences within an HOA to have higher fees, as they are assumed to utilize a greater extent of services. For example, maintaining the grounds of a spacious single-family home is more costly compared to a narrower townhouse.
Special Assessment Fees
While regular HOA fees tend to remain relatively stable, the community's board may also authorize something known as a "special assessment." These assessments are typically implemented to cover the costs of substantial or unforeseen work, such as repairing damage to common areas after a natural disaster or refinishing a building's facade (an obligation enforced in some cities, such as New York, on a periodic basis). Special assessments may also be used to build up the community's reserve fund, which serves as the HOA's financial safeguard. This fund stands ready to help offset much larger special assessments in the event of significant required work. Special assessments can take the form of one-time charges or ongoing fees in addition to your regular dues. HOA boards typically enjoy a significant degree of autonomy in implementing these assessments and may not always need to seek the input or even notify residents beforehand. Nonetheless, passing a resolution and notifying the community is considered a best practice.
Inflation and Its Impact on HOA Fees
Your HOA fees cover the costs associated with goods and services, and these costs can be significantly influenced by inflation. For example, if the company responsible for maintaining the community pool raises their prices due to increased costs of materials caused by inflation, your fees may increase in response to cover this additional expense. Any inflation-induced rise in the expenses that an HOA must bear is likely to be passed on to homeowners through higher fees.
Key Inflation Statistics and Its Consequences for HOA Fees:
• As of August 2023, the annual inflation rate stands at 3.7 percent, as reported by the U.S. Bureau of Labor Statistics' Consumer Price Index.
• Industry experts anticipate that community associations will need to raise dues by 10 to 15 percent by the end of 2023 to keep pace with inflation, according to HOA Management.
• Data from Bankrate's American Dream survey reveals that 53 percent of Americans are currently not homeowners due to unfavorable housing market conditions, including high prices and elevated mortgage rates.
• Housing constitutes one of the most significant contributors to overall inflation, with the shelter index increasing by 7.3 percent in the past 12 months.
• Soaring insurance premiums are also contributing to the escalation of HOA fees.
HOA Fees and Location
The location of your property plays a significant role in determining the amount of HOA fees you will incur, as these fees can differ considerably depending on local regulations and the cost of living in the area. An illustrative example is the situation in Tampa Bay, Florida, where owners of high-rise condos are grappling with a new law that necessitates milestone inspections and mandates HOA associations to maintain ample reserves for any necessary repairs. In another instance, Miami, Florida, registered the highest inflation rate of any metropolitan area in the United States during 2022, according to data sourced from the Bureau of Labor Statistics. Other cities in the top five included Phoenix, Seattle, Atlanta, and Philadelphia, followed by New York, Baltimore, Detroit, St. Louis, and Chicago. In these areas, HOA fees are likely to increase due to the elevated inflation.
Are HOA Fees Tax-Deductible?
IRS regulations can be intricate, but as a rule, HOA fees are not tax-deductible when the property you own within the community serves as your primary residence. However, if you rent out the property, your HOA dues might qualify as deductible rental expenses. Special assessments imposed by HOAs are generally not deductible.
Addressing Financial Challenges with HOA Fees
If you find it difficult to meet your HOA dues, the HOA board or management company might be able to arrange a payment plan to assist you. It is advisable to be transparent about your financial situation with the board at an early stage to explore the possibility of reaching an agreement. Ultimately, if you fall into arrears for an extended period or face insurmountable debt, the HOA holds the authority to initiate eviction proceedings. In some cases, a lien could be placed against your deed to facilitate the recovery of the community's financial losses.
Key Questions to Ask Before Buying into an HOA
If you are contemplating a property purchase within a homeowner’s association, you should have access to information regarding the amount and nature of the HOA fees. Often, this information is included in real estate listings. You should also be able to obtain minutes from past board meetings and other records, which detail fee changes and any rules related to these fees, through your real estate agent or the HOA.
As you delve deeper into the realm of HOAs, it is advisable to seek answers to the following questions:
• How frequently has the HOA increased fees in recent years?
• What services do these fees specifically cover? What do they not cover?
• Does the HOA maintain a reserve fund for long-term repairs and maintenance, and if so, how substantial is it?
• Has the HOA engaged an expert to conduct a reserve study, which estimates the amount of money that should be set aside to cover future expenses?
• Does the HOA have a history of imposing special assessments? If so, what were the amounts, the reasons behind them, and how often were they implemented?
Gathering responses to these inquiries can aid you in concluding whether the HOA has set aside sufficient funds to address significant expenses, thus averting the need for unexpected high assessments, or whether higher fees or special assessments might be in the cards.
Concluding Thoughts
In conclusion, when considering the purchase of a home within an HOA community, it is essential to weigh the costs against the benefits. HOA fees can vary significantly due to various factors, encompassing your location, the range of amenities provided, and the impact of inflation. Areas with a higher cost of living or exposure to severe weather conditions are more likely to have higher fees. While these fees might initially seem like an additional financial burden or a substantial portion of your monthly budget, their conveniences can be invaluable, sparing you the substantial effort required for tasks like snow removal and lawn maintenance. For a thorough exploration of the pros and cons of living in an HOA-governed community, do not hesitate to reach out to Scott and the highly informed Smolen Team. Their expertise can provide you with the insights you need to make an informed decision about your future in an HOA community.