If you’re considering buying a home in a planned community, you are likely aware that along with the benefits the community might offer (such as pools, spas, private roads and beautiful landscaping), homeowners there have certain obligations, including financial ones, to the community’s homeowner’s association (HOA). You will likely have to pay periodic dues (also sometimes called assessments) to the HOA, and face the prospect of special assessments in urgent situations.
Before making a purchase, the informed buyer should fully understand the financial commitment involved – how much the current dues are, how much and how often the dues might increase, and the likelihood of special assessments cropping up in the future.
Getting an Assessment Statement and the HOA Financials
To find out how much the current dues in the community are, request an assessment statement from the HOA. (You can contact the HOA directly, or ask the seller or your real estate broker for this statement.) The assessment statement will disclose the amount of the current dues and whether the current homeowner (if you’re buying an existing unit) is up to date on paying these dues.
The assessment statement alone, however, isn’t enough. To get a complete picture of what your financial commitment will be as a homeowner in an already-existing community, you should also request and review the HOA’s past financial statements (going back at least two years). This will give you a better idea of the financial stability of the HOA, and help you assess whether you might, as a homeowner in the community, be in for greatly increased dues, or large or frequent special assessments.
If you’re looking at buying into a brand new development still under construction, however, there won’t be any financial history to review. In this situation, the best you can do is to request and review the developer’s estimated HOA budget (typically required of a developer under most state’s laws).
Understanding What Costs the HOA Is Responsible For
To know what to look for in the HOA’s financial statements, you must first understand what homeowners’ dues are used for.
A community’s HOA is responsible for operating, maintaining, repairing, and replacing the features of all the common areas in the community. How much all this adds up to depends on the community, its size, and its amenities.
For example, basic operation and maintenance costs might include the cost of gardeners to mow the grass (in the common areas) and electric bills for heating and lighting the common clubhouse. In more “upscale” communities, these costs might also include the costs of fancy landscaping displays and holiday lights, maintaining pools and hot tubs, and paying security guards and maintaining entrance gates.
Repair and replacement costs might include fixing a leaking roof in the common clubhouse or a broken shower in the pool’s locker room, or replacing old fitness equipment for the common gym.
How the HOA’s Annual Budget Preparation Affects Dues
To make sense of the financial statements, it’s helpful to know how the HOA calculates the amount of the periodic dues. In most communities, the HOA is required to develop and adopt an annual budget to cover the common area maintenance and repair costs. Ongoing maintenance costs typically comprise the major portion of the budget, with an additional portion of the budget allocated to a reserve fund. The money to pay for the less frequent (and sometimes unanticipated) common area repair and replacement costs usually comes from the reserve fund.
An HOA gets the money for the budget by collecting periodic dues from the homeowners. The HOA determines the amount of the periodic dues based on the annual budget, and collects these either monthly, quarterly, or biannually.
By examining an HOA’s previous financial statements (in an existing community), you can find out a lot about how much money it takes to run the community and whether or not it is run well. You can see the HOA’s budget from previous years, which will show where the HOA is spending money, how much it spends, whether it has a reserve fund, and whether the HOA has consistently been collecting enough dues to meet the budget.
In the case of a brand new development; you can find out some of the same things from the developer’s estimated budget. However, keep in mind that developers commonly underestimate the amount needed for the budget (probably because it’s easier to sell homes if the dues are lower). Because the developer will remain in control of the HOA until a certain percentage of units in the development are sold, it’s a good bet that once the developer’s control period is over, the HOA will need to adjust the budget, and increase the dues.
How Much Should Be in the HOA Reserve Fund?
If the HOA has a reserve fund, that’s a good sign. But how can you tell if it has enough money in it? HOAs commonly have a “reserve study” prepared by an outside accountant (be extra concerned about the financial stability of any HOA that hasn’t commissioned one of these).
The reserve study sets out a long-term schedule (typically for the next 20 to 30 years) estimating the cost and timing of the repairs and replacements to the common areas that will likely be needed.
For example, if the roads are full of potholes and the HOA will need to repair them within the next five years, the schedule in the reserve study will spread out the estimated cost of these road repairs over the five-year period, and require that the apportioned amount be paid into the reserve fund in each of those five years.
Or, if the common pool will need resurfacing in 15 years, the estimated cost of that work will be allocated over that time period. This way, the cost of larger repairs is spread out over time, and ideally enough money will remain in the reserve fund for the HOA to cover these and other costs when they arise.
When There’s No Reserve -- Watch for Special Assessments
If the HOA does not collect enough money in periodic dues to maintain an adequate reserve fund, it may be unable to pay for unexpected costs to repair or replace the common areas, or anything else not included in the general operational expenses. In this case, the HOA will need to collect the money needed from each homeowner through a special assessment. Special assessments can be hard on homeowners because they typically require large amounts (sometimes in the thousands) to be paid at one time.
If you examine the HOA’s financial statements and see no reserve fund, no reserve study, or that the reserve fund does not contain the amount recommended in the reserve study, this is a red flag that the homeowners will likely be hit up for special assessments in the near future.
Find Out About Other HOA Financial Problems
Other things to look for in the financial statements are whether the HOA has previously received emergency loans or levied frequent special assessments. Also look for the amount of delinquent dues (sometimes caused by a homeowner’s inability to pay special assessments, or by foreclosures -- where a bank owns the home). These things might indicate a poorly managed HOA or a problem in the community, and a greater likelihood of special assessments in the future.
Beyond looking at the financial statements, potential buyers should ask lots of questions. Talk with members of the board of directors of the HOA about concerns you might have. If there is no reserve study, for example, ask why not, and ask how the HOA plans on paying for common area repairs and replacements.
You might also inquire about the number of foreclosure sales in the community, the number of delinquent homeowners, and what action the HOA takes to collect from delinquent owners. Also talk with current homeowners in the community. Ask about how the HOA functions and whether it’s run in a sustainable manner.
If it’s a new development, and you only have an estimated budget to review, ask questions of, and about the developer. Ask about the cost estimates in the budget, and do some independent investigating (such as comparing the estimated budget with that of a similar, existing development) to gauge their accuracy.
Homeowner Budgeting in a Planned Community
Even if you’ve done your homework, the financial statements show that the HOA is financially stable, and you are satisfied with the information you’ve found out from the HOA’s board members and other homeowners, the truth is that past conditions are no guarantee of the future. It’s common for annual common area costs to exceed an HOA’s budget.
Also, you never know whether the economy (local or national) might tank after you buy, causing delinquent dues or a rash of foreclosures in the community. Expenses can also arise from unpredictable circumstances, such as accidents (maybe the broken shower flooded the whole fitness room) or natural disasters (such as if the clubhouse roof blows off in a cyclone).
In such cases, the HOA might not be able to meet its budget or keep the reserve account fully funded. As a homeowner in the community, you would be faced with a (potentially large) increase in periodic dues, or having to pay special assessments to make up the difference. As a potential buyer, you should be aware that these things can happen, and realize that if you become a homeowner in a planned community you must budget for unforeseen circumstances.
Knowing Before You Buy
By investigating the HOA’s financials and doing your homework prior to buying a home in a planned community, you will better understand your financial commitment as a homeowner in the development. If you have questions or want to know more about the assessment statement, the financial statements, or about a specific HOA and its operations, an experienced attorney in your area can help.