If you own (or are planning to buy) a home in a planned development, you know you need to “pay your dues” -- HOA dues, that is. Almost all planned developments are run by an HOA (homeowners’ association), which collects periodic dues from each owner to pay for common area maintenance, repair, and replacement costs.
If you’re wondering whether the amount of your dues might go up in the future, the answer is almost always “yes.”
The more relevant questions are; how soon, and by how much, the dues might rise? You can usually get clued in regarding what to expect by taking a hard look at the development’s amenities, current condition, and financial statements.
How well the HOA is run, and its financial stability, will play a big part in any potential dues increases. You can find out a lot by reviewing the HOA’s financial statements. Get a copy from your real estate agent (if you are a potential buyer and using an agent) or directly from the HOA.
One thing you can find out by reviewing the financial statements is how often and by how much the HOA has hiked dues in the past. This will give you an indication (although it’s far from a guarantee) of what kind of increases to expect in the future.
To get an even better idea of what kind of dues increases to anticipate, look at whether the HOA has consistently met its maintenance budget through dues, and whether it has money in reserve for future common area repairs and replacements.
By studying the HOA’s financials, you can also determine whether the money coming into the HOA from homeowners is at least equal to the money going out for ongoing maintenance expenses.
Some HOAs fail to collect enough dues to meet ongoing expenses because of balking homeowners or because the board of directors is reluctant to raise dues (occasionally due to board members promising not to do so if elected).
If you see from the financials that the HOA has been running in the red, or has delayed needed common area maintenance and repairs due to lack of money, this is a definite warning flag. It typically means that to prevent the development’s common areas from going to ruin, the HOA will need to raise dues soon (and possibly significantly), or levy a special assessment, to pay for problems arising due to delayed maintenance.
For example, if you find out that the common pool has been neglected due to the HOA’s lack of funds, you can guess that it won’t be long before the pool starts to leak. To avoid a deserted, unuseable pool, the HOA then will either need to hike dues significantly or levy a special assessment (or in some cases both!) to get the money to repair it.
You must also review the financials to see if the HOA has an adequate reserve fund. A well-run HOA maintains a reserve fund to pay for expenses that arise outside its ordinary operation and maintenance costs. The reserve is funded from amounts set aside from the periodic dues. The HOA determines how much to set aside for the reserve fund based on anticipated upcoming repair and replacement costs, typically set forth in a reserve study.
For example, if the reserve study determines the roof of the clubhouse will need replacing in ten years, it will first obtain an estimate of the cost of the replacement. Then it will calculate how much of the dues must be set aside in reserves each year for the next ten years, so that the HOA will have enough money to pay for the new roof in year ten.
If the HOA does have a reserve fund, you can also tell from the financial statements whether the HOA uses the reserve amounts appropriately. Sometimes, if an HOA does not collect enough in periodic dues to pay for its ongoing maintenance responsibilities, it will dip into its reserve fund to pay for the maintenance costs (rather than raising dues or levying a special assessment as discussed above). This means that even if the reserve account was once adequate, it will be quickly depleted without an increase in dues.
If you see from the HOA’s financial statements that there is no reserve fund, or that it has been depleted, you can expect that as soon as a problem with a common area arises (for example, if the clubhouse roof starts leaking in a bad storm), the HOA will need to raise dues (probably significantly). Alternatively, the HOA might levy a special assessment to pay for these unfunded costs. Sometimes, an HOA must do both!
Although reviewing the financial statements is the best way to get an idea of how much and how soon dues will increase in the future, just looking around the development can also clue you in to the amount of dues the HOA will require.
The age of the development, and even more importantly, the condition of its common areas and amenities, play a part in the amount of dues that are necessary for the HOA to do its job.
An older development commonly contains older amenities that require more maintenance and repairs. For example, it might contain a common clubhouse with dated decor, parks with worn-out landscaping, and playgrounds built over a decade ago. The HOA is likely to need to continually increase dues to keep up with the maintenance, repair, and replacement costs for these older amenities.
However, even if the development is newer, or has newer amenities, it won’t necessarily be inexpensive to maintain. The quality of construction of the amenities is a big factor. Take a look at the clubhouse construction and the quality of the fitness room equipment, for example. If you see shoddy construction and poor insulation in the clubhouse, or inferior equipment in the exercise room, you can expect higher operation, maintenance, and repair costs (and a greater chance of raised dues to pay for them).
The outlook is much better if you find quality construction and energy-saving insulation and fixtures in the clubhouse, and state-of-the art exercise equipment in the fitness room.
If you take a good look at the HOA’s financials, as well as the common areas in the development, you will have some idea of what to expect when it comes to future dues.
If you have questions about an HOA, or need help reviewing its financials, contact a real estate professional in your area to help. Knowing what kind of dues increases to expect can help you plan your own budget as a homeowner or help you make the decision whether to purchase in the development.