Paying periodic dues is a necessary part of living in a planned development. You can (and should) find out what the current dues are before buying in. However, even if the dues are affordable now, what if they keep going up and up? Is there any limit on how high the homeowner's association (HOA) can raise dues?
Unfortunately, the short answer is usually "no." An HOA can typically raise dues as much as it needs to in order to meet its annual budget. There are exceptions, however. This article will discuss some ways that increases in dues and assessments might be limited.
To understand why your HOA might raise dues and assessments, you need to know what an HOA is and how it determines the amount of dues needed. An HOA is typically a nonprofit corporation, put in place to run the development.
Upon purchasing a home in a development, the owner automatically becomes a member of its HOA. HOAs are usually run by a board of directors, made up of individual members (homeowners) elected by all the members (owners). (In a brand new development, however, until a certain percent of the property is sold, the board of directors will likely comprise the developer and its representatives.)
An HOA's responsibilities ordinarily include paying for the operation, maintenance, repair, and replacement expenses for all the common areas in the development. Expenses might include the costs of keeping a common pool cleaned and maintained, or paying for heating, lighting, and cleaning a common clubhouse.
The HOA adopts an annual budget, which usually includes the cost of all ongoing maintenance and operation expenses, plus an additional amount for a reserve fund. (For more information on reserve funds, see Nolo's article "Why an HOA Needs Sufficient Cash Reserves.")
The HOA then determines how much it needs to collect from each owner in periodic dues to meet the budget. The HOA might pay for any costs that arise outside the budget by collecting a special assessment from each owner, or by withdrawing funds from the reserve account.
Because costs are constantly on the rise due to inflation, most HOA's annual budgets require annual increases. As a result, most HOAs need to collect more from the owners in dues each year. Sometimes, circumstances demand that the HOA increase dues quite significantly (more than the amount required for general cost increases), or levy high assessments. This might happen, for example, if the HOA does not have sufficient funds in reserve to pay for a common area repair.
After seemingly constant dues increases and assessments, it's natural for a homeowner in a development to wonder whether there is a limit on these charges.
The development's Declaration of Covenants, Conditions, Restrictions, and Easements (CC&Rs) is typically the key document governing its operation. In some (usually older) developments, the CC&Rs contain limitations on how much the HOA can increase dues and assessments. For example, the CC&Rs might limit increases in periodic dues to 2% per year, or assessments to a maximum annual dollar amount.
The only way to determine whether there are dues or assessment limitations in the development you live in (or are considering buying into) is to review the CC&Rs.
If the CC&Rs do limit increases, however, it's not always good news. If the limitations are too severe, the HOA might be prevented from collecting enough money to properly maintain and operate the development. For example, a 2% annual limitation on dues hikes might be a problem if cost of living increases are averaging 5% per year. A shortage of funds can mean that the development's common areas fall into disrepair. This can hurt property values in the entire development. So, while you might keep some coin in your pocket because of lower dues, the value of your home might decrease.
Depending where your development is located, state laws might regulate assessment amounts and dues increases. Some states limit assessments to a certain amount per year, or require the approval of some or all the members (homeowners) before the HOA can raise dues more than a certain percentage.
In Arizona, for example, the HOA cannot increase dues by more than 20% per year without the vote of a majority of members of the HOA (Arizona Revised Statutes §33-1803).To find out whether your state has laws limiting dues or assessment increases, you'll need to do some research, or consult an attorney in your area.
Although there is a risk of an HOA facing a money shortage if dues and assessments are limited under state law, unlike CC&R limitations, state legal limits are typically fairly generous (such as Arizona's maximum 20% annual dues increase). Also, since state law limitations typically leave the final vote to the members (homeowners), hopefully the homeowners will approve greater increases if necessary to keep the development from severely deteriorating.
You might find that neither your development's CC&Rs nor your state's laws limit the dues and assessments you can be charged. If so, your best option to prevent unnecessary increases might be to become familiar with the workings of the board, and get involved in the HOA's budget process.
Usually the homeowners in a development have the right to comment on the HOA's annual budget. Attend the HOA's budget meetings and make your voice heard on budget decisions. Also, the adoption of the annual budget is typically subject to the approval of a certain percentage of the owners. If you disagree with budgeted items, voice your objections to your fellow homeowners, and do what you can to prevent the budget from passing until excess expenditures are removed.
Keep in mind that the HOA's board of directors are homeowners as well, and must also pay any increased dues. Further, the board is probably well aware that most homeowners are not keen on dues increases and assessments. Most boards work hard to keep the budget in check and avoid significant dues increases or assessments.
Occasionally, however, a bloated budget or the need for assessments might be due to a fiscally irresponsible board. In this case, it might be worthwhile trying to remove the irresponsible board members.The CC&Rs and other governing documents most likely provide a means to remove board members. This isn't as easy as it might sound however; the process is typically complicated and lengthy.
It can be difficult to determine whether the development you live in (or are interested in buying into) is subject to any state law or CC&R limitations on dues or assessments, or whether the board is being fiscally responsible. If you need help, an experienced real estate attorney in your area can assist you.