FAQ: What is an HOA?

What is a HOA? 

HOA is an abbreviation for Homeowners Association. A Homeowners Association is created by a developer upon the completion of a multi-family project, such as a subdivision or a condominium. The HOA documents are approved by the State and provide the framework for governing the Association as well as detailing the budget and how money is spent.

What are HOA Dues?

A HOA generates money through HOA Dues that are typically paid monthly by the homeowners. In newer subdivisions and condos, the HOA dues are defined State guidelines. The dues are designed to pay for ongoing maintenance as well as future repairs.  Therefore, a portion of the dues immediately get put to work paying bills and the rest funds a Reserve (savings) account. Unlike State bonds such as Mello-Roos, HOA dues are forever, and they can and usually do increase over time.

Who pays for repairs on a building in an HOA?

Reserve account funding for new developments is initially approved by the State based on formulas available from the Department of Real Estate.  Subsequently, a formal review (usually by a third party vendor) is required every three years, and a less formal review is conducted annually by the HOA Board.  The Reserve Study considers the components that the HOA will ultimately need to repair or replace, each component’s life expectancy, and the estimated replacement cost in the future.  Then, the reserves analyst calculates how much the HOA should be saving as a whole each month to cover the anticipated expenses.  This amount is then broken down into the cost per unit per month.  

It's very important that the reserves are adequately funded in an HOA so that when a big expense occurs (such as the need to replace a roof) the HOA has the funds to pay for the repair. If the HOA does not have the funds to repair big expenses, they must vote on an assessment to cover the amount due.  That assessment can either be in the form of a dues increase or a special assessment.  A special assessment is money due in addition to the regular monthly dues. 

The accuracy of the reserve study is critical in evaluating the solvency of a property you may be considering.  What we look for are detailed reserves studies completed by an independent third party vendor, not one completed by the HOA management company or HOA board, unless they are truly qualified to do that sort of analysis.   

Do HOA Dues affect my loan qualification?

Yes.  If you are purchasing a property that has HOA dues, the dues are calculated as debt when you are qualifying for a loan.

Who makes decisions on behalf of the HOA? 

The HOA is typically run by a board of directors, who are elected by the homeowners. Many HOA's also contract with a management company to collect the HOA dues and pay the bills on behalf of the Association. Typically, the management company is also tasked with ensuring the HOA is in compliance with relevant state laws.  However, in small HOAs in particular, it can be very difficult to enforce laws or rules if a majority of the homeowners aren’t in agreement.  

Are there rules about what I can and cannot do if I buy a home in an HOA?

In addition to the monthly cost consideration of buying a property within an HOA, there are also Covenants, Conditions, and Restrictions (CC&Rs), Bylaws and Rules and Regulation that govern the HOA.  The CC&Rs can dictate everything from rental restrictions, to pet restrictions, to architectural review for remodels.  The goal of the CC&Rs are to create a harmonious environment amongst the neighbors and to set expectations when someone buys a property.  The CC&Rs, Bylaws and Rules and Regs should be reviewed carefully before purchasing a home subject to an HOA.

What else should I know about HOAs?

If you’re considering the purchase of a property in an HOA and plan to get a loan for the purchase, there may be some things you need to consider:

1. FHA/VA: If you plan to take advantage of the FHA or VA home loan, the complex has to be approved by FHA or VA to qualify.  If it’s not, our preferred lenders may be able to help get the building approved as part of the purchase, but that can add time to the process.

2. Owner Occupancy: Some lenders have requirements on the minimum owner occupancy in a building they will lend on.  For example, if you want to buy a condo in a 10-unit community, but 7 of the units are tenant occupied, your lender may not feel comfortable lending on the building.

3. Litigation: If the HOA is currently in litigation, the lender will likely not be willing to lend on the property.

4. Financial Solvency: The lender may want to see that the HOA is solvent (has sufficient reserves and operating capital) before they will agree to lend on the building.

Anytime a Buyer is considering purchasing a property within an HOA, it is important to remember that there are pros and cons to buying that type of property.  The most important thing to remember is that reviewing all of the HOA documentation provided during escrow and satisfying yourself on the condition of the HOA are big undertakings that must be completed during your due diligence period.

For more information about HOAs or about buying or selling a condo, contact Kate Gillingham. Kate owns a property in a HOA and has ample experience representing clients through condo escrows. Kate can be reached at (619) 933-5319 or kate@coronado-realty.com.