Learn Everything You Need to Know About Homeowners Associations
Whether you are a first-time homebuyer, a seasoned real estate investor, or somewhere in between, there are a plethora of factors to consider when buying a home, condo, or townhome. One of the most important, and often misunderstood, factors involved in buying real estate is if the property is located in a Homeowners Association (HOA) managed subdivision.
Along with these considerations come a variety of different questions:
- What exactly is a Homeowners Association? Are they good or bad?
- What are the Pros and Cons of Living in an HOA?
- What are the most important factors to consider when buying property within an HOA community?
- What do I look for in a Homeowners Association?
As realtors, we feel it is vital to help our clients better understand the nuances of HOAs, which is why we created this in-depth article. By the time you finish reading our Ultimate Guide to Homeowners Associations, you will have a better idea of what to look for when buying your next home or condo.
What is a Homeowners Association/ HOA?
The simplest definition of a Homeowners Association is:
A nonprofit corporation established by a real estate developer to market, sell and manage homes. Once a certain number of homes have been sold, control of the HOA is transferred to a Board of Directors (who own homes in the subdivision) to operate and manage basic services for the community.
Just like any corporation, a Homeowners Association operates under a determined set of rules, regulations, restrictions, and guidelines. If you decide to own a home in an HOA-managed community, you are legally obligated to follow the rules established by the Association.
Understanding the rules and regulations of an HOA is the most important aspect of buying a home in an HOA-managed subdivision. In the next section, we will provide more detail on the CC&R, which is the backbone of any Homeowners Association.
What are CC&R's?
CC&R stands for Covenants, Conditions, and Restrictions, and are essentially the rules of your neighborhood. Every HOA has one of these, and the specific rules, bylaws and guidelines can vary widely from one subdivision to another.
Some of the most common rules and regulations covered in a CC&R include:
- Parking: Certain HOAs prohibit parking on the street near your house, and possibly parking anywhere other than in your garage.
- Pets: Breed and weight restrictions are important factors to consider if you have pets.
- Exterior: The CC&R may have certain restrictions on what color your house can be painted, adding/removing trees, or even adding a fence.
- Rentals: Whether you are a real estate investor or simply buying a home to rent until you move in permanently, some HOAs may have restrictions on homes being used as rentals.
- Add-ons: Thinking about adding a backyard cabana, a patio, or an extra bedroom? The Homeowners Association may not allow you to.
- Penalties: Depending on the violation, penalties can include fines, a suspension of community amenity use, and legal action.
- Fees/Dues: Everything from the total amount of dues, what they cover, and the frequency of payment will be included in the CC&R.
This is not an exhaustive list, but it should provide an indication of how important it is to read the CC&R from top to bottom before making any decisions. Surprises and homeownership are rarely a good thing when combined, so knowing as much as possible about the Homeowners Association’s Covenants, Conditions and Restrictions is essential.
The Pros of a Homeowners Association
In many ways, the rules and regulations of a Homeowners’ Association are designed to protect the neighborhood, its residents, and (most importantly) home valuations. Here are some of the Pros of HOAs:
- Community Amenities: Several HOA communities provide pool/spas, playgrounds, fitness centers, clubhouses, game rooms, tennis courts, and more! These facilities add extra appeal to a neighborhood, and provide spaces for the whole family to get out and enjoy the outdoors with their neighbors.
- Uniform appearance: One of the worst things that can happen to a subdivision is having one (or several) bad neighbors. Unkempt yards, cars parked everywhere, loud parties: the list can go on. Not only can bad neighbors be a nuisance, they can also hurt your home’s value AND make it difficult to sell your home. By implementing (and enforcing) strict rules regarding appearance, noise levels, etc., HOAs provide a peaceful and visually appealing environment for current and future residents.
- Less work: Typically, Homeowners Associations handle the contracts for a variety of services many homeowners may not think about. Common area maintenance, water, trash collection, sewer maintenance, and front yard maintenance can be a hassle if you have to contract them on your own. When an HOA handles these services (with the dues you pay), it will save you time and money in the long run.
The Cons of a Homeowners Association
The downside of HOAs can vary depending on the individual homeowner, their overall plans with their home and their lifestyle preferences. However, there are certain aspects of a Homeowners Association that can affect the entire neighborhood in a negative way. Some common Cons of Homeowners Associations include:
- Special Assessments: When a Homeowners Association collects dues, those funds are typically dispersed into two categories: current expenses and reserves. One key thing to point out regarding HOAs and the CR&Rs is that the amounts you pay are not fixed; certain circumstances can incur unforeseen expenditures that no one could anticipate. For example, a major storm damages the clubhouse roof and insurance won’t cover it. In these instances, an assessment is a one-time fee paid by the community in addition to their normal HOA dues.
- Embezzlement/Fraud: It’s a sad fact of life: whenever money is involved, there is the possibility of fraud and/or embezzlement. Homeowners Associations are no different. A simple Google search for “HOA Fraud” will provide countless stories of board members scamming their HOAs out of 6- and 7-figure sums. These thefts can create a whole host of problems with vendors and basic service providers, and potentially deter prospective buyers from the neighborhood.
- Stifled creativity: This has already been mentioned briefly, but Homeowners Associations are not very friendly to people who want a “unique” home. Depending on how strict an HOA is, something as simple as a mop and bucket may not be allowed in the front yard. Additions to the home may be heavily scrutinized or outright denied, and exterior paints may have to fit within a certain palette range. This may not be the most detrimental con, but for those who want the freedom to decorate and personalize their home, an HOA will not be their ally.
Now that you have a general understanding of everything an HOA does, are you still interested in finding a home or condo within one? If so, great! The next section will provide some simple guidelines to help you find an HOA that meets your needs.
What to Look for in a Homeowners Association
Finding a Homeowners Association that aligns with your goals of homeownership will require some research and planning, but the extra time you spend will be rewarding for both you and the HOA you decide to live in.
Before we get into the specifics, there is one very important step EVERY prospective homebuyer needs to do before they start their search:
Know exactly (or as many details as possible) what you are looking for in a home, and the things you absolutely MUST have.
For example, if you have a dog or pet that may be a questionable breed or species, put it in writing. If you plan on renting your home, put it in writing. If you know you are going to have a lot of visitors and parking may be an issue, put it in writing.
Having these must-have items in writing will ensure there are no surprises later on down the road. Another benefit to listing your must-haves is it will make it easier for an experienced realtor to narrow your search based on his or her knowledge of the area.
Once your search is narrowed to the HOAs that meet your criteria, here are the steps you should take:
Google the name of the Subdivision and the HOA: Search engines are incredibly useful for finding out any past history of foul play. If you find any type of negative (verifiable) news about an HOA you are interested in, this can help you narrow your search even more.
Read (or have someone read) the CC&R thoroughly: This was mentioned briefly in the CC&R section, but somethings need to be repeated. If you don’t have the time or patience to read the CC&R, consult a real estate attorney to do it for you. The last thing any prospective homebuyer wants to encounter is to close on a home and move in only to find out your Rottweiler isn’t allowed in the community.
Check the financials and other records: Once an HOA has passed the first two tests, the next step is to check a Homeowners Association’s records for any discrepancies, such as:
- Pending/current lawsuits.
- Ample cash reserves for catastrophes and unforeseeable expenses.
- Delinquent accounts (vendors and fellow homeowners).
- Anything that may seem suspicious
Another good litmus test of any HOA or seller is how willingly (or not) they share these records with you, the prospective homebuyer. Although most of the records you need are publicly available, a property manager or board member who makes it easy to access information is typically a sign of good faith. However, if the property manager, the seller, and even the listing agent tries to hinder or dissuade you from checking their records, there is usually a (bad) reason.
If you follow these steps and everything checks out, you can move forward in the buying process!
Homeowners Associations are ideal for prospective home and condo buyers who prefer a uniformity, amenities, and tight-knit community atmosphere. Conversely, homeowners who want more freedom with how they decorate or renovate their home will feel more comfortable in a neighborhood without an HOA. The Kay-Grant Group is here to help all prospective buyers in Scottsdale, Phoenix, and the entire Valley find the perfect home or condo. HOA or no HOA, we have the knowledge and expertise you need for a smooth real estate transaction.
*Disclaimer: Home Owners Associations are very complicated matters and nothing in this article is intended to be used as legal advice. If you have questions about a particular scenario, it is recommended that you speak with an attorney. Under no condition should you rely on the above information to make any legal or investment decisions.