HOA Fees: What You Need to Know Before Buying
Homeowners Association (HOA) dues are a method of sharing costs with others in your community. But HOA payments can add a significant amount to your housing expenses. Before you commit to buying a property that's part of an HOA, get familiar with where your money goes and what to expect with your HOA dues.
An HOA is an organization or group of homeowners in the same neighborhood or building who share costs, set rules, and manage common areas together. For example, everybody who owns a condo in the same building is typically part of the same HOA. The HOA makes decisions about (and pays for) things, such as:
- Maintaining common areas like lobbies and community courtyards
- Regular cleaning and landscaping
- Repairs and upkeep
- Parking lot maintenance
- Additional amenities, such as pools or fitness centers
- Rules governing what neighbors may do with their property, also known as covenants, conditions, and restrictions (CC&Rs)
Property owners could handle everything themselves, but with more than a handful of units, it’s common to hire a management company (and contractors) instead. The HOA board, along with other members, makes decisions and then delegates the work to others.
Each homeowner pays HOA fees, typically monthly. Those funds go toward regular expenses. Ideally, the HOA also saves for future projects and emergencies by building up a reserve fund. These fees (your HOA dues) are in addition to your monthly mortgage payment.
Seven Ways HOA Dues Affect Your Finances
Before you commit to a home with an HOA, there are a few things you should know about HOA fees.
They Can Change
As you prepare to buy a home with an HOA, you and your lender should evaluate the property's HOA dues to determine if you can afford both the loan and the dues. However, dues can change in the future. If that happens, you may find that your housing payments become unaffordable. HOA fees will rise when projects need funding, and they also may increase due to automatic inflation adjustments. Ask about the HOA’s history of increasing fees, and find out about any planned projects or other changes in the works.
They Don’t Cover Everything
Your HOA covers routine costs and planned expenses. But sometimes significant projects and emergency repairs need immediate funding. In those cases, you may need to pay an additional special assessment. These assessments can cost several hundred dollars or even several thousand dollars (or more).
HOAs keep a reserve fund, which can help absorb large expenses and surprises. View financial statements and evaluate the reserve fund before you buy a property with an HOA. An insufficient reserve fund is a sign that dues may increase soon, and assessments are more likely when there’s no rainy day fund.
They Can Affect Your Credit
When you buy into an HOA, you agree to pay HOA dues. If you don’t pay, you owe the HOA money, and the HOA can eventually send past-due accounts to collections. The HOA can also put a lien on your property, and skipping HOA fees can even lead to foreclosure in some cases. Collection accounts and public records may appear on your credit reports, making it harder for you to get other loans or find housing in the future.
You Pay for Things You Might Not Use
HOA dues cover costs for common areas around your property, but you might not enjoy or even want everything you’re paying for. That’s a tradeoff of living in a shared space. For example, you might not use the pool or rooftop patio (which tend to increase HOA dues, when compared to properties without those amenities), but you need to pay for them anyway.
You Probably Won’t Save on Taxes
HOA dues are typically not deductible for your personal residence. However, if you own a rental property and pay HOA fees, you could get a tax break, and the home office deduction might also provide some relief. Check with a CPA or tax preparer to find out if any savings are available.
You May Need to Pay Dues at Closing
When buying a property with HOA dues, be prepared to pay for every day you own the property. The good news is that you may have a prorated payment when you sell.
You Still Need Insurance
HOA dues pay for a master insurance policy. But those policies typically don’t cover your personal property, the individual home you live in, the interior of your unit, damage that originates from your unit, or your personal liability. Speak with an insurance provider to determine what your risk is, and find out what type of policy makes the most sense for you. Price those policies before you buy an HOA-managed property so you have a clear picture of your future costs.
Rules and Restrictions
In addition to handling finances and maintenance tasks, HOAs are responsible for setting and enforcing rules in your community.
Familiarize yourself with the rules and regulations before you buy so you aren't unpleasantly surprised later. Examine the HOA’s CC&Rs, request recent meeting minutes, and look at properties in the area to determine how strict the rules are.
Bylaws and CC&Rs can cover numerous topics, including:
- Maintenance requirements
- Exteriors (including paint)
- Landscaping responsibilities and restrictions
- Noise limits
- Whether or not owners are allowed to rent out units
- Modifications and visible attachments to your property
- Business use of your home
In some cases, you’ll appreciate the rules. They may keep you physically safe, protect your property value, and allow you to enjoy your environment. But some rules may be problematic, and you need to know about potential conflicts before you buy. Ultimately, it’s your choice whether or not to buy a property, and you get to decide if the rules are acceptable to you.