What is a homeowners association?
A homeowners association, or HOA, is an organization within a community that sets the rules for properties in its jurisdiction and enforces them. Whether you live in a single-family home, condominium or townhouse, if your community has shared spaces or amenities like a swimming pool, tennis court and security gates, those common areas are likely maintained by an HOA. The HOA is usually run by a board consisting of property owners who are elected by other property owners in the community.
The HOA collects fees from its member property owners to pay for upkeep. These fees help maintain the quality of life in the community and protect property values.
What do HOA fees cover?
If you plan to buy a home in an HOA, it’s important to understand what HOA fees are and how they work. HOA fees are paid in addition to your mortgage, property taxes and insurance, and are usually paid monthly or quarterly. Some of the costs paid out of the HOA fees are:
- Grounds maintenance and landscaping
- Pool maintenance
- Trash removal
- Electricity and other utilities for common areas
- Fire alarm systems
- Gate security guard
- Pest control for common areas
It’s the duty of the HOA board to collect enough fees to cover the expenses. HOA fees can rise steeply depending on how much maintenance costs increase each year.
How much are HOA fees?
The board that runs the HOA decides how much to charge property owners to cover the community’s expenses. HOA fees vary widely depending on the property location and the amenities available to property owners.
For example, the owner of an oceanfront condo in Florida that’s loaded with amenities might pay $1,000 a month in HOA fees, while someone in a modest gated community 10 miles inland might pay only $150 a month.
Larger residences in an HOA sometimes pay more than smaller ones, with the assumption being they use more services. For example, it costs more to cut the grass at a large, single-family home than at a one-bedroom unit.
Unexpected HOA fees
While your regular HOA fees are generally predictable, the community’s board can also authorize what’s known as a special assessment. Special assessments are usually put in place to cover the cost of major unanticipated work, like repairing damage to common areas after a natural disaster or refinishing a building’s facade, which some cities like New York require periodically.
Special assessments can also be used to help build up the community’s reserve fund, which is essentially the HOA’s rainy day account. That money can wait in the wings to help mitigate much larger special assessments in the event of major required work.
Assessments can be one-time charges or ongoing fees on top of your regular dues.
HOA boards usually have a lot of freedom to institute assessments, and don’t necessarily have to poll, or even notify, residents before they do (though of course, passing a resolution and notifying the community is a better practice).
Are HOA fees tax-deductible?
IRS regulations can be a little complicated, but in general, HOA fees are not deductible if the property you own in the community is your primary residence. However, if you rent it out, your HOA dues may be deductible as a rental expense. HOA special assessments are not deductible.
What happens if you can’t pay your HOA fees?
If you’re struggling to pay your HOA dues, the board or management company may be able to put you on a payment plan. You should try to be upfront about your financial situation with the board early to see if you can reach an accommodation.
Ultimately, if you’re in arrears for too long or your debt is insurmountable, the HOA has the power to have you evicted, and a lien could be placed against your deed to help the community recoup its losses.
Questions to ask before you buy in an HOA
If you’re considering buying a property in a homeowners association, the amount of the HOA fees should be readily available. Often, it’s included in the real estate listing. You should also be able to access, through your real estate agent or the HOA, minutes of past HOA meetings and other records that show fee changes and any rules that relate to fees.
As you learn more about the HOA, look for answers to the following questions:
- How often has the HOA increased fees in recent years?
- What services do these fees cover? What don’t they cover?
- Does the HOA have a reserve fund for long-term repairs and maintenance, and if so, how much is in it?
- Has the HOA hired an expert to conduct a reserve study that estimates how much money should be saved to cover these expenses?
- Does the HOA have a history of charging special assessments? If so, how much were they, what were they for and how often did they occur?
Getting answers to these questions may lead you to conclude that the HOA doesn’t have enough cash on hand for significant expenses, which means that either HOA fees will go up or special assessments will be charged. Alternatively, the answers may give you confidence that the HOA has planned well for the future and has enough money for future costs to avoid high unexpected assessments.
As you assess the short- and long-term costs of buying a home, learning about HOA fees will help you make a better decision. You might discover that a property that otherwise looks affordable is actually out of reach, or you might conclude that it’s a perfect fit for your finances.
You can use Bankrate’s calculator to figure out how much house you can afford to buy.