Sometimes efficiency doesn’t come cheap. In the case of homeowner associations (HOAs), residents have experienced the good and bad from property management agencies that serve community residents, but can, at times, over-police them. Regardless, HOAs are here to stay. In fact, nearly 80 percent of new construction in the U.S. is governed by an HOA or condo association, and as many as 65 million Americans live in such neighborhoods.
Of course, HOAs are about more than giving citations for an open garage or sagging shutter. Organizations typically pay for needed services involving such things as common areas, gates, pools, clubhouses, landscaping and parking enforcement. In a townhome or condo community, the HOAs usually handle repairs on the exterior of the units. HOA fees can range from several hundred dollars per month to just a few hundred a year, depending on the area and services offered.
Since an HOA fee can be a significant part of your mortgage bottom line – and is non-negotiable – make sure it’s in line with what you’re prepared to spend before you buy.
Understand the rules before making an offer
As a potential homebuyer in a HOA-managed development, examine HOA finances carefully. Make sure your Realtor connects with the seller’s agent to get you copies of the full financial report for a particular community. Quite often, those documents are a required disclosure before an offer on a home is made, which provides a potential buyer with the opportunity to fully understand the property’s financial implications.
Your lender will also study the ratio of buyers to renters, the vacancy rate in a condo building, the condition of the property, and whether it could be vulnerable to natural disasters. If the number of renters is too high, it may be difficult to get financing. Why? Lenders will be reluctant to loan to a borrower in a condo building where the remaining owners could get stuck with special assessments to keep the building livable after a major disaster. At the very least, you could be paying a higher interest rate.
This is not the place to cut corners
It’s important to know that letting your HOA fees go unpaid is sometimes just as serious as being delinquent on your home loan payments. In recent years, HOAs have successfully won in court the right to compel homeowners to pay delinquent HOA fees. Several courts have ruled that HOAs have the right to foreclose on homeowners for lack of payment. This was particularly acute during the housing downturn, when borrowers in financial trouble frequently stopped paying HOA fees.
As a result of mortgage lenders wanting to stay in the first lien position, where they get paid first in case of a loan default, some banks are even going as far as to pay borrowers’ delinquent HOA fees. Because of this, many lenders require payment of fees as a condition of the loan, and repeated delinquencies could lead to a lender seeking judgment to repay the fees. In addition, in states where HOAs can foreclose on a borrower, some lenders may charge higher rates for properties that are managed by an HOA. So again, make sure you understand the ramifications.
So before you buy a home, take a careful look at how HOA fees are assessed. Remember that your lender will require an escrow or impound account for property taxes and homeowner insurance, but probably not for HOA fees. This is partly because HOA maintenance companies change often along with the requisite payment address. Make sure you always budget for your HOA fees and pay them as conscientiously as your mortgage.
Published July 19, 2017
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