How homeowners associations work

As you search for a home, you're likely to find many houses and condos have a homeowners association (HOA). These organizations create rules for housing developments and the properties within them, and they also offer a range of perks. So what can HOAs do for your property, and what are the pros and cons of belonging to one? Find out how HOAs work and discover five things you should know before buying a home with an HOA.

What is an HOA?

An HOA is an organization that sets and enforces rules and regulations for properties and residents within a housing development. The organization also works with property management companies and service providers that oversee community facilities.

Anyone who purchases a home within the community must become a member, pay the required fees and abide by the rules. Members can also take advantage of the community's amenities. These amenities might include:

• Parks, playgrounds and landscaping
• Gyms and golf courses
• Swimming pools and hot tubs
• Clubhouses and community rooms
• Laundry rooms
• Garbage removal
• Parking lots
• Community security

Most HOAs outline their policies in a charter, which is often known as the Declaration of Covenants, Conditions and Restrictions (CC&R). For standalone houses, rules typically apply only to property exteriors. For condos, rules may also govern interiors. HOA rules may cover:

• Roofing or fencing materials
• Exterior paint colors
• Landscaping and gardening
• Rentals and sublets
• Type or number of pets

In addition to discussing the policies, CC&Rs also list the consequences for violating the rules. Penalties may include anything from a fee to legal action. Depending on the policies outlined in the CC&R, the HOA may be able to take homeowners to court to get them to comply. Alternatively, if a homeowner doesn't comply and the HOA doesn't take action, other members may be able to take the homeowner to court.

In most cases, residents of the housing development run the HOA. Most HOAs have elected boards of directors who make decisions about creating and enforcing rules.

What property types have HOAs?

Almost any type of property can have an HOA, from single-family homes to multi-family buildings. HOAs can cover:

• Houses in a subdivision
• Townhomes in a planned community
• Units in a condo building

How are HOAs different from community associations?

All HOAs are community associations, but not all community associations are HOAs. That's because "community association" can refer to any established group of property owners. This term can include:

• HOAs: Typically make homeowner membership mandatory and tend to be incorporated organizations that follow state laws
• Property owners association (POA): Usually have voluntary membership, which may include local renters or business owners, and tend to focus on increasing property values
• Cooperative (co-op) boards: Generally review and approve resident applications and enforce rules about property maintenance and renovations

How much do I have to pay for an HOA?

HOAs collect fees to cover the cost of maintaining amenities and community areas. Most HOAs keep an additional reserve of funds, which the organization can use for major construction or renovation projects in the community.

The amount you pay depends on your HOA, as each association sets its own rates. The HOA's board of directors typically sets fees and can charge on set schedule such as a monthly, quarterly or even annual basis. The board of directors collects the fees and distributes the funds as necessary.

Can HOA fees change?

HOA fees can increase or decrease over time. In most cases, the board of directors reviews the community's needs, the total of the current fees and the size of the reserve fund to decide whether to raise or lower fees.

The HOA's CC&R may outline rules for how much the fees can change each year. Read over the CC&R to make sure you understand how much you may have to spend on HOA fees. In addition to your regular HOA fees, there may be additional assessments from time to time to cover special projects or deficits.

Do you have a say in your HOA fees?

HOAs are typically required by their CC&Rs to hold meetings throughout the year. At these meetings, board members and homeowners discuss the state of the community, upcoming changes and budget issues.

In many cases, homeowners provide input or vote on HOA fees and other policies. Check the CC&R to learn how much input you have as a homeowner.

Pros of HOAs

Buying a house or a condo with an HOA can offer many perks. Some of the biggest advantages include:

• They set and enforce standards. Since the HOA makes and applies the rules, individual homeowners don't have to worry about the neighborhood's appearance. That means you may be able to avoid confrontations with neighbors about the state of their property.
• They can protect property values. Many HOA rules focus on preserving or improving property values, although they can't guarantee any increase. When you buy into an HOA, you may be able to feel more confident in your investment.
• They handle some essential home maintenance. Some HOAs provide landscaping and exterior maintenance. Even though you pay fees to cover the costs, these services can prevent you from having to hire contractors or save you the time you'd need to do the chores yourself.
• They offer helpful amenities. Many HOAs oversee extras like pools, parks and community spaces. If you plan to use these facilities, then buying a property with an HOA could offer even more value than one without.

Cons of HOAs

Belonging to an HOA can also have drawbacks. Some of the most notable downsides include:

• They increase your monthly debt. HOA fees increase the amount you owe every month, which can affect the type of mortgage you qualify for. Most mortgage lenders require you to have a debt-to-income ratio (DTI) of 43% or lower. That means the total of your monthly debts should be 43% or less than your monthly pretax income.
• They may charge additional assessments. In addition to regular fees, some HOAs can charge extra to cover  costs for special projects or deficits. Review the HOA's financial statement to find out if it's fully funded or if it has charged extra in the past. 
• They control how your property looks. Many HOAs have rules about home exteriors, which can prevent you from adding unique touches. They can also prevent you from doing things like putting up a deck or installing a pool. If you want the option to paint your house an unusual color or install a decorative fence, be sure to review the CC&R first.
• They can hinder your investment. Since HOAs may have rental restrictions, they could prevent you from generating rental income. Check the CC&R to find out if renters are allowed, if the HOA has to approve them and if there are any lease restrictions. Also make sure to ask or review if there are any resale restrictions you need to be aware of.

What to know before buying a property with an HOA

When you buy a house with an HOA, you should know exactly what to expect. Make sure you understand the following issues before you move forward with your purchase.

1. Fees and rules can vary widely from one HOA to another

If you're comparing multiple properties with HOAs, review the fees, CC&Rs and amenities carefully. Some HOAs are more restrictive, while others have a shorter list of rules. Some have high monthly fees, while others don't charge very much. Ask your real estate agent for a copy of the CC&Rs and financial reports so you can review and compare the details.

2. The amenities might not be worth the fees for some homeowners

When you're considering buying a home, it's easy to get excited about the amenities. If you don't play golf or if you already go to a gym you like, then having access to a golf course or a workout room doesn't provide value. Make sure you weigh the amenities and their cost carefully as you consider your purchase.

3. HOAs may be involved in lengthy disputes

When HOAs raise issues with homeowners, they may be resolved quickly or go on for months. Before buying a property with an HOA, ask your real estate agent if they're aware of any known issues and/or you can review recent board meeting minutes. You might get a better sense of some common issues that homeowners experience as well as major problems that may be cause for concern.

4. An HOA could make the property ineligible for some home loans

The Federal Housing Administration (FHA), which provides government-backed loans, has requirements that must be met for condos. You can check the Housing and Urban Development (HUD) database to find FHA-approved condo buildings. Similarly, Conventional and VA loans may have requirements that the HOA is unable to meet.

Other factors such as if the HOA includes a right of first refusal which may allow the HOA to decline a potential buyer’s application for certain reasons and be unacceptable when applying for some mortgages.

5. The HOA could foreclose on your home

In some cases, HOAs can fine homeowners who fail to comply with their rules. If homeowners refuse to pay fines or fall behind on monthly fees, the HOA may be able to foreclose on their homes. Most HOAs only pursue this action as a last resort, but it's important to understand the possible consequences.

Buying a property with an HOA can be a smart choice for many homeowners but make less sense for others. Understanding your options is the key to finding the right home for your family.