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What Does HOA Mean? The (Ultimate) Guide

hoa real estate investing May 05, 2020

Did you know that 25-27% of the U.S. population lives in some form of an HOA? The Foundation for Community Association Research estimates there are 347,000 community associations in the U.S. with 73.5 million residents!

If you're involved in the real estate industry, it's very likely you've encountered an HOA at some point in your career. Even so, there may be a number of real estate investors out there that don't really know what HOA means.

For home buyers, investors, and other real estate professionals, knowing all about HOA's meaning will help you decide on the best property investment strategies.

Even if you reside in an HOA or have just heard about them before, you may still lack an understanding of what they're all about. In this article, you'll learn exactly what an HOA is and everything else you’ve wanted to know about HOAs.

We hope you enjoy What Does HOA Mean? The Ultimate Guide! Use this menu to jump to your section of choice:

 

What Does HOA Stand For?

HOA stands for HomeOwners Association. 

When buying property in an HOA development, you're usually required to become a member of the HOA that the property resides in. However, in some cases, HOA membership may be voluntary for a property owner.

HOA members can participate in the HOA’s governance and have access to the HOA amenities, as long as they maintain home ownership and pay the HOA fees. When an owner sells their HOA property, they forfeit membership in the HOA and lose all their rights in the HOA.

 

What Is HOA?

HOA is a non-profit organization in a subdivision, planned community, or condominium development that creates and administers regulations for its dwellings and residents.

An HOA is initially formed by a real estate developer with the purpose of marketing, managing, and selling homes in a residential subdivision. The homeowners gain control of the association from the developer once a predetermined number of lots are sold. 

HOAs are formed in communities of multiple residences, such as condominiums, single-family homes, and townhouse developments, even skyscraper buildings!

The number of homes within an HOA can be limited to just a handful or up to several thousand. HOA membership is required for anyone buying homes in communities controlled by that particular HOA.

Homeowners Association (HOA) has a board of directors or a board of governors which is elected to administer and oversee the HOA’s rules and regulations. An HOA will use a Declaration of Covenants, Conditions, and Restrictions (CC&Rs) document to describe its rules.

The CC&Rs provide restrictions on certain home improvement choices, such as:

  • Type of fences
  • Additions to the home
  • Color of paint
  • Landscaping allowed

HOA rules may vary depending on what's contained in the CC&Rs. HOAs can be very strict or relatively lenient when it comes to the way they dictate and enforce rules. 

Furthermore, these HOA documents list the penalties for violating the CC&Rs. These penalties may include fees, forced compliance, and litigation in some cases.

 

What Does An HOA Do?

what does an HOA do?

HOAs are active in urban planning, zoning and land use. HOA decisions affect the pace of growth, quality of life, level of taxation, and property values in the community.

Well-ran HOAs help increase property values by ensuring communities stay visually appealing and well-maintained. However, if your HOA does not function properly due to high HOA fees or poor management, owning a home in that HOA may become troublesome.

Additionally, HOA's administer the organization's governing documents, including the Articles of Incorporation, CC&Rs, and Bylaws. These documents affect every homeowners' options throughout ownership in the HOA.

In short, responsibilities of an HOA include:

  • Manage and maintain common facilities
  • Collect HOA fees from residents
  • Manage the HOA budget
  • Set aside reserve funds for capital improvements
  • Administer the CC&Rs

 

What Is HOA For A Condo?

Nearly every condo you buy will come with an HOA attached to the deal. Common areas, such as lobbies, walkways, and stairwells, are an inherent feature that must be maintained by someone.

Since most individual residents don't want to take on that responsibility, the HOA steps in. Condo HOAs maintain, manage, and preserve these facilities, thus, they enhance property values in the community.

Decisions such as making significant capital improvements (i.e. changing the roof, adding security features & electrical improvements) are handled by the condo HOA.

The HOA fee for condo units may vary from $50 to $100 a month on the low end, to over $1000 a month in expensive areas! The HOA fee may vary depending on services and amenities included, such as pools, clubhouses, paid utilities, landscaping, and insurance. 

Be aware that expensive HOA fees do not always correlate to high-end amenities.

High HOA fees might be a result of poor management because the HOA cannot manage its reserve fund correctly. That's why it's so important to review the HOA financial statements before deciding to invest in one.

 

What Are HOA Fees?

HOA fees are one of the first things home buyers ask about when shopping for a property in a homeowners association. They'll ask: What do HOA Fees include? How much are the HOA fees? Have the HOA Fees increased over time? Do the HOA Fees include utilities or insurance? Are HOA fees paid monthly, quarterly or annually?

Homeowners agree to pay these periodic HOA dues because the HOA needs money to cover costs of common area upkeep, ongoing maintenance and operational expenses.

hoa fees

Furthermore, the HOA is responsible for running the development, replacing equipment and repairing features on common property grounds.

These operating expenses can include:

  • Cleaning Common Facilities
  • Community Pool Maintenance
  • Landscaping & Gardening services
  • Laundry Service
  • Elevator Maintenance
  • Common Area Utilities
  • Janitorial Services
  • Security Features & Personnel
  • Clubhouse Operations

HOAs should set aside a portion of the periodic dues collected in a reserve fund because they will need it to pay for larger costs in the future. For instance, when an HOA needs money to pay for infrequent expenditures like replacing worn-out patio furniture in the pool or putting a new roof on an old clubhouse.

These HOA fees might be paid monthly, quarterly, or even yearly. Additionally, these fees pay for adding and servicing community areas like pools, elevators, parks, walkways, and lighting.

An HOA has the authority to raise its own fees depending on the community’s maintenance needs and the number of residents it serves. Additionally, the HOA can charge a special assessment with or without a majority vote if there's inadequate capital in its reserve fund.

Here's a short clip explaining more about HOA fees:

 

What Is HOA Transfer Fee?

An HOA transfer fee is a charge that is due to the HOA when a property is sold and covers the costs of updating internal documents with the new owner’s information, as well as distributing HOA documents to the buyer.

These HOA documents that are transferred to the new owner include the governing covenants, conditions, and restrictions (CC&Rs), rules and regulations, financial statements, amendments, and notice of property defects.

HOA transfer fees are generally $500 or less, and the fees are often paid by the seller at the close of escrow.

 

What Is HOA Special Assessment?

Although they have a nice name, HOA special assessments are certainly not something to celebrate. Special assessments are unexpected demands for payment to an HOA that cover expenditures in excess of the HOAs capacity to pay. 

When an HOA is not running well, it may not have adequate capital in its reserve fund. If a large expense is required (i.e. repairs), the HOA would have no account to pull money from. Therefore, the HOA is authorized to collect a special assessment from each homeowner to get the needed funds.

Special assessments have their own limitations because the HOA has to follow its governing documents like CC&Rs, rules and regulations, and bylaws. These governing documents set forth procedures that the HOA is required to follow, such as notices to homeowners, voting requirements, and special assessment conditions.

State laws can restrict an HOA’s power to impose special assessments. Some states might limit the amount in special assessments that an HOA can collect during a calendar year. Other state laws might require a vote of all the homeowners in order to levy a special assessment for a certain amount.

You should review your HOA governing documents to figure out if there are any restrictions that might limit the HOA’s power to levy special assessments. In addition, you should research your state laws to see whether the laws have legal restrictions or requirements on HOA special assessments.

You should analyze your HOA’s financial statements in order to check it's reserve account and gauge when special assessments may be needed for repairs. Additionally, you should visually inspect the property to get a better idea when special assessments may be imposed in the future. Older common areas will need repairs sooner than those in a brand new development.

Here's a short clip explaining what HOA special assessment is:

 

What Are HOA Pros & Cons?

Pros

  • An HOA enforces regulations and guidelines for its community, which can preserve and enhance the community’s property values. HOA focuses on things like appearance, cleanliness, condition, and repairs. Moreover, HOA is designed to keep a uniform appearance to its properties and the community.
  • HOA provides amenities such as landscaping, parking lots, swimming pools, tennis courts, or party spaces which are available for all of the HOA members.
  • Property owners have to pay HOA fees, but the fees may cover necessary services like the cost of trash collection and snow removal.
  • HOAs are self-governed, so they exist to advance the interests and preserve property values of its own members

Cons

  • Most home buyers work with mortgage lenders to finance their HOA property. High HOA fees can negatively impact the borrower's debt to income ratio, limiting the amount they can borrow with a mortgage loan. 
  • HOA rules and regulations can appear to be unreasonable or restrictive to homeowners.
  • HOA board members are volunteer roles. So, it's possible the board does a bad job of managing the real estate, dealing with complex financial issues, or working to unite diverse groups of people into a common cause.
  • HOAs need to have a consensus for common property decisions like maintenance and upgrades. This can easily cause a conflict between the HOA and the homeowners.

 

What Are HOA Rules?

HOA rules are typically known as the covenants, conditions and restrictions (CC&Rs). HOA covenants can apply to all townhouses, condos, and single-family houses in a homeowners association.

HOA rules generally focus on the exterior portions of properties within the community. For example, common HOA rules might include:

  • Homeowners must keep their lawns green, even in a drought
  • Limitations on types of pets you are allowed to have
  • Restrictions on smoking inside apartments or condominiums
  • Noise policies to prevent nuisances from neighbors
  • Color of paint allowed on exterior of property
  • Type of roofing materials allowed on your structure
  • Restrictions on building an accessory dwelling unit on your property

If you are worried about secondhand smoke, noisy and ignorant neighbors, or large animals, you might consider welcoming these rules from HOA. However, you might run into conflict with your HOA if you want to install solar panels, paint your front door with your favorite color, or have late-night parties.

what does hoa mean in real estate

You should do the following before you buy a home within an HOA:

  • Look at the financial statements of the HOA
  • Review the HOA rules
  • Look at the consequences when the HOA rules are not followed
  • Ask yourself: “Can I follow these HOA rules?”

 

What Are HOA Bylaws?

The HOA establishes a set of bylaws that describe how the HOA is run. Moreover, the bylaws point out voting rights, procedures, and contain rules like how to call a meeting and how often meetings are to be held. Most bylaws also describe the HOA’s rights and responsibilities.

The HOA bylaws provide procedures to create an annual budget and to determine special assessment amounts.

HOAs are run by a board of directors, which is made up of HOA members that own property in the community. The board is elected by all of the community's homeowners during periodic elections.

HOA bylaws set the length of the terms for the board members and the procedures for elections. Potential buyers and current owners alike should review the bylaws in order to understand how the HOA functions.

Reviewing the bylaws will help you become familiar with the powers and restrictions of the HOA. For example, you might find out from the bylaws if the HOA is able to hold closed meetings or remove a board member without notifying the owners.  

 

What Are HOA CC&Rs?

hoa cc&r meaning

The Declaration of Covenants, Conditions, and Restrictions (CC&Rs) is a legally binding document that details the HOA rights and obligations to its members and vice versa. HOA CC&Rs are officially recorded and filed with the State in which the HOA resides. CC&Rs lay out the rules and guidelines for that particular neighborhood, such as things that residents can, can’t, or must do with HOA property.

The CC&Rs can cover legal issues like maintenance obligations, property-use restrictions, dispute resolution, assessment obligations, and insurance obligations. For example, the CC&Rs might not allow you to have certain types of landscaping or require you to keep your garage door closed.

The purpose of CC&Rs are to maintain and enhance the property values in the community. Some of the rules are easily acceptable such as not breaking the law or parking in non-designated areas. However, other rules might be controversial and create issues between the HOA and its residents.

For example, you may want to park your car in the street so that you can use your garage for storage. However, your HOA requires you to park your car only in the garage.

You should review the CC&Rs carefully before buying an HOA property because there are many different penalties for violating the CC&Rs. When buying a home in a planned community, you will have to sign a series of papers which mean that you have read the CC&Rs and agree to abide by them.

Things like types of dues, special assessments, and penalties for nonpayment of HOA fees are specifically listed in the CC&Rs.

Here's a short clip discussing about the differences between HOA bylaws & HOA CC&Rs:

 

Most Common HOA Problems

HOAs and homeowners may run into problems with each other, which can be relatively simple or very complicated. For example, simple disputes can be around:

  • Neighborhood disturbances
  • Noise complaints
  • Parking issues
  • Restrictions on renting out properties
  • Pet policies

The problem can be something more complex involving:

  • Building construction quality
  • Major homeowner inconveniences
  • Financial malfeasance
  • Proposed special assessments
  • Capital expenditures

It comes does to owner's preferences, which may be directly opposed to how an HOA governs it's community. That's why prospective buyers need to fully assess the HOA before buying into one - or else you might be selling your home before you know it!

 

What Is HOA Management?

HOA can hire management companies to handle the governing duties of the association. There are three types of HOA management which are:

  1. Financial services
  2. Full management
  3. On-site management

Financial services include administration of bank accounts, bookkeeping, fee and assessment collection, and HOA budgeting. 

Full management includes financial services, help with board meetings, board elections, and maintenance duties. Furthermore, help with administrative and legal duties can include like keeping minutes and agendas for the organization. 

On-site management has all the services of full management plus direct assistance for homeowners that is regularly available on the premises. 

 

What Is HOA Property Management?

Hiring HOA property management can be helpful as it significantly reduces the workload for the board members. HOA board member seats are voluntary positions and the terms are usually one year or several years. 

HOA Property management can help the HOA with financial obligations such as budgeting enough reserves for long term repairs, assisting in filling out taxes, preparing the annual reports, and tracking HOA’s spending throughout the year.

If an HOA is not collecting enough dues for long term repairs and replacement over the years, they have to levy special assessments to homeowners which may make the owners unhappy.

Property managers can perform administrative tasks for the HOA such as things like dealing with irate owners, going after owners that violate the HOA’s rules, and enforcing collections on homeowners who do not pay their dues.

When completing construction projects, HOA should hire property management to oversee all the work that is being performed in the development such as bidding contracts and hiring general contractors. Property managers can help the HOA avoid hiring someone who might be unqualified and not properly insured for the job. 

If you don’t own a home, buy one. If you own a home, buy another one. If you own two homes, buy a third. And, lend your relatives the money to buy a home.” - John Paulson

 

What Do HOA Lawyers Do?

HOA lawyers help draft legal documents like HOA founding and governing documents. These documents help the HOA comply with state law and set guidelines for the ongoing operations and management of the community.

The most important documents that HOA lawyers produce are the CC&Rs because they describes the functions of the HOA.

These important legal documents should be drafted by professional attorneys because all homeowners and the HOA are legally bound to them.

HOA lawyers can also represent homeowners’ interests. For example, when legal action is needed to take action against a developer who has over-inflated the repairs needed.

Additionally, construction defects can be discovered years after the development of a neighborhood is completed. The property developer may be liable for these defects, and can be expected to remediate these defects. If the property developer does not fix the issues, then an attorney may have to get involved, especially in situations where homeowners should not be responsible for the defects.

If there is a dispute with a homeowner or allegations of unlawful behavior, lawyers can also help members interpret the language of the relevant HOA documents.

HOAs can also hire lawyers to collect outstanding fees and assessments from homeowners if they are not responding to the HOA’s demands. In these situations, engaging an attorney will help increase the chance of success of collecting the fees and assessments.

 

What Is HOA Insurance?

HOA members collectively pay for insurance as part of their membership dues. Property and liability insurance are combined together in what's known as a master policy. Each member pays a similar amount toward the master policy, and everyone in the HOA has equal access to the same common areas and amenities.

HOA property owners are still responsible to pay the HOA dues and insurance claim expenses, even if they don’t use the common amenities, such as the pool, clubhouse, and parking garage. 

HOA insurance and master policies should be in place to cover shared spaces and structures owned by that HOA. Therefore, liability expenses and damage to the building and shared spaces are covered by HOA insurance for members of the HOA.

 

The Bottom Line On HOA

Investing in HOA real estate is not for everybody. Due to the fees, rules, regulations, and reduction in the freedoms that come with home ownership, buying property in an HOA means you have a lot to consider. 

Before buying an HOA property, you should look at the HOA rules and financial statements to become aware of what you are getting into.

You should also consider how the HOA can improve values in your neighborhood over time. Common area maintenance, security, and supervision over a community are sought-after features by prospective home buyers and families. 

One thing you have to keep in mind is that an HOA should not be a burden on homeowners. Their goals are to help preserve, and even increase property values in the community over time. 

Most importantly, the presence of an HOA means the well-being of the residential community will be maintained long-term.

What else do you want to know about HOAs? Leave us your thoughts in the comments below!

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