If you’re looking into a condominium, townhouse or even a development community, you may have to become familiar with three letters: HOA.
That stands for homeowners association, an entity that is often set up to govern the affairs of a condo, a community, or similar forms of housing. According to realtor.com, one in four Americans lives in a home with an HOA.
In order to fund their responsibilities, homeowners associations charge fees that all owners must pay. Here’s what to know about them.
What Is an HOA Fee?
HOA fees, or homeowners association fees, are often part of the cost of living in some types of communities. They can cover the cost of many expenses from basics such as water, gas, and electricity to gardening and snow removal. They are independent from your mortgage or any other loans such as home equity loans. They’re also different from property taxes, since they are a fee you pay to a private association, not to the federal or local government.
Not every homeowner is a member of an HOA. Typically, those associations exist in condominiums or in neighborhoods that define themselves by a certain geographic area, says Elliot Pepper, CPA and CFP at Baltimore-based Northbrook Financial. In addition to a gated community or large condominium complex, this can also mean a group of streets that are connected or geographically close to one another.
As for planned communities, not all of them have an HOA, although it is “extremely common,” Pepper says. Recent research published by the Journal of Urban Economics shows that 60% of new-build single family homes and 80% of those in new subdivisions are part of HOAs.
Read the rules in detail before buying property that has a homeowners association, so you’re not surprised later by something you don’t agree with.
Homeowner associations, and the fees they charge, are intended “to keep the community attractive and uniform,” says Mark Kinsella, a Certified Financial Planner with Family Financial Planning Services. “Every homeowner in the community benefits by receiving the same care as everyone else.”
That means potential buyers are not put off by something like an unkempt yard, and that sellers will not have a difficult time marketing their home if the one next to theirs is not up to par.
Homeowner associations often set strict rules regarding exterior appearances.
For example, HOAs can tell homeowners what things they can or can’t have in their yard, how the exterior of their homes needs to be maintained, and even appropriate noise levels or the type of pets one can have, Zakelj says. They can impose fines for noncompliance. It all goes back to wanting to look “uniform,” Kinsella says.
To determine whether a particular homeowners’ association rules are appealing to you, or are something you can live with, you should take the time to read them before closing on the property.
That push for uniformity, however, comes with a controversial past.
The number of HOAs grew hugely in the 1960s, as more Americans moved to the suburbs. That growth intersected with a history of residential segregation, which in some cases is ongoing.
While the Federal Fair Housing Act of 1968 prohibited discrimination in housing, the Journal of Urban Economics research cited above showed “people living in HOA neighborhoods (…) are on average more affluent and racially segregated than those living in other nearby neighborhoods.”
HOAs have played a part in creating that segregation, according to research. A study by the liberal-leaning Center for American Progress singles out “restrictive covenants,” referring to the rules governing an HOA and its residents.
“Restrictive covenants were declared unenforceable in 1948; however, they continued to be used informally to resist black entry into white neighborhoods,” the study notes.
What Do HOA Fees Cover?
While some of the money you contribute goes towards more day-to-day expenses such as gas or electricity, some of it goes towards long-term projects that keep the community looking up-to-date. This can include a new parking lot or even a roof on buildings, says Zakelj.
The frequency of payments varies; typically you will pay monthly, quarterly or once a year, says Jeff Burke, a financial planner and founder of 7th Street Financial. “If the HOA is small, they might charge it on an annual basis. For places like a condo or townhouse where the fee is a little higher, it is usually charged on a monthly basis,” he adds.
Note that in addition to HOA fees, there are occasionally other types of fees, such as assessments. “Assessments are commonly imposed by an HOA related to common area costs that are more ‘one time’ or not-recurring in nature,” says Pepper. A good example of this is that an HOA fee might include regular lawn care, but if there is a large, dying tree that needs to be removed and would cost thousands of dollars, the HOA will likely impose an assessment fee.
While there is typically no room to negotiate your HOA fees, you can petition the association’s board of directors for a reduction of expenses or elimination of a service to lower the fee.
If you decide not to pay your HOA fees, whether in full or in part, the association may place a lien on the property for unpaid charges. The amount you did not pay will be taken from the proceeds on the sale of your home when you eventually sell it, says Steve Zakelj, a Certified Financial Planner at Flatirons Wealth Management.
Fees vary by region and by community, sometimes drastically; while it’s common to see monthly HOA fees in the thousands in New York City, nationwide you can expect to pay between $200 and $300, according to realtor.com.
Unlike mortgage payments, the fees are adjusted upwards with time, and will not end. They will have to be paid as long as you continue to own the property. “It is common to see fee adjustments scheduled annually,” Pepper says.
“The more amenities you have, the more that cost goes up,” says Jacqueline Cooper, President and Executive Director of Financial Education Associates.
Most ordinary decisions are taken by the HOA’s board of directors, who are elected among the community’s homeowners. Decisions regarding major expenditures are typically taken at meetings where all owners, not just board members, vote.
Homeowner association fees are indispensable for the upkeep of certain housing communities; they fund essential services and often amenities that benefit all homeowners. But they come with rules as to what is and isn’t allowed in the community, and sometimes those rules can be strict. Make sure you are familiar with all of them before agreeing to buy a property with a homeowners association.