Buying Into a Homeowners Associations -- the Pros and Cons
About 20 to 30 percent of homebuyers purchase properties within common-interest developments, commonly referred to as homeowners associations or HOAs. Before weighing the pros and cons of owning a property in an HOA community it's important to understand what HOAs are, how they are governed and how they affect a homeowner's bottom line. Here are some basic facts homebuyers should know.
What is a common-interest development?: In a common-interest development individual owners typically share some parcel and the buildings on that parcel as co-owners. A common-interest development would generally be a condominium building, a town home community or lofts, or could be a single-family home community, private neighborhood or other similar arrangement. Buyers in the%VIRTUAL-pullquote-HOAs are nonprofit organizations, but their complex financial and legal operations can sometimes cause owners significant financial pain in the form of unexpected dues increases and special assessments.% development or building agree to live by the community rules and regulations.
These regulations mean that as an owner you have certain rights and restrictions as outlined by development documents commonly called CC&Rs (covenants, conditions and restrictions). The CC&Rs govern your allowed ownership, use and behavior at the property -- everything from use of your unit to parking restrictions, insurance, architectural rules, paint colors, storage of RVs or boats, pets, allowed inhabitants and more. These rules and regulations can be changed, subject to approval by a majority of the owners.
How are HOAs governed?: To interpret and enforce the rules and regulations, most HOAs elect a board of directors who follow the regulations of the community and make prudent financial and operational decisions. As an owner, you get to vote for the board members (this process is usually outlined in the community bylaws).
However, most owners in a typical community don't go to board meetings and don't get involved in the operations of the community. And that's fine, as there's no requirement for an owner to vote or otherwise be involved. Most owners only show up to meetings when HOA fees are raised or if they are affected by a particular issue. Keep in mind though, if you have an issue or disagree with a restriction in your community, you should attend the board meetings and work with the HOA toward finding a solution that the majority of owners can agree with.
Are there financial risks with HOAs?: HOAs are nonprofit organizations, but their complex financial and legal operations can sometimes cause owners significant financial pain in the form of unexpected dues increases and special assessments. Unfortunately, few buyers know how to evaluate HOA documents ahead of time, which could help mitigate the considerable risks.
Many people don't like having to follow rules and decide to avoid living in an HOA-governed community altogether. But don't forget, the HOA makes sure your neighbors don't park cars in their front yards and/or that a neighbor doesn't paint a house pink or carry out other nuisance behaviors -- any of which could easily occur in an area not governed by an HOA.
Leonard Baron, MBA, is America's Real Estate Professor®. His "Real Estate Ownership, Investment and Due Diligence 101" textbook is designed to teach real estate owners how to make smart and safe purchase decisions. He is a past lecturer at San Diego State University and teaches continuing education to California real estate agents at The Career Compass.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow or AOL.