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Who Are the HOAs and How Do They Play a Significant Role in Real Estate?

Owning your own home is often synonymous with classic depictions of the American dream, whether it be a quiet farmhouse out in the country or that brownstone neighboring the big city.

But most people don’t realize that traditional, single-family homes are not the only option available to consumers. Condominiums and townhomes are popular choices amongst new and existing homeowners for many reasons.

For example, you don't have to personally maintain common areas such as green spaces, pools, and recreational amenities. However, unlike most traditional houses, these properties are commonly governed by homeowners’ associations (HOA).

Suppose you own a condominium or townhouse or have thought about purchasing into a community-run by a homeowner’s association. In that case, it's crucial to understand how the HOA functions, what power it holds, and how it plays a significant role in the real estate industry as a whole.


What is a Homeowners Association (HOA)?


Homeowner’s associations, or HOAs, can be structured in many ways but are essentially self-regulated organizations created to help manage and maintain communities where homeowners hold common interests in certain aspects of the neighborhood.

In most instances, the board of directors often manages the homeowner’s association. Homeowners are elected to serve on the board of directors to help oversee the HOA’s budget and help enforce decisions set forth by the board and those found in the community bylaws.


To pay for capital improvements and maintenance, homeowners that live in HOA-run communities are often required to pay monthly and annual assessments or fees to cover the collective costs toward community maintenance.


The homeowner’s association collects these dues and allocates a portion of the money to an operating fund and a reserve account. An operating fund supports regular costs, including landscaping, lawn maintenance, trash removal, parking, and even insurance premiums.


The reserve account acts as a savings account for the association where the funds can be used for future expenses and larger projects. The associations can also levy special assessments for urgent or unforeseen projects or cover a shortage of funds in the community reserve account.


HOA's is a self-regulated organizations created to help manage and maintain communities where homeowners hold common interests in certain aspects of the neighborhood.

How Significant Are HOAs in Real Estate?


While they may seem a bit insignificant at times, they have a significant impact on buying and selling real estate. Specifically, HOAs have a say in how you can use or even improve your home in a limited capacity1. For example, they are responsible for enforcing provisions in the governing documents regarding regulations like painting your unit a particular color or restricting the size or breed of your pets.


In many cases, you cannot make specific improvements without the approval of the HOA or meeting certain criterias1.


Additionally, if you are late on your homeowner’s association dues, HOAs have the power to file a judgment against you or create a lien against your real estate for the money owed1. In almost all cases, these liabilities will need to be satisfied for you to sell your home or obtain a new mortgage.


The HOAs also add a clause in their governing documents giving them a right-of-first-refusal, which grants the right to vet any potential buyers before the seller can accept an offer2. In some extreme cases, the HOA can reject the buyer’s offer completely2.

For real estate investors, HOAs can also enforce restrictions on you renting your property.


Many associations have rental caps to help protect the property values of owner-occupied homes in the project. They could restrict renting out properties or require additional fees.

Lastly, if you are looking to buy a new property located within an HOA, certain types of financing might not be eligible.


When obtaining a new mortgage, mortgage lenders are often required to review the community project to ensure the eligibility criteria are all satisfied. The requirements include analyzing the number of properties, occupancy distribution, insurance coverage, and even the budget.


For example, Fannie Mae requires that no more than 15% of the total units are past due to common expense assessments 60 days or more. The budget must allocate at least 10% of the funds to reserve capital expenditures and deferred maintenance expenses3.


In short, if the HOA does not meet all the eligibility criteria, you may not be able to obtain a mortgage to purchase that property or refinance with a currently owned property.


When it comes to real estate, people have more choices other than buying a traditional single-family home. Properties that reside within a homeowners association (HOA) are also popular for various reasons.


If you are considering buying or selling a property within an HOA, it’s crucial to understand the significant role these organizations play within real estate. While the associations are great because community directors often run them, they are also responsible for keeping the community and the residents’ well-being.


Furthermore, HOAs have the power to limit specific ways you use or improve your home and can even enforce restrictions for you to rent your property. Similarly, if you sell your property in an HOA, the organization often has the right to vet and even refuse your buyer. It can also impact your ability to obtain financing if you are behind on your assessments or poor management.


Before you buy or sell a property in a community run by a homeowners association, it’s important to understand how the organization functions, the scope of its authority, and the overarching effects it can have on your transaction.


Sources

1 Chang, E. (2020, December 16). What Is a Homeowners Association? Retrieved June 9, 2021, from https://www.bankrate.com/real-estate/what-is-an-hoa/

2 Mastroeni, T. (2020, January 23). What Is a Right of First Refusal in Real Estate? Getting First Dibs on Making an Offer. Retrieved June 9, 2021, from https://www.realtor.com/advice/buy/right-of-first-refusal/


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