Living in a community association can come with many perks like well-manicured lawns and parks, pools, gyms, and exterior maintenance. While not everyone is keen on the restrictions and fees that come with those amenities, it’s worth it for many.
Most people may have a good idea of what they’re getting themselves into when they buy a property governed by an HOA or COA, but there may still be some common misconceptions to dispel.
Common Assumptions about Owning an HOA property
For buyers looking in associations, here are some important things to consider. Be sure to ask your real estate agent or title company about how these common assumptions may or may not apply to the property you’re buying.
- Your dues will pay for all expenses
- Buying a property at an HOA auction extinguishes all liens
- Title insurance will cover future issues with an HOA
- I can rent out my property when I’m not using it
Your dues will pay for all expenses
Everyone knows that dues are a part of living in a community association. That’s how all the extra perks are funded. Beyond the monthly, quarterly, or yearly dues, however, there are many other not-so-well-known fees associated with HOAs.
Perhaps one of the most shocking of these additional fees is what is known as a special assessment. These periodic fees may be levied against property owners in the condo or homeowner association at any time, and they can be for thousands of dollars. These assessments are created to fund special projects that benefit the community, like renovating the clubhouse, repaving the roads and parking lots, or painting the exterior of units.
Homeowners may be happy to pay a little extra on top to improve their community’s overall appearance and experience, but some of the assessments can be exorbitant and for issues that happened before you even moved in.
Most people downsize to a condo because they can’t afford the upkeep of a single-family home. That’s why one condo owner in Colorado decided to move into the Peachtree complex in late 2020. Three months later, she received a notice of a $9,546 special assessment to repair roof damage from a hail storm that occurred in 2018. Before closing, she wasn’t told that the association was in litigation with the insurance company over the damage.
Some owners may question how much the projects will benefit them. A high school teacher in Arizona is at odds with his COA over a $7,500 special assessment for a planned $3.3 million renovation. “They’re boosting up the amenities to raise rent in their apartments, to some degree at our expense as owners,” he told azcentral. About 75% of the units in his community are owned by a new real estate and management company that also controls the HOA board. According to the HOA’s governing documents, the company’s special assessment is legal.
Protect yourself from surprise special assessments
Understandably, special assessments can’t always be avoided, so buyers in associations should be prepared for them. To better understand who levies these fees and how much it may cost you, look at all of the HOA documents.
The By-laws will be of particular interest as they lay out how the association is run. It will include information on voting rights, how often meetings must be held, and the power and responsibility of the association regarding the collection of assessments and rules enforcement.
Copies of the association’s financial records may be available to review and give you a better idea of how the budget is managed. Some associations may also conduct reserve studies that will help you determine if a pending special assessment is looming.
Your title agent or real estate attorney will obtain this information from the HOA as part of the resale package or association estoppel, but it’s up to buyers to carefully review it.
Buying a property at an HOA auction extinguishes all liens
For homeowners who don’t pay their special assessments, dues, or other fees, they run the risk of having a lien placed on their property. Typically, these liens will stay on your property until they are paid off fully, and an official release or satisfaction is recorded.
During the pandemic, most homeowners struggling to pay their mortgage have been put into forbearance programs. Homeowners Associations haven’t been required to provide the same kind of relief to their members, so some homeowners in HOAs falling behind on their dues are receiving default notices.
When the market is hot, owners will usually sell their property and use the proceeds to pay off the lien, hopefully leaving them with some money left over. If the debt is never settled, the HOA may have the right to force the sale of the property in an auction or foreclosure. These kinds of forced sales can happen when the homeowner doesn’t pay their mortgage, HOA dues, utilities, or taxes for a prolonged period of time.
While the HOA foreclosure will pay off the debt owed to the association, purchasing a property at an HOA auction doesn’t come with a guarantee that there are no other liens on the property. It’s common for that to happen as one debt piles up with fees and interest, homeowners give up on paying other bills.
Finding Liens on a Property
What looks like a great deal could quickly become a money pit for investors if they don’t do their due diligence before purchasing with a property title search. This can be done by searching the public record, but it’s a good idea to reach out to a professional who can create an in-depth Title Report, sometimes referred to as Ownership & Encumbrance Reports. These reports provide vital information to protect the interests of homeowners, real estate investors, and lenders.
Title Insurance will cover future issues with an HOA
Title insurance will protect a future homeowner’s property rights to use and occupy real estate, but there’s a catch with homeowners associations and other deed restrictions; these rules supersede any ideas you might have about decorating or renting out the property.
Taking title to an HOA property means agreeing to their terms which may include many restrictions. Therefore, title insurance won’t cover any of the restrictions outlined in the covenants, conditions, and restrictions (CC&R’s) of a homeowner association or other deed restrictions.
Review the title commitment
What will and won’t be covered by title insurance will be shown in the preliminary title commitment and finalized when the policy is issued. These restrictions are usually listed as exclusions or exceptions.
A common one you’ll find is assessments by the association that are not yet due or payable. That’s because title insurance protects owners from problems that have happened before taking title. So, again, you’ll want to take the time to carefully review documents like the financial records and budgets to figure out if you may be footing the bill for a renovation project.
I can rent out my property when I’m not using it
An updated unit in a popular tourist town with amenities may seem like a great investment as a vacation home for your family and potential additional income. But renting is one of the many restrictions you’ll find in an association. Some associations may not allow owners to rent at all while others may put restrictions on:
- Length of rentals
- The approval process for renters
- How long you must be a member before renting
- Number of tenants
With the popularity of apps like Airbnb and VRBO growing, so are the city and association rules barring short-term rentals, usually anything less than 30 days.
HOA demand letters or estoppels are needed to protect buyers
Buying a property in an HOA or COA means you’ll need to be prepared to review more information. Before you enjoy the community pool and relax, you’ll need to put in some work.
Don’t be afraid to ask the real estate and title professionals involved in your closing questions about how the governing association will impact your rights as a homeowner. Research common problems that come up after closing on an HOA property, and understand what title insurance will and won’t cover to determine how you can avoid surprises.
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