HOA Management 101
Are you looking to buy a piece of vacation rental paradise to call your own? You’ll likely need to choose between a standalone property or a property in a planned community managed by a homeowner’s association (HOA). According to the Foundation for Community Association, approximately 25-27% of the US population lives under some form of HOA management. These can be in either a single family, townhome, or condominium unit structure.
HOAs are common-interest governing bodies responsible for making rules for properties and residents. These rules and regulations are legally binding and enforceable. Those who purchase in an HOA automatically become members. They are required to pay dues, called HOA fees. Owners generally find that HOA management helps limit costs that would normally be paid for ad-hoc services. Those savings, however, are often mitigated by HOA fees.
1. It’s All About the Property Values
An HOA management association’s primary responsibility is to maintain and improve property values. To this end, they institute rules, or covenants, on what homeowners can and cannot do with their property.
2. HOAs Manage the Managers
Typical responsibilities for HOA management include overseeing repairs and maintenance for shared amenities and monitoring upkeep of common areas like walkways, tennis courts, and pools. An HOA typically provides communal insurance coverage for public areas like land, roofs, exterior walls, decks, and patios. They also enforce architectural standards, supervise the association budget, and organize recurring resident meetings.
3. Not All Members are Created Equal
HOA management is typically elected during an annual association meeting. Candidates will often lobby for votes by sending letters to residents sharing why they believe they are qualified. People are serious about this. It’s important for prospective buyers to learn who they are and to understand their motives. We had one particular member who ran for a seat just so that he could get his pet qualified for residency!
4. Beware the Underfunded Reserve Account
Many boards fail to set aside adequate funds to cover costly repairs and expenses. According to a study from the National Association of Realtors, 70% of all HOAs are underfunded. At one property we owned, our HOA discovered that they were well short of the state-mandated reserve threshold. As a result, they were forced to ask each resident to pony up $2,000 twice in a 12-month period to meet this reserve level!
5. Low Fees or Deferred Maintenance?
Be wary when shopping for a new property. Check to see if the HOA management fees are below those at other neighboring communities. If so, this can mean that HOA management is deferring maintenance. This is often done to bolster the short-term value of individual properties, as lower fees can attract more buyers. This can drive higher demand. This can be perfectly acceptable for existing homeowners. For new buyers, this should be a red flag, as these buyers will likely be forced to pay higher fees down the line.
6. Ask to See the CC&R
A prospective homeowner should always review the HOA Declaration of Covenants, Conditions, and Restrictions (CC&R). What fees is a homeowner responsible? Who are the primary decision makers? What bylaws exist that might restrict future renovations? Are pets allowed? What is the existing management structure? Are short-term rentals allowed? This document will describe in detail the official rules enacted by the HOA management.
7. Learn How Often Fees Increase
Prospective homeowners should ask to see historical HOA fees to ascertain how dues have changed over time. A buyer should also check to see if there are any limits on either how much or how often dues are modified. These limits may be set by HOA management, or, in many cases, state regulation.
8. Warrantable is Preferable
Warrantable properties can be financed using a conventional mortgage. Non-warrantable properties, on the other hand, have been deemed too risky to finance through conventional debt vehicles. They can only be financed through non-traditional debt instruments like portfolio loans. In general, owners should avoid purchasing within a non-warrantable HOA as these properties are harder to re-sell.
9. Phone a Friend
Homeowners should ask their agent to connect them with residents who live in the community. This is a great way to get another perspective on the HOA management style.
Now that you know how to buy with confidence, check out the below article on how you can make more money from your vacation rental.
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