Buying a Home in a Community Association: Part Two – Evaluating HOA Financials and More
Finding the perfect home is an exciting experience, yet an HOA association can raise several questions and concerns. While they may initially appear to be a limitation, HOAs can also be beneficial in many ways. It's important to ensure that HOA financials are sound and membership fees are levied fairly before signing any papers and committing to the association.
According to Kolleen Weber, regional director of FirstService Residential, “If you are considering buying in a condo or HOA community, you absolutely need to look beyond just the four walls of the home. The health of the association is just as important because it can affect your fees, property value, and even your enjoyment of the community.
Being part of an HOA association doesn’t need to be a deterrent when trying to find your dream home. With some due diligence beforehand, you can discover if joining the HOA is right for you. Although some indicators of whether an association is managed well are easy to identify, Weber points out that many others are easily overlooked. “If you have never owned a home in a community association before, you simply may not know what to look for or the right questions to ask,” she says.
Not to worry! In this second article in our two-part series, we reveal the six most important things buyers should do to accurately evaluate a prospective community association.
Review HOA FinancialsThe amount you pay in assessment fees is directly tied to the association’s financial management, so you’ll want to know upfront if money is well managed. According to Sherwood, “Knowing the association’s financial situation is crucial, especially the amount of money they have in their reserve. The community must have adequate funds to pay for capital improvements.” Capital improvements can range from replacing expensive common-area elements, like heating and cooling systems, to repairing sidewalks.
Weber agrees, “It’s a red flag if the reserves are low.” She continues, “It means that down the road, the association may increase your fees significantly or impose a special assessment to cover expenses.”
Reviewing the association’s reserve study will let you know if the community is putting enough aside for major expenditures. The study details the estimated useful life of various components and equipment and the amount of money the association needs to put in its reserves each year to cover anticipated capital expenses. Make sure the study has been updated within the last three to five years and compare it to what is actually in the reserve fund. If the reserve is funded at less than 30 percent, the community is at high risk of needing a special assessment. More than 71 percent of funding indicates low risk.
Be aware that reserve study requirements vary from state to state and province to province. Some regions may not require an association to have a reserve study if the community is small. For example, in Texas, associations with an annual budget of less than $100,000 do not need to get one done. On the other hand, California requires annual updates, as well as on-site inspections every three years. In British Columbia, a depreciation report (the equivalent of a reserve study) is required for any strata corporation with five or more strata lots. And in Ontario, all condos are required to conduct “periodic” reserve studies.
Review the Association’s Governing DocumentsIt’s essential to review the HOA documents in detail and ask questions if new terms or fees appear suspicious. The first documents you want to request are the articles of incorporation, association bylaws, covenants, conditions, and restrictions (CC&R), and financial documents. All of these will help provide a clearer picture of the association’s standing, and if this will be a community, you would like to be a part of. “You don’t want to find out after you’ve moved in that you really aren’t comfortable with the community’s guidelines,” explains Weber.
Examine the Landscaping and Outdoor MaintenanceUp until now, your attention may have been on the condition of the home you want to buy, but now it’s time to focus that critical eye on the common property. “The outdoor grounds can tell you a lot about a community,” says Asa Sherwood, president of FirstService Residential. “A well-run association will have a schedule for landscaping and basic maintenance, and that will be apparent in the community’s appearance.”
Sherwood also recommends checking to see if:
• The grounds are well-maintained and attractive
• The walls and fences are in good repair
• The roofs on common buildings are in good condition
Weber adds that it’s important to look beyond just the area around the community’s main entrance to evaluate its commitment to preventative maintenance. “Most HOAs and condos give attention to areas that homeowners and guests see the most,” she says. “But you shouldn’t assume that maintenance is a high priority just because the community has a pretty entrance.” She recommends walking – rather than driving – around the property. “You’ll notice a lot more on foot than you would behind the wheel,” she explains.
Check Out the Condition of Amenities and Common Indoor SpacesThe next thing you should look at are the community’s amenities, such as the swimming pool and fitness center. Weber suggests trying out a piece of fitness equipment to see if it is functioning properly. “Even if you don’t intend to use the fitness center, it is another indication of the community’s attention to preventative maintenance. Plus, the condition of the fitness center can affect your property value.”
Look carefully at other common areas as well, such as the lobby, hallways, or game room. Does the furniture, flooring, and walls appear fresh, clean, and updated? Or do they look worn, dirty, or out of date? An attentive community will keep up with things like painting and carpet cleaning, and it will have the funds to replace worn-out furniture.
Contact the Community’s Property Management CompanyIf the community is managed by a professional management company, ask the company if the association has ever imposed special assessments, and if so, how often. Find out how many insurance claims it has filed, as well as whether the association has been involved in any lawsuits. You can check court documents for details.
Also, ask about homeowner delinquencies, otherwise you could be in for a rude awakening when you seek a mortgage. Lenders often look at the financial stability of the association, not just that of the potential homebuyer. For example, in the U.S., Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) will not guarantee loans in condominiums in which more than 15 percent of owners are over 30 days overdue on their assessment fees.
Speak to Current HomeownersAs you walk around the building or community, stop, and talk to your prospective neighbors. Find out if they are happy with the community and with the way the association is managed. Look for common themes, especially regarding complaints. If many people cite the same issues, decide if these are deal breakers for you or if they are minor inconveniences you can tolerate.
Basically, you are making a commitment to the association when you buy a home in a managed community. Purchasing a home is a big move under any circumstance. However, by doing your homework beforehand, you can eliminate many unwanted surprises.
Did you miss the previous article in our two-part series? Read Buying a Home in a Community Association: Part One – Dispelling Common Myths now.
Learn more about how FirstService Residential’s property management services can support your community by clicking here.