Assessment Basics: What are HOA Fees?
HOA fees (also known as “assessments” or “maintenance fees”) are set by your association’s board of directors. Your board determines how much the HOA fees are, what your HOA fees cover and how they are paid. Monthly is the most common setup, but they can also be paid quarterly, semi-annually or annually. The board bases each owner’s share on the expected annual budget for the association. The HOA budget covers a lot of costs in your community.
Buying a home in an HOA or community association means you are part of a common interest development (CID). You are required to share the costs of operating the association, including maintaining common areas and shared amenities, like a pool or fitness room. Your HOA fees also go towards maintenance and upkeep, so landscaping and common areas in your community always look well-maintained.
And while your board determines your HOA fees, it’s essential to know that board members do not profit from HOA fees. Your board comprises volunteers and homeowners just like you, who pay HOA fees like everyone else in your community. Your HOA is typically set up as a nonprofit corporation, which means that any extra money goes back into operations at the end of the year.
Now that you know what HOA fees are, the next question people usually ask is, “What are HOA fees used for?” Each association has its unique rules and policies, so you must read your community’s governing documents to learn the specifics. If you don’t understand the governing documents, you may see your hard-earned money go to things that you’d rather not spend on.
So what do HOA fees cover?
Ongoing maintenance and repairsContinuous maintenance to common areas, equipment, systems and shared amenities – all of these things cost money. Depending on your community, this may include:
- Lawn care and landscaping
- Snow removal
- Water, plumbing and sewage systems
- A/C and heating systems
- Electrical system and lighting
- Sanitation system and trash removal
- Security system and gates
- Cleaning, painting and upkeep of exteriors and common areas, such as hallway walls, carpeting and clubhouse
- Pest control
- Repair of damaged roofs, interior roads, pipes, elevators, etc., due to age, weather conditions or other causes
- Maintenance of shared amenities like the pool, fitness equipment and clubhouse
Insurance policiesYour association must purchase a master insurance policy to protect your community’s building structures, exteriors and common property against damage. In addition to HOA Insurance, your board must also factor in other riders and add-ons as required by your community’s location, property type, and different needs. Liability insurance, theft insurance and directors' and officers’ insurance are common coverages. The association may also be required by law to buy flood insurance. But despite all this coverage, it is still best practice to take out your own homeowner’s policy, even in a high-rise.
Utility paymentsCommunity associations cover the costs of electricity, lighting, water, heating and air conditioning for the community’s common areas. The community’s common areas include the guardhouse and front gate, lobby, clubhouse, pool, fitness rooms, meeting rooms and landscape lighting or streetlights. In a high-rise, that also may include common A/C and heating systems that cover the whole building. Nowadays, more often than not, HOAs also partner with cable and internet providers and use HOA fees to pay for service for the entire community.
Reserve fundsYour board not only sets a budget and keeps your community’s costs down, but they also establish a reserve fund. Reserve funds are NOT for day-to-day expenses. Reserve funds cover repairs and replacements of major assets and systems, like elevators or roof replacements. The best practice is for your board to hire a reserve study firm to help your association understand the expected life span of pool pumps or boilers and the costs to replace them. A reserve study firm can help your board make a budget covering current expenses and saving for projected future expenditures. Reserve funds are invested in helping generate more revenue toward future expenses. Some states and provinces have particular restrictions on how your reserve fund can be used. But the bottom line is that a substantial reserve fund is critical to avoiding the need for a dreaded special assessment!
Contingency fundsThis money is automatically set aside each month to cover unforeseen community expenses and emergencies like an insurance deductible after a storm or an accident.
StaffingIf your community employs its management, maintenance or janitorial staff, a portion of your HOA fees cover their salaries and benefits.
Professional property managementAs we mentioned earlier, board members are volunteers. Running an association is a lot of work, so many HOA and condo association boards partner with an experienced property management company. Your HOA fees cover that service also. A professional management company can help your board effectively manage vendor contracts, maintenance, insurance, investments and other financial and operational tasks. All this benefits your community by helping to keep it in tip-top shape and your property values up.
No one likes to spend money on unnecessary expenses. And for some, HOA fees may seem excessive. But they are an investment in your community that helps to keep it financially fit, safe and beautiful, all of which keeps your home’s value high.
Now that you know the answers to the question, “What are HOA fees?” and “What do HOA fees cover?” you can take a deeper dive into how your board budgets those fees. Download our Budget and Finance guide today for an inside look at association budgeting.