Buying a home in an HOA: what to check first

With 78.1 million Americans living in community associations, according to the Foundation for Community Association Research, there's a good chance the next home you look at has one. Buying in an HOA means buying into its rules and its finances. Here's how to check both before you're committed.

Get the documents early

Ask for these as soon as you're under contract, or sooner:

• declaration (CC&Rs), bylaws, rules, and architectural guidelines;
• current budget and latest financial statements;
• the most recent reserve study;
• 12 months or more of board meeting minutes;
• a summary of the master insurance policy;
• any resale certificate, estoppel letter, or disclosure package your state requires.

Many states require specific disclosures to buyers, sometimes with a right to cancel for a short period after delivery. Ask your agent or attorney what applies in your state.

Check the money

• Dues history. Have dues risen steadily and modestly, or jumped?
• Reserves. Compare the reserve balance and contributions with what the reserve study recommends. See HOA reserve studies.
• Special assessments. Is one approved, proposed, or being discussed in the minutes? Who pays one approved before closing? That's something to negotiate.
• Delinquencies. A high share of owners behind on dues strains the budget.
• Litigation. Pending lawsuits can affect finances and lending.
• Seller's account. Confirm there are no unpaid dues, fines, or liens.

Check the rules

Read the use restrictions with your plans in mind: renting (including short-term rentals), pets, parking and vehicles, home businesses, fences, solar, paint colors, and landscaping. If you plan changes, read the architectural review process.

Check how it's run

Read the minutes for tone as well as content. Are meetings orderly? Do owners participate? Is the board stable, or does it turn over constantly? Ask a few residents how violations are handled and whether the manager responds.

Red flags

• No reserve study, or reserves far below recommendations.
• Repeated deferral of major repairs in the minutes.
• Frequent special assessments.
• Pending litigation involving construction defects or the association's finances.
• Rules that would prevent something you know you'll want to do.

After you buy

Keep the documents you received. Go to a board meeting, and read the minutes and budget each year. Our before-you-buy checklist prints everything above on one page, and our state law pointers link to the statute that governs your community.

Run the numbers before you offer

HOA dues and a possible special assessment belong in your budget alongside taxes, insurance, and repairs. The expense stack worksheet and the pre-offer checklist on Real Estate Investment Insights help you price them in. It's also worth adding a radon test during the inspection period: see radon when buying or selling a home.

A document-review checklist you can actually finish

Resale packages are often several hundred pages long, and most buyers get only a few days to review them. Rather than reading front to back, work through them in this order and write down one question for anything that worries you:

1. The budget and the reserve summary. Write down the total annual budget, the amount going into reserves each year, the reserve balance, and the percent funded. In California, the annual budget report required by Civil Code 5300 has to include a reserve summary, the reserve funding plan, and a statement on whether the board expects to need a special assessment. That one document answers a lot of questions quickly.
2. The last 12 months of board minutes. Search them for words like "assessment," "loan," "litigation," "roof," "siding," "balcony," "insurance," and "deferred." Minutes often describe problems long before any formal disclosure does.
3. The rules and the architectural guidelines. Check that what you plan to do with the home is allowed: rentals, pets, parking a work truck, solar panels, a fence, a home business, painting the front door.
4. The CC&Rs' rental and use sections. Rental caps and minimum lease terms usually live here, not in the rules.
5. Insurance certificates. Find the master policy deductible. If it is $25,000 or $50,000 per claim and the association can pass it on to the unit where the damage started, you need to know before you choose your own HO-6 coverage.

How much the dues can rise after you buy

Buyers sometimes assume today's dues are locked in. They are not, though some states cap how fast boards can raise them without a vote. California is a useful example. Under Civil Code 5605, a board can't raise regular assessments by more than 20% over the prior year, or levy special assessments totaling more than 5% of budgeted gross expenses in a fiscal year, without approval from a majority of a quorum of members. There are exceptions for emergencies. Other states give boards much more freedom. Budget your purchase as if dues could rise faster than inflation for a few years, especially in an older community with a low reserve balance.

Questions to put to the manager in writing

Send these by email so the answers are documented:

• Are any special assessments approved, proposed, or under discussion?
• Is the association a party to any lawsuit, or does it expect to become one?
• When was the last reserve study, and was it a full study with a site inspection or an update without one?
• Has the association taken out a loan, or does it plan to? What secures it?
• Are there any open violations recorded against this unit?
• What are the transfer, capital contribution, and estoppel or resale certificate fees, and who pays each one?

If the answers are vague or the manager won't respond before your contingency deadline, ask your agent about extending the deadline. You can also treat the silence as a warning sign in its own right.

Talk to the neighbors

Spend half an hour walking the community on a weekend. Owners who are washing cars or walking dogs will usually tell you how responsive the board is, whether fines feel fair, and whether there is a fight going on. Notice how well the pool, the landscaping, and the roofs are kept up. Those are signs of how the money is actually being managed. Then compare what you hear with the minutes. When the two stories line up, you can trust what you read more.