Homeowners associations can be a boon, or bust, for buyers. Here's how to vet HOAs when house hunting

Miniseries | E+ | Getty Images

Homebuyers are dealing with record-high costs this year amid interest rate hikes and shrinking supply.

While shopping for homes is increasingly competitive, prospective buyers should consider an additional factor when weighing the pros and cons of a given property: the homeowners association, or HOA.

Homeowners associations are run by community residents elected to be members of the board of directors, which govern the neighborhood by a set of rules and regulations. Homeowners pay the HOA fees to have common areas such as parks, roads and community pools maintained and repaired.

Mandatory membership in an HOA can cost homeowners a pretty penny, with dues as high as $1,000 a month, according to the American National Bank of Texas.

If the board is running low on money or didn’t budget right, all they have to do is charge a special assessment, said Raelene Schifano, founder of the organization HOA Fightclub.

“Unless the association members have 51% of the majority voting power, they can’t outvote a budget,” she added. “I’ve seen budgets go from $300 a month to $800 a month.”

As 84% of newly built single-family homes sold in 2022 belonged to HOAs, per the U.S. Census Bureau, it will be important for prospective buyers to vet these organizations ideally before signing the deed.

What kind of home are you considering?

Different types of homes can be affiliated with an HOA, from single-family homes to co-operatives.

Single-family homes are separate units where residents own both the plot of land and the house on it, said Clare Trapasso, executive news editor at Realtor.com. They have their own entrances and access to the street and don’t share utilities or other systems with other homes.

Townhomes and rowhomes are somewhat similar; however, they do share walls with units next to them, although they are separated by a ground-to-roof wall, added Trapasso.

Meanwhile, condominiums, often called condos, and co-operatives, or co-ops, are units in a shared building where residences jointly own the common space, but their ownership structure is different.

In a condo, residents own their individual units but jointly own the land and the common areas with other residents. Condos are run with a board of people on the homeowners association making decisions for the community, said Jaime Moore, a premier agent for Redfin.

In a co-op, residents own shares of a company that owns the building and will have a board made up of each member of each unit creating a community where all parties have a say, he added.

“Co-ops are popular in places like New York and Boston, but condos are generally more common throughout the rest of the country,” said Trapasso.

Why HOAs are becoming so common

A high percentage of new homes built nationwide today are part of developments managed by an HOA due to the financial benefit for local governments, according to Thomas M. Skiba, CEO of the Community Associations Institute, a membership organization of homeowner and condominium associations.

“They don’t have to plow the street anymore [or] do all that maintenance and they still collect the full property tax value,” Skiba added, referring to local authorities.

Homebuyers who want to avoid the additional costs associated with HOAs can search older homes on the outskirts of developments, said Redfin agent Moore. If you’re left with no other choice than to buy within an HOA-affiliated area, here are a few ways you can evaluate the organization.

How to vet an HOA

While real estate agents are not required nationwide to disclose to buyers if a property is tethered to an HOA, homebuyers can take initiative themselves and review the organization.

Some states such as Nevada do require sellers to provide potential buyers a disclosure of all things that relate to the homeowners association, including their financial status and meeting minutes, said Redfin’s Moore. However, brush up with local and state laws to be aware of what your rights are as a homebuyer and potential homeowner.

These vetting tips may not apply to co-ops, and you may not have the time to completely investigate a given HOA.

Here is a checklist from experts:

Ask for a copy of all HOA paperwork, such as covenants, bylaws, rules and regulations, which serve as the community’s constitution, said Schifano of HOA Fightclub. Also ask for meeting minutes to see what repairs have been done or discussed.
Inquire about monthly or annual fees, the HOA’s budget and the history of how assessments have gone up year to year, said Skiba.
Look into the community’s reserve funds, which ensures repair and renovation. Check if the community is putting enough money aside for big expenses or if they are properly funded. “No one likes surprises, and that is the kind of big financial surprise [that can] be really problematic for every homeowner,” said Skiba.
Search the HOA on the county website to see how many liens, judgments and foreclosures have been recorded within the community’s lifespan, said Schifano.
Look at the financials and see how much in attorney’s fees is disclosed. This signals whether they are having a lot of issues, said Schifano.
Check for permits with the county for reroofs, electrical and plumbing services for the community, she added.
Request to attend at least one board or annual meeting if possible. A meeting helps buyers understand who is controlling the finances and decisions of the community, said Schifano. The annual meeting includes other homeowners. As a litmus test of whether the board is doing a good job, note if residents seem to be happy, in a fight or complacent.

“The most important thing a buyer can do is to ask questions to their agent, the community association and neighbors,” said Skiba.

Don’t miss these stories from CNBC PRO:

This article was originally published by Cnbc.com. Read the original article here.