Homeowners Associations: What Investors Need to Know

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Homeowners Associations: What Investors Need to Know

Homeowners Associations (HOAs) are common throughout the United States, and it is fundamental every home buyer knows the requirements and limitations imposed by a prospective HOA. This familiarization with an HOA’s norms is especially necessary for investors who for purely rental income are contemplating a purchase. Being aware of an HOA’s conditions and requirements before acquiring property will prevent future problems and even enhance property value.

The Why and How of HOAs

The concept of homeowners associations has been around since the late 19th century. But they didn’t become common in American residential neighborhoods until the post-World War II real estate boom. Planned unit developments became increasingly popular and, with them, the need for owner organizations to maintain common areas, fencing, and landscaping. Today, there are more than 345,000 HOAs in the United States; 61% of new residential constructions include some form of community association. Massachusetts has the 7th most HOAs of all U.S. states.

State laws regulate HOAs’ formation and management. HOA rules (also known as ‘covenants, conditions and restrictions’) are an additional layer of governance over municipal laws. HOAs have the legal power to impose dues for normal maintenance and conduct special assessments for large repair or improvement projects. Property subject to HOA rules cannot opt out of membership. An HOA’s covenants, conditions, and restrictions are included in a property’s title and run with the land and cannot be assigned to someone other than the owner.

HOAs are typically governed by a citizen board and are often managed professionally. An HOA manager collects dues, enforces rules, and provides centralized information. When owners become delinquent in their dues and assessments, HOAs can place liens on member properties. Liens blemish a property’s title, making it more difficult to sell. Most states allow HOAs to foreclose on properties if unpaid fees accumulate over a specified period.

HOA Due Diligence for Buyers

A prospective buyer should thoroughly investigate an HOA before purchase. A title search may reveal HOA liens, but the buyer would be wise to contact the HOA directly to verify a property’s full compliance. The buyer should also carefully review an HOA’s rules to confirm that the property can be used as planned; this is a logical move should the buyer intend to offer the property for rent: some HOAs prohibit rentals.

A buyer can also ask for an HOA’s current budget and balance statement to verify that such an association is in sound financial condition. It is a good idea to research an HOA’s reputation: local sales agents can alert a buyer if an HOA is lax in its maintenance duties or overzealous in enforcing rules.

Landlords’ HOA Issues

Landlords must remember that they alone are responsible for HOA dues and assessments since these can’t be assigned to tenants. The rental rate, then, should account for these owner expenses. Similarly, the landlord will be responsible for any rules a tenant violates. HOA rules should be clearly laid out in a lease document, and the landlord should ensure that an HOA board or manager contacts them, rather than the tenant taking on this responsibility, if issues arise.

Tenants’ violations of HOA rules are often first noticed by neighbors. Common violations include landscape neglect and pet nuisances. A landlord can minimize issues by being sure that nearby neighbors know how to contact the owner rather than just complaining to the tenant.

Maximize Homeowner Association Benefits

Homeowners associations can increase home values by enforcing property maintenance standards, maintaining open spaces, preserving a neighborhood’s design character, and upholding a sense of community. However, HOA issues can also spell disaster for the residential investor. Some HOAs prohibit short- or long-term rentals or both. Use restrictions may apply to pet ownership, noise, building improvement/decoration, and exterior maintenance. A deteriorating HOA can complicate title transfer and fail in its governance responsibilities. Over-zealous HOAs can develop reputations that will deter buyers. An investor must carefully research an HOA prior to purchase and be prepared to enforce HOA requirements with tenants.

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