Article Courtesy of  Forbes Advisor

By Bob Musinski and Mike Cetera

Published December 3, 2020

If you’re looking to buy a home, you’re likely familiar with the main monthly costs associated with it—mortgage, taxes and insurance. But you may need to add another one, as well: Homeowners association (HOA) fees.
    

You’ll probably join an HOA if you’re purchasing a home in a condominium development, townhome complex, gated community or any neighborhood where your association is in charge of upkeep of common areas. You might welcome reasonable HOA fees if you don’t want to mow your lawn, shovel your driveway or clean your gutters. But if you haven’t budgeted for the additional cost, you might have trouble coming up with the money you need each month for your mortgage payment. What Is a Homeowners Association? An HOA is a resident-run private organization that governs a neighborhood, primarily to set up and enforce rules that are aimed at keeping the neighborhood’s appearance consistent. HOAs also provide upkeep of common spaces and sometimes the property surrounding individual homes.

HOAs are usually governed by volunteer resident-led boards that also might include a representative from a development or management company. The board can enforce rules—known as covenants, conditions and restrictions (CC&R)—that could result in fines and legal action for residents if they are not followed.

HOAs have become more common in recent years: More than 1 in 4 homeowners live in a community association, according to the Foundation for Community Association Research, a nonprofit that provides analysis on HOA trends.

That trend is likely to continue. Almost 60% of recently built single-family homes and 80% of homes in new subdivisions are in HOAs, according to a study by researchers Wyatt Clarke, who works at IBM, and Matthew Freedman, an economics professor at the University of California-Irvine. The researchers found that HOAs can have a positive effect on home prices, as homes in an HOA were valued, on average, 4% higher than similar ones that did not belong to an HOA.

What Are HOA Fees?

If you plan to buy a home in an HOA, you’ll pay fees—often monthly—directly to the association to help cover a variety of maintenance costs and neighborhood amenities.

The fees could go toward:

• Basic upkeep. An HOA is usually in charge of maintenance of common areas, such as lawns in front of and in between townhomes and other common areas throughout the subdivision, including parks and along walking paths. HOAs will hire someone to plow the driveways, parking lots and possibly the streets in the area after a snowfall.

• Building maintenance. The maintenance of the home exterior, such as siding, roof and gutters, could be covered by an HOA, especially in a townhome community where there are shared walls. Since major projects can cost a lot of money, an HOA might put aside a percentage of fees over the course of several years to pay for community-wide roof and gutter replacement, for example.

• Amenities. If the neighborhood has a pool, a clubhouse or on-premises security, you’re likely to pay for them through your HOA fees.

• Insurance. The HOA’s insurance policy will need to cover the areas that wouldn’t fall under individual homeowners’ insurance, such as common areas.

Average HOA Fees

HOA fees can vary quite a bit—from a couple hundred dollars a month to a few thousand— depending on the type of development in which you live. The average cost is more than $300 per month, although fees in some states are much higher, such as New York, which averaged about $570 per month, according to a study by Trulia, a real estate website.

For example, a small townhome development might require just $200 to $300 per month in fees to keep up with lawn and exterior maintenance. A higher-end development that provides exclusive services such as a valet and a fitness center would charge much more. Some HOAs might even cover cable TV and utilities.

But HOA fees are not static. Like taxes, they can go up each year or every few years, depending on the needs of the association.

After you reach a purchase agreement with the seller and before you finalize the deal, you’ll want to review documents—including financial disclosures and board meeting minutes—to learn details about the HOA’s finances, such as:

• How much it has in reserve, which can help you determine whether the HOA can pay for major, planned repairs as well as unplanned ones without hitting everyone with a special assessment or higher ongoing fees

• Whether the HOA is facing legal trouble

• How frequently it has raised rates in recent years

• Whether the HOA has made any special assessments on homeowners in addition to HOA fees

Checking the CC&Rs Before You Buy

In addition to checking on the HOA’s financial details, make sure you’re comfortable with all the CC&Rs you’ll have to comply with if you buy the house.

Regulations could cover:

• The exterior of your home. The HOA might require you to keep the exterior consistent with the entire neighborhood, specifying the type of roof, shingles and paint colors you use and what type of fence or pool you can get—if you’re allowed one at all. If the HOA doesn’t take care of your lawn, you might have restrictions addressing trees and bushes as well.

• Vehicles. Street parking and the number and types of vehicles parked around a house could be specified.

• Pets. You might be restricted on the allowable size and number of pets, if you can have them.

• Rentals. If you’re allowed to rent out your property, the HOA might impose restrictions.

Can You Avoid HOA Fees?

If you are buying a home in a neighborhood where being part of the HOA is required upon purchase of the home, then you’ll need to pay fees. You could avoid fees if your HOA is voluntary. For example, you might have neighborhood amenities such as a pool and fitness center that are optional for homeowners.

If you have trouble paying your HOA fees—because of a job loss or another major financial hardship—you can try to negotiate with the association. But the association likely has enforcement mechanisms if you don’t pay, from late fees to putting a lien on your house that would force payment before you could sell.

Can You Deduct HOA Fees From Taxes?

If you purchase your primary residence in an HOA, the fees are not exempt from taxes. But the fees might be if you are renting out the property. The amount of money that’s tax deductible would depend on whether the rental was for a partial year or full year.

HOA Benefits

• Consistency helps property values. If you love the look of an HOA-run neighborhood, then it’s likely it will stay that way for years to come. A well-run HOA will ensure that homes and common areas are well kept and should preserve property value and overall quality of life.

• You can avoid maintenance. If you’re not a fan of mowing your lawn, keeping up the yard and shoveling snow, an HOA might be for you. Add up the money and time you would spend keeping up a yard and you might find that an HOA fee pays for itself.

• More amenities. If you want to live in a neighborhood with exclusive access to a pool and fitness center or you want to live in a gated community, you might welcome the fees and regulations that come with an HOA.

HOA Drawbacks

• Could be too restrictive. If you don’t like being told what vehicles you can have in your driveway, what paint color your deck can have and whether you can plant a certain type of bush or tree in the front of your house, an HOA neighborhood might not be for you. Some HOAs are more aggressive than others with regulations and enforcement, and you’ll need to make sure you’re comfortable with it before closing on the house.

• Might be very expensive. When you evaluate HOA fees, consider what you’re getting for your money. It’s helpful to compare fees among HOA-run neighborhoods so you can see, for example, if one charges $100 per month more than another for essentially the same services. If fees are high but there are a lot of amenities—such as a pool or 24-hour security—you’ll need to decide whether those perks are worth the extra cost.

• Might not be well-run. On paper, an HOA might have reasonable restrictions and fees, but in reality homeowners might ignore the rules. In some cases, you might have many homeowners who refuse to pay fees and an HOA that doesn’t enforce its rules.

Bottom Line

If you’ve never lived in an HOA neighborhood and are considering buying a home in one, make sure you take plenty of time to review the HOA’s rules, financial records and meeting notes to see if there are any issues that concern you. While HOAs can play a vital role in maintaining a neighborhood’s property value, they also can be a miserable place to live if you’re unhappy with restrictions and extra fees.