HOAs have seen a massive expansion in the past few years. It is estimated that 80% of new properties all belong to an association. Most people understand the benefits such as; value, quality of amenities, and structure that comes with living in an organized association and choose to live in them.
However, the process of buying a home belonging to an association has almost no difference from buying a home that does not. The process of
- Obtaining mortgage
- Insurance
- Closing costs
- Moving costs and
- How much contribution is to be made as a down payment, is all the same for both HOA members and non-members.
Are there differences between buying a home that belongs in an HOA and buying a home that does not?
Yes, the obvious first are dues and fees. Most HOA associations require fees from their owners for the maintenance and development of properties. Special assessments can also levy homeowners a large sum, especially with unforeseen circumstances that need major repairs. Most organized HOA’s with good financial management may have a reserve fund to cover emergency expenses like this but in cases where the reserve funds have been used, there is seldom enough money available.
These HOA fees are not included in the mortgage and have to be paid directly to the association. However, HOA fees are factored into how much you can buy and borrow a home because they are considered housing costs.
HOA fees are not included when lenders set up an escrow account but they are incorporated into the debt-income calculation.
Associations can decide to bill HOA fees annually or quarterly. Lenders always evaluate the finances of both the HOA and the buyer. An HOA with shake finance can be enough reason to not approve a mortgage for a buyer.
What is the impact of poor HOA finances on buyers?
HOAs that employ the right accounting and finance services always have their books in check. But prospective homebuyers can have their mortgage denied by the lender if the finances of the HOA are unstable. Factors such as HOA insurance, and taxes will determine a buyer’s eligibility. Super low HOA fees aren’t a great deal-breaker because it could mean there is not enough to maintain a healthy budget to meet the repair and maintenance requirements.
Informed buyers are likely to look out for the following from the association when making a purchase.
Recent purchase of properties
Clearly, HOA associations that have closed on a mortgage in the last few months are doing something right. It is almost always a good sign.
A copy of the HOA’s Budget
The HOA budget can be confusing to look at. The important sections that buyers pay attention to are the net income, and capital reserves. They can also ask for past and pending assessments. A long history of special assessments means more bills to be paid and that is a red flag.
Conditions and proof of proper management
Buyers are likely to inspect homes, floors, furniture, and walls. They will evaluate the community’s proactivity to preventive maintenance.
Additional impacts of poor HOA finances on sellers add up
The effects of Poorly managed HOAs spiral into a lot of losses for both property owners and the association. The impact is felt immediately on the value of properties in the condominium. Poorly financed HOAs often mean that there are several assessments that require the community to pay increased dues from special assessments. Over time – a short period if not resolved quickly – the community deteriorates and becomes less enjoyable to live in.
Sellers will also have a hard time trying to sell their homes because it will be difficult to attract buyers with all factors mentioned earlier. The good thing about HOAs is that members can easily join meetings if they do not like how the board is running things.
How can you avoid problems associated with poor HOA finances?
HOA should always evaluate its finances. However, the complexities in the lending standard can make it difficult to evaluate finances. It takes a good financial expert to know exactly what lenders and buyers need to see to underwrite or approve a loan.
If the books are managed properly, other factors such as maintenance levels, community standards, and reduced special assessments can easily be kept in check.
This is why you need a reputable accounting agency to help manage your books. At core accounting, we specifically tailor our accounting services to ensure that every investment in HOAs is protected. The earlier you can get your books and manage your budget, the better you can improve the quality of your HOA community.
At C.O.R.E we are dedicated to helping manage your books. Most importantly we help detect Condo Fraud which is a major reason why most HOA maintenance struggles. If you ever need something about getting your books right, feel free to reach out to us.
