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For first-time homebuyers or homeowners who want to be informed-
a straightforward discussion of this very popular form of homeownership
People have been choosing this form of housing for thousands of years. Early in the history of this housing type, the motivation was primarily security, a basic common need that it still one of the reasons people choose to live in a homeowner association ( also referred to as a common interest development, although not all common interest developments are HOAs). Over the centuries the number and type of “common interests” that people perceive as important elements in a housing development has evolved. In it’s very simplest form, it may be a driveway or access point for more than one dwelling, which are each owned by separate owners. The association between these two or more owners is an agreement to maintain the driveway. This agreement could be verbal, but in recent decades, most state governments, or local municipalities require this relationship to be formalized. In simple cases like this it is typically a clause that is included in the title of the properties and recorded. As the number of owners increase along this driveway, it may require another recorded document known as a deed restriction.
Depending on the state you live in, the developer of this hypothetical development with a shared common drive, may be required to create a formal entity to govern how these neighbors deal with the driveway and each other. This well intentioned requirement is anticipating that there may be a dispute over how this driveway should be maintained, and the governing documents of this entity will spell out how it should be resolved (There are several forms of governing documents, which may include Covenants, Conditions and Restrictions (CC&Rs), Bylaws, Articles of Incorporation. Another article discusses the various forms and uses)
Anticipating dispute resolution is the basic reason for having an association of two or more neighbors, who have some common interest. There are thousands of simple associations like this, formal and informal, all over the world. But we do not typically equate the shared driveway example with a Homeowners Association. Most HOAs have dozens of “common interests” and the more you have the more complicated the rules are to govern disputes.
Most prospective buyers of a home within a homeowners association are concerned with how much they will have to pay in assessments or dues. This is critical in making a decision to purchase. Once the common interests are defined, the primary purpose of an HOA is to budget for the needs of the association (and maintenance of the common areas), determine how much each homeowner should contribute, then collect those funds and disburse them as needed. Sounds simple but it’s not. The way most HOAs currently operate, the dues will increase each year between 5% and 10%. In just a few years, what appeared to be a reasonable dues rate will grow out of control. This does not have to be if the board of directors do their job. If controlling the growth of dues is set as a priority the dues should not grow and if the board is very focussed the dues can be decreased. I have written a number of articles on this subject and in fact my whole website is dedicated to the subject of keeping HOAs focused on needs of the membership, not the other way around. Go to hoahomepage.com and look up your HOA, then read what others are saying about the community or the board or any of the services. A rating system like this will help the HOA Board in judging how the membership judges their job and provides prospective buyers with some insights on the community. I have found that the more the homeowners in the community communicates their concerns to the board, the more the board will respond.
An HOA, with lots of common interests, resembles a small town or municipality; instead of tax assessments, an HOA assesses dues, based on the budgeted needs of the community. The municipality has officials elected by the residents and an HOA has a Board of Directors elected by the members. The municipality maintains roads, common buildings, public services; like waste removal, water, electricity and many other services. An HOA may provide some or all of the same services. There are several construction types that fit in this category. Planned unit development (PUD)- this is typically where the lot below the unit is owned by the homeowner- this might be a Townhouse community where most of the homes are attached to another and common construction components like roofs, siding etc. A PUD can also consist of detached homes, meaning they are not attached to another unit, but have common components like roads, security fencing, clubhouse, pool etc. Condominiums are where the land and all building components are owned in common by the homeowners, and the owner only has title to the air space in the unit. Co-op buildings are similar to condominiums except the occupants own a percentage of the Co-op and do not have title to the air space of their unit. When you purchase a co-op unit the agreement will define the location of the space you have been assigned. Make sure you get good legal advice when purchasing into a co-op. In fact, no matter which type of HOA you are looking at, make sure to review all the documents, you need to know what you are getting into. It is also important to check the status of the HOA reserve accounting- see my article on HOA budgets- if there is a deficit in the Reserves, review the plan for bringing it current, if there is no plan you could be responsible for a share of any shortfall. Or you can point it out to the seller and negotiate a reduction in the price. See my article on Buying and Selling in an HOA.
In 2000, the American Institute of Certified Public Accounts projected in a study that over 80% of future homes will be built within a common interest development. There are a number of reasons why they anticipated this trend. One, with the increase in the cost of land, a developer will want to increase the density of the project (the number of units he can squeeze onto the land), in order to keep the homes affordable. But the more dense a project, the more likely there will be common areas. However, the developer must first convince a local building department that his plan should be approved. At the same time many municipalities have faced their own budgetary concerns so adding additional tax payers to the roles is important, but this in turn adds pressure on public services. The HOA offers these municipalities an opportunity to add taxpayers without having to add the additional costs related to building infrastructure and providing road maintenance and other services. The municipality will approve the builder’s project in exchange for building the homes within an HOA. The downside is that the homeowners within the HOA, not only pay their property taxes and other local taxes which go to typical common expenses, but they also pay their dues which cover the roads and other components included in their community. There are plenty of positive reasons to live in a common interest development, but duplication of these expenses is not one of them. This fact is all the more reason for members of a common interest development to pressure their Board and manager to keep the dues under control.
If you choose to live in one of these communities, the best thing you can do is resist dues increases. Find out why they are increasing, communicate with your neighbors and the board. Become informed.
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