Purchasing a new home involves a variety of costs beyond just what you see on the listing. The asking price is just the start. You have to consider how does earnest money work, mortgages, insurance, utilities, and property taxes in your budget before you even make an offer on a house.
One cost that many prospective homeowners forget is the HOA fee. This is a monthly payment given to the homeowner’s association, and while it can seem like an unnecessary expense, it may offer some much needed coverage that benefits you and your immediate community. What do HOA fees cover in California? Learn more below.
A homeowner’s association comprises a group of residents within a specific building, community, or subdivision. Not all homes come with an HOA, but if you are planning to purchase a home in a planned community, subdivision, or condominium, you can generally expect an HOA. The United States had about 355,000 HOAs in 2020, and about 25 percent of the country’s population is estimated to reside within a community association neighborhood of some kind.
While they can perform various roles, HOAs are designed to establish and enforce rules and guidelines within their living community. The organization comprises residents within that community with a board of governors or directors to oversee the overall group’s proceedings. The board is elected by the residents and can put forth changes or addendums to existing rules or suggest new guidelines entirely, which can then be voted on by the residents.
All the rules of the HOA are organized in a document called a Declaration of Covenants, Conditions, and Restrictions (CC&Rs). Along with guidelines, the CC&R outlines any penalties that can come from violating the guidelines like or otherwise breaking the rules. Penalties can range based on the severity of the infringement, but it typically involves extra fees, forced compliance, or legal action.
Like anything, HOAs come with their advantages and disadvantages. In terms of disadvantages, HOAs can feel restrictive to certain homeowners. Most guidelines dictated by a homeowner’s association involve the appearance and aesthetics of your home. The idea is to create a uniform appearance for all properties within the community. That can include the look of fences, landscaping, and even the color of paint on the exterior walls of your home. This can pose a potential annoyance for homeowners who might want to decorate their homes.
On the other hand, those same guidelines can dictate the cleanliness, repairs, and maintenance of your home. That can ensure the overall cleanliness and safety within your neighborhood.
The board members running an HOA are volunteers, meaning they may not have the knowledge or training to handle real estate, juggle finances, or speak to a large, disparate group of residents. That can contribute to potential problems within the community.
The biggest advantage to HOAs: they provide extra services and amenities that can help the community and its residents. That can include landscaping and gardening services, safe parking lots for residents and guests, and extra facilities. HOAs are what provide shared swimming pools, basketball and tennis courts, exercise rooms, laundry facilities, and party spaces for all members of the HOA. The mandatory HOA may also cover trash removal and weather-related services.
Managing all of those different components and duties naturally requires money, which is where the HOA fee comes in. Every member of the HOA community is required to pay a fee, collected monthly or annually by the board.
So what are HOA fees? While HOA community fees are a natural component of the services rendered by an HOA, they also tend to be the biggest criticism for HOAs among prospective home buyers. HOA fees have the potential to be high. The average HOA fee tends to be about $200 to $300 per month, with fees as low as $100 per month. However, it is not uncommon for HOA fees to get as high as $1,000 or more per month. The general rule of thumb: the more services and amenities within the community, the higher the HOA fee.
Association fees can potentially differ even within the same development or community. This is based on square footage, orientation, location of the property, and other variables that affect the amount of upkeep that your property requires.
That amount can add up when a homeowner factors in their mortgage, utilities, and other costs of ownership. HOA dues go toward a reserve fund, but mismanagement of that reserve fund can result in higher fees. The HOA board is required to properly maintain and manage that reserve fund.
Buying a house within the community also means signing a contract with the HOA to ensure that you pay your regular dues. Failure to pay HOA fees can result in penalties, though those penalties will vary from HOA to HOA. These penalties appear in the CC&R. They may be as minor as paying a late fee, but depending on the HOA and the number of unpaid association fees, the HOA may pursue a lawsuit, put a lien on your property, or completely foreclose on your property to collect delinquent payments.
HOA fees can seem high, however, they do tend to go toward things that you and other residents in the community use every day. The actual coverage for HOA fees can vary based on the type of properties involved and the amenities within the community.
Much of what an HOA covers in California happens behind the scenes. The HOA is responsible for ensuring regular maintenance of shared spaces, knowing is a home inspection required, drafting and enforcing bylaws and community policies, and deciding on larger repairs or renovations. In larger communities, HOA fees cover the costs for maintaining common areas, including:
For townhouses and single family homes, HOA fees will go toward maintaining and repairing common amenities in the neighborhood. This may include community clubhouses, tennis courts, and neighborhood parks.
Essentially, all of the invisible things that you may not notice, like trimming shrubbery or cleaning the community swimming pool, gets paid for through the HOA fee. On-site maintenance personnel also tend to get their salary through the HOA payments.
Fees can also go toward common utilities, like water, sewage, and garbage disposal. You would still have to pay for the electricity, gas, and other utilities on your own property, but if you have lights in common areas, chances are that the HOA fee pays for the electricity that powers those lights. If your building has shared heating, air conditioning, or hot water, the HOA fee will also go toward that.
HOA fees also go toward a reserve fund. Think of this like a rainy day or emergency fund. If some part of your community requires major or emergency repairs, like a roof repair or elevator replacement, the HOA can dip into the reserve fund to pay for it. The HOA can also levy special assessments if the reserve fund does not have enough money to pay for those emergency repairs.
As HOA fees can contribute significantly to overall home costs, it is important to take them into account when determining your budget for buying a new home. Most modern home listing services include the HOA fees in the property listing.
Lenders also tend to factor in HOA fees and property taxes when deciding your mortgage. That can lead to some confusing offers. High HOA fees may leave you with a smaller loan amount compared to a property that has lower or no HOA fees. However, studies do show that properties with HOA fees tend to increase the value of the property and sell for more than those that are not part of an HOA. If you are a new home buyer, working with the team at Berkshire Hathaway HomeServices California Properties can help you to navigate the ins and outs of HOA fees to help you find a home that works within your budget.
Even after moving in, there is a potential for your HOA fees to change. HOA fees tend to increase on an annual basis. These increases are outlined over three to five years in advance and depend on estimates for utilities, maintenance, labor, and other future costs. If you can, try to get a record of HOA dues for the property over the past ten years, which can give you an idea of where the HOA fees may be headed in the future.
There is the alternate possibility of HOA fees going down slightly. This can happen if your development adds new homes. This means more homeowners in the development, which equates to more members in the HOA to offset the HOA’s fixed costs.
HOA fees can add to your existing home budget. However, they can provide some necessary services that may cancel out any headaches and annoyances that may otherwise come from living in a community or development. Don’t let high HOA fees scare you from pursuing a property.