Chances Are, You’re Buying Into an Underfunded HOA

condoThe financial troubles faced by homeowners’ associations — those being the governing bodies of many new-home or condo developments — have gotten worse over the last decade, according to Association Reserves, and as reported by Sandra Block in the April, 2014 edition of Kiplingers.

A disturbing 70% of them are “underfunded.” That means they don’t have enough cash in reserve to handle a major repair or an emergency that’s not covered by insurance.

And that could be very bad news for the homeowners buying in. An HOA isn’t some remote group that’s meant to take care of the homeowners in a planned community — it IS the homeowners in the planned community. When and if a major need for cash arises, it’s the homeowners who will be asked to pitch in and cover it, in the form of “special assessments.”

Did I say “asked” to pitch in? I meant “required.”  As described by Beth Ross in Nolo’s article on “When HOA Associations Can Impose Special Assessments,” “A well-run HOA also sets aside a portion of the periodic dues in a reserve fund. This fund is meant to pay for the costs of larger, infrequent expenditures, such as replacing worn-out patio furniture around a common pool, or putting a new roof on an aging clubhouse. . . . [but if the] HOA’s reserve fund is inadequately funded, . . . the HOA won’t have enough money when it comes time to make repairs, so — you guessed it — a special assessment will probably be on its way.”

As described in the same article, HOAs don’t have unlimited power to impose these assessments. But assuming they act within their legal limits, they do have power to penalize nonpayment — for example, by placing a lien or ultimately foreclosing on the homeowner’s property.

All of which is to say that it’s important to do your research BEFORE buying a home in a development. See the articles on the “Buying a New Home or One in a Development” page of Nolo’s website for more on this.