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When Your Home Is Not Your Castle

Shopping for a new home brings out your creative side. As you look at promising prospects, you see not just what's in front of you, but also what a property might look like after you add your own personal touches to it. In your mind, you might paint those drab gray walls a nice bright yellow, rip out those ugly bushes in the front yard, and think about big renovations.

But don't get ahead of yourself. In many neighborhoods, buying a home automatically makes you part of a homeowners' association. And as surprising as it may seem, these seemingly innocuous groups of overseers can throw a big wrench in your dreams for your new home.

More than you bargained for
At first, you might think a homeowners' association is a cute way for neighbors to work together on holiday decorations or to keep the neighborhood park clean. But in many cases, homeowners' associations are serious business, where disobeying their rules can land you in big trouble.

Those rules may make you feel like you live in a police state. There are few legal limits on what homeowners' associations can regulate. You may have to keep your house painted a particular color, keep your garage free of clutter, not hang laundry outside -- or even extensively decorate your home at certain times of year. If you repair your roof incorrectly, plant a tree, or put in a swing set for your kids without checking the rules, you might find yourself the subject of the next monthly meeting.

Getting out of it
Unfortunately, it's virtually impossible to escape a homeowner's association. Most of the time, they're included in the language of your real estate deed, as a covenant that is legally attached to the land. That means that if you want to live in the neighborhood, you're stuck with the association.

Furthermore, getting permission to do what you want can be tough. Many associations argue that their primary goal is to keep property values up, but association board members often have strong opinions about what should and shouldn't be allowed in their neighborhood. As a result, you may have to go through a formal hearing to get permission to do even relatively minor things to your property.

Problems
In addition, not all homeowners' associations are well-managed. If an association mismanages the funds it collects from assessments and dues, then it may not have enough money to do necessary work that's vital for everyone, such as fixing sewers and sidewalks.

Homeowners' associations also become a focal point for litigation involving angry homeowners and developers. For instance, associations across the country have alleged that Pulte's (NYSE: PHM  ) Del Webb developments have major problems, including inadequate irrigation systems and other construction defects. A homeowner in a community built by Centex (NYSE: CTX  ) alleged that her association board is entirely controlled by Centex employees, who are selectively enforcing the association's rules. Another group of homeowners have claimed that developer D.H. Horton (NYSE: DHI  ) wrongfully withheld information about plans for a nearby shopping development that they argue will reduce their property values.

What to do
If you're in the market to buy a home, make sure you know about any homeowners' association before you make an offer. If a home you like is controlled by a homeowners' association, take a look at the rules and see if you can live within their constraints. In today's buyer's market for housing, there's no reason to accept rules you don't want.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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