In simple terms, an HOA or homeowner association is a governing body that oversees a residential community. HOAs are run by the residents of a community through an elected board of directors. Typically, but not always, the board hires a third-party management company to oversee the day-to-day operations of the community.
HOAs are funded by the residents of a community through regular dues. Some HOAs collect their dues (also known as "HOA fees") monthly, while others have quarterly or annual assessments. As we’ll see in the next few sections, the decision of whether to move into a community with an HOA or not is a significant one, both from a financial perspective as well as a standpoint of day-to-day living.
What does an HOA do?
It’s a common misperception that HOAs are there to be party-poopers -- that is, to tell homeowners what they can and cannot do with their own properties. While creating and enforcing rules is certainly a function of HOAs, it’s not why they exist.
HOAs have several functions, but it’s important to emphasize that HOAs have one basic mandate: to increase property values. That’s it. Everything else a neighborhood’s HOA does is with that goal in mind.
If something could adversely affect property values, you can be quite certain that the neighborhood’s HOA has a rule preventing it from happening. For example, I’m on the board of directors of my HOA and we have a rule that requires homeowners to obtain HOA approval to change the exterior color of their home. Why? Because a home painted an odd or obnoxious color lowers the value of surrounding properties. We also have rules that prevent homeowners from putting a sofa in their front lawn, leaving their trash cans in locations visible from the street, or putting window air conditioners in their front windows, for the same reason.
Furthermore, HOAs are responsible for maintaining common areas in their communities. Why? Because nicely-manicured common spaces increase property values.
Finally, HOAs often build and maintain certain other amenities for the community. For example, my neighborhood has a community pool, and the HOA is responsible for making sure it is maintained properly. Again, any HOA-maintained amenities are there for the same reason -- because they increase property values. Homes in a neighborhood with access to a pool are worth more than homes with no pool access.
Why does an HOA cost so much?
HOA costs can vary dramatically by location, type of community, and the level of amenities the community offers. For example, if you live in a community of single-family homes and the only things covered by the HOA are common area maintenance and a small playground, your HOA dues could be in the $20–$30 range per month. On the other hand, if you buy a condo in a popular resort area and the HOA covers a swimming pool, tennis courts, pest control, and your building insurance, it’s not uncommon to see monthly dues of $1,000 or more.
The point is that your HOA is a non-profit organization, so it’s fair to assume that the money collected by your HOA is going towards some type of maintenance, amenity, or other costs. If you perceive your HOA fees as expensive, it’s probably because your neighborhood has lots of common areas to maintain or your HOA provides amenities that cost money. For example, my neighborhood’s community pool costs roughly $15,000 per year just to maintain -- and that’s not including any unexpected repairs. And don’t even get me started on the cost of landscaping for large common spaces.
Do you really need to follow HOA rules?
In a word, yes. HOA rules and regulations are legally enforceable. And by owning a home in an HOA community, you’re legally bound to pay whatever HOA dues are charged.
If you violate HOA rules, you’ll generally receive a warning and a certain period of time to correct whatever problem there is. For example, if your lawn needs to be mowed, you might have 10 days to get it done.
If you don’t comply with your HOA’s rules or pay your dues in a timely manner, they have the power to impose fines, take legal action, and even put a lien on your home.
Because of this, it’s very important to know the rules of a neighborhood’s HOA before you decide to buy a home there. HOA rules are known as covenants, conditions, and restrictions (CC&Rs), so be sure to ask for and read a copy for the neighborhood you’re considering. If you want to bring your five dogs with you, for example, it pays to know before making an offer if this is allowed, as many communities -- including mine -- limit the number of pets any home can have. If you want to put an above-ground pool in your backyard, it’s important to ensure your community allows them. And if you plan to rent out your property, you’d better make sure the HOA allows it, as many (especially condos) restrict owners’ ability to rent their homes out.
Benefits of living in a community with an HOA
Obviously it can be a good thing to have an organization whose sole purpose is to increase property values in your neighborhood. If you live in a non-HOA community, there’s nothing to stop your neighbor from painting their home a ridiculous color, setting up living room furniture on their front lawn, and then letting the grass grow knee-high around it. In a situation like this, you can bet it makes your home less valuable. With an HOA in place, you don’t have to worry as much about issues like this dragging down your home’s value.
The amenities HOA communities offer can also be a benefit. You’re unlikely to find a community pool that’s free to use unless your home is in an HOA community, just to name one example.
Drawbacks to living in a community with an HOA
The biggest downside to having an HOA is a lack of freedom with your own property. As I mentioned, HOA rules are designed to maximize property values, but they can feel rather restrictive at times. For example, you may not see the harm in keeping a window air conditioner unit to cool a particularly warm room of your house, but your HOA might have a problem with it. Or, you might want to park an extra vehicle on the street, only to find that it’s against your HOA’s rules.
Not only is there a lack of freedom in an HOA-run community, but you’ll also have to submit to an approval process every time you want to modify your property. Want to add a screened patio? You’ll have to check with the architectural review committee, and this isn’t always a quick process. Plus, sometimes there can be a bit of back-and-forth before your plans are ultimately approved.
Your HOA dues can also make your home less affordable, since the bank generally takes them into account when analyzing your mortgage payment. For example, if your bank calculates that you can afford $1,500 per month and your desired community has a $100 monthly HOA fee, it effectively reduces your maximum mortgage payment to $1,400.
The bottom line on HOAs
The key thing to remember is that your HOA is there to increase (or at least maintain) property values, and every rule and function of your HOA is done with this mandate in mind. However, living in an HOA community is not for everyone, and the rules (and costs) vary considerably among HOAs, so be sure you know what you’re getting into before making an offer on a home within an HOA-run community.