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How to Avoid “Gotcha!” HOA Scenarios

Handled correctly, HOAs preserve the value of your home. But dealing with one can sometimes be the opposite of smooth sailing: here are 6 ways to steer clear of potential pitfalls.

Most people have a love-hate relationship with their homeowners’ association, or HOA. There are definitely benefits to having one, but there can be some big negatives as well. It’s key to know how to make your HOA work for you — and when you should avoid buying into a neighborhood that has one.

Here are six possible “gotcha” scenarios you should look out for when selling or buying a home with an HOA.

1. An investor’s “gotcha”: Renting is against HOA rules

My Georgia neighborhood’s HOA restricts the number of homes that can be used for rental investment property to 10%. That’s good for me: Most people in the neighborhood are owners who are invested in their homes’ upkeep.

But when I buy investment property in an HOA neighborhood, I make sure the HOA puts no restrictions on how many homes can be rentals.

If you buy investment property in an HOA neighborhood, find out what the covenants, conditions, and restrictions, also called the CC&Rs, say about this. If the HOA restricts or forbids rentals and you bought the property with the intent to rent, you could be out of luck.

2. The lender “gotcha”: The HOA has financial difficulties

If you want to sell, you need to know whether your HOA is solvent. If it doesn’t have enough cash reserves to pay for common-area repairs and upkeep, a lender might not approve a new mortgage.

“Ask whether there is ongoing litigation,” says Jim Angleton, president of AegisFS, who has dealt with HOAs for 10 years. If there’s a construction defect under litigation, it will be tough to find a lender to approve a loan.

Additionally, check with your association to find out whether it has adequate insurance. Many lenders won’t approve a loan unless the HOA has enough liability coverage for common areas and community amenities.

If yours doesn’t, ask a member of the HOA board to upgrade the policy. If this affects your sale, it will affect your neighbors’ sales as well.

3. The architectural control committee (ACC) “gotcha”: We don’t approve

You just shelled out a pretty penny to upgrade your home, including a whole new color scheme and paint job, a new roof and door, and some lovely window boxes planted with trailing ivy.

Oops. You forgot to submit your modification request form to your HOA. An ACC representative drove by, found that your improvements violated the HOA bylaws, and now you need to undo what you did or face fines. If you refuse, your HOA could sue you.

Bottom line: Make sure you get approval before updating the exterior of your property.

4. The board of directors “gotcha”: Special assessments

If you live in an HOA development, you know there are periodic dues. Those dues go toward upkeep of the common areas and amenities, general operating expenses, and reserves for large projects, such as upgrading parking lots.

If enough money is in the reserve fund to pay for the big projects, that’s the end of the story: The HOA uses the reserve money.

But if there isn’t enough money in the reserve fund, the HOA can charge you a special assessment fee. Fun, right? It’s one thing to budget for regular HOA dues, but a surprise special assessment fee can really throw your finances for a loop.

Before you buy, read the minutes from the last board meeting, look at the HOA’s financial statements from the last five years, or ask an HOA board member if there will be a special assessment fee in the near future. Ask too whether the HOA uses some of the dues toward reserves. If not, brace yourself: those are prime conditions for a special assessment fee surprise.

5. Two amenities “gotchas”: You don’t even use the amenities — or they go under

If you buy a home in a community with a swimming pool, tennis courts, and hiking trails, and you maybe use the trails once in a while, but no one ever finds you at the pool or the courts … guess what? You pay for them anyway.

Maybe you picked the property because of the fabulous amenities. But wait. The HOA isn’t collecting enough money to sustain them. If more than 15% of homeowners aren’t paying their dues, the HOA might not have enough money to maintain the neighborhood’s amenities. Instead of looking at that inviting pool, you might soon be faced with an algae-infested eyesore.

Make sure you don’t mind paying for amenities that you might not use, and ask the HOA board what percentage of homeowners aren’t paying up.

6. The deed restrictions “gotcha”: You can’t park that here

Before you buy, check the parking situation. “If you have a boat on a trailer that you like to keep in your driveway, deed restrictions might not allow that,” says Dr. Richard Horowitz, secretary of the Lake Valencia Homeowners Association in Florida.

Likewise, if you drive a large, nine-passenger Suburban but your parking space is big enough for only a compact car, then, Houston, you have a problem. These aren’t fun discoveries to make once you’ve moved into your new home, so if you don’t want to be forced to trade in your SUV for a Mini Cooper, make sure you can abide by deed restrictions before you buy.

If you live in a neighborhood governed by an HOA, it’s always a good idea to attend the meetings or even volunteer to join the board. What’s your best advice?