You’ve most likely already heard of a homeowner’s association (HOA), which is basically the governing entity over homes and common areas within an HOA community. It’s the HOA that sets forth a set of rules and regulations that homeowners need to follow and charges a set monthly fee that covers the cost of maintaining the community.
But what exactly are HOA special assessments? More specifically, how do such assessments affect you as a homeowner in an HOA?
HOA Special Assessments – Defined
The HOA fee that you pay every month is generally made up of two components. One part covers operations for the current year, which generally includes things like loan mowing, landscaping, garbage removal, pool maintenance, insurance, and water. The second part is placed into a reserve account to cover long-term repairs and replacements, including replacing the roof, paving the parking lot, painting the exterior, and so on. It’s imperative that these reserves are adequate enough to pay for these expensive things that will be required at some point down the road.
Part of the job of the HOA board is to predict with as much accuracy as possible which repairs will have to be done and when. If their predictions are on point, then the monthly dues should adequately cover the current operating expenses and long-term repairs and replacements.
If not, that’s when a special assessment enters the picture, which occurs when the HOA has to come up with more money over and above what’s collected each month from owners in the form of HOA dues. If that happens, the HOA board has the legal right to enforce a special assessment to cover the cost of major one-time expenses for repairs.
There could be any number of reasons why the HOA’s reserves come up short when money is needed for these major improvements. For instance, some homeowners might be in default on their monthly payments, or perhaps an unexpected natural disaster occurs that causes major damage not covered by the insurance policy. In either case, a special assessment may be imposed if there aren’t enough funds needed.
How Much Money Should a Reserve Fund Have?
An HOA should definitely have a reserve fund to begin with. If it doesn’t, that’s a huge red flag. Further, any reserve fund that does exist should have enough money needed to cover the cost of major repairs. The HOA board is typically responsible for determining how much should be set aside by hiring an outside accountant to conduct a reserve study.
This study estimates how much money is required to meet the needs of the HOA’s repairs and replacements as they are needed over time. Once completed, the accountant conducting the reserve fund study will recommend how much of the monthly dues should be set aside for the reserve fund in order to ensure there is enough money to pay for expected repair costs as they occur.
Why a Special Assessment Matters if You’re Buying in an HOA
While the majority of HOA’s may be well run, there are some that are not. Without an adequate reserve fund, an HOA has nowhere to take money from when a major repair is required. That usually means the HOA will have to impose a special assessment that involves taking more money every month from each homeowner, including yours.
Before buying into a particular HOA community, it’s imperative to review a copy of the HOA’s financial statements in order to see if the HOA has a reserve fund, and if it does, determine whether or not it’s sufficient.
The state of the reserve fund and the results of the reserve fund study will be included in the HOA’s financial statements, which should be reviewed before a purchasing decision is made. By comparing the two, you’ll be able to tell whether or not the HOA’s reserve fund is adequately funded or not. If it isn’t, that’s a huge sign that a potential special assessment could creep up in the near future.
Take a look around the building or community to determine roughly how old it is. Older communities will be more likely to require major repairs or replacements sooner than a newer complex. In addition, assess how well-maintained the common areas are. If they’re properly cared for, it could be a while before significant work is needed. If not, however, the odds of needing expensive repairs sooner rather than later – and having to pay for them – are much higher.
Limitations on Special Assessments
Special assessments cannot just be arbitrarily assigned and implemented. Some HOA documents require a certain proportion of homeowner approval before any changes in regular dues and special assessments that exceed a specific amount are made. Even if there are no specific details in the governing documents about the requirement of homeowner approval, the law in California requires that at least 50% of the homeowners must approve any increase in dues of 20% or more. If it goes through, all homeowners must receive notification of an increase between 30 to 60 days before the increase is slotted to go into effect.
The Bottom Line
When putting in an offer for a unit in an HOA, be sure to include a contingency that provides your attorney with the opportunity to request the HOA’s governing documents and review them to ensure the development is in good standing. If the possibility of a special assessment is very probable in the near future, you may want to think carefully about whether or not your pocketbook will be able to handle a price hike in your monthly dues at some point in the near future.