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When I bought my first home, I started looking only at single family homes. Why? Part of it was privacy and space. Even more, however, was a desire to avoid massive HOA fees in the downtown neighborhoods I was searching.
About 15% of all U.S. real estate belongs to an HOA, which equates to $2 trillion in property value. The majority of Americans claim to be on good terms with their HOA, and 78% believe that their HOA does enhance property value. 62 million Americans live in an HOA. That is big business, and an important issue for all property owners and investors to understand.
What Do Your Fees Pay For?
Homeowner’s association fees are the core of what allows many HOAs to operate. In my old building, our fees paid for a full-time building manager, cleaning common areas daily, landscaping, a pool, elevator maintenance, a small gym, and snow removal services in the winter.
In addition to services that you interact with daily, you may get other HOA services bundled into your bill. Common inclusion are water, power, and gas utilities, heating and cooling systems, windows, insurance, and maintenance and repair for any common elements shared by all residents.
According to Leonard Baron, a real estate teacher, roughly one-third of HOA dues are used towards current year operating needs.
Some HOAs are adding other amenities such as social gatherings, outdoor lounge space, gym upgrades, and additional staff services such as a full-time concierge.
Capital Reserves
Sometimes bad things happen in large communities. Boilers break down. Elevators need major maintenance. Pipes burst. Lawsuits arise. The list goes on.
When these issues arise, the HOA needs additional funds beyond the current annual operating budget. While I was living in the building, one of the three boilers broke down to a point where it was beyond repair. The HOA did not require a special assessment to cover the six figure cost, the money came out of building reserves.
Some residents do not like paying a large amount into reserves each month, but those funds are very important for an HOA to remain stable and solvent in the event of an unexpected, large expense.
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