Review those HOA Docs!

Love Buying a Home – Week 11

This step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to settlement day, and all the details in between. Every first-time buyer will find this information-packed series easy to follow and understand. Make sure to tune in for the next few weeks!

Even though you’re buying a home when you purchase a home in an HOA, you’re actually buying into a “business.”

That’s why it’s so important for you to determine how stable and financially sound this “business venture” is before taking it on.  And that’s where reviewing HOA docs comes in.

What Happens When You’re Under Contract

You’ll have the chance to review a stack of “HOA docs” or Homeowner Association documents once you’re under contract to purchase a home.  These documents will give you a better idea of the financial outlook of this particular community.

And yes, it does seem backwards to review these docs after your offer has been accepted, but that’s how the process works!

Both you and your lender need to know what you are getting into with this purchase.  This is a very important step when purchasing a home. You will share in the financial responsibility of this community with your neighbors.  And your lender won’t give you a loan if there’s something amiss.

Take every ounce of that time to review these important documents and show them to a lawyer:

HOA Docs 101

HOA docs include but are not limited to the following parts:

Declaration;

By-laws; Rules/Regulations;

Financial Statements;

Budgets; and

Minutes from Meetings.

Let’s go over some of these below and point out what you should focus on during your review.

Financial Statements and Budgets

Basically, these documents provide crucial information on the financial status of your association. Most importantly, take a look at the reserve funds and operating budget.

•Reserve Fund: These docs will tell you if there are enough reserves. A reserve fund (or savings account) is used for major repairs or improvements to the neighborhood. An HOA needs to build up reserves for future repairs so a percentage of your monthly fees should be deposited into this fund. Also make sure you see how that money is invested.

If your association has a low reserve fund, it will require a special assessment (additional fees) when a major repair or renovation is needed.

A good rule of thumb is at least 10 percent of the budget should be going to the reserve account. 

•Operating Budget: Your monthly fees are what fund most of the operating budget. Experts say about two-thirds of the operating budget should be used toward expenses.

Keep in mind that your association shouldn’t be dipping into the reserve fund for basic maintenance. That’s a big warning sign!

•Delinquencies: It’s important to know what percentage of homeowners are delinquent on their monthly fees. If more than 15% are more than 30 days delinquent, Fannie Mae may not approve your mortgage. Plus, if too many units go into foreclosure, the association could go into a budget shortfall, which could mean a special assessment is issued.

Rules, Regulations and By-Laws

You want to check these out to see if you will be able to live by the rules and regulations of your community. Remember, you’re living with many other people, and there will be certain expectations and restrictions. Do these suit your lifestyle?

These rules can vary widely from community to community. In general, these documents could specify a range of items, including its pet policy, or if you can rent out your home at any time.

Also, review any grandfather clauses since you might not have the same “rules” as an earlier buyer.

Other Important Questions to Ask

Contact board members to ask questions. This additional information can help round out your review of the HOA docs. Here’s a “must ask” list:

•Are there any upcoming upgrades or projects planned?

•How are those projects going to be paid for? Reserves? A special assessment?

•What projects are on the 5-7 year horizon? Are there adequate reserves being funded for these projects?

•What are the major issues the board is discussing at the last several board meetings? Ask to receive a copy of the board meeting minutes from over the last year.

• Is the HOA experiencing any litigation? Whether it’s a small or large lawsuit, reserves can be deleted quickly to cover this.

•How much turnover occurs? This will tell you if residents are happy with the community.

•What percentage of homes are owner-occupied? Generally, the higher the percentage of owners, the more marketable your home will be for resale. It’s not unusual to find some associations in financial trouble over short sales or foreclosures.

•What does the association’s master insurance policy cover? A list of coverage should be included in your HOA docs. By reviewing these carefully, you can determine how much additional coverage you may need for your own home.

We’re heading into the final weeks of my Love Buying a Home series and also for your final steps to buying a home. You’ll get the nitty-gritty in the next article, Almost There … Pre-Closing Details for Buyers.  It provides a breakdown of what to expect so you’re ready for the big day.