All home buyers are affected by HOAs. No, really…. even people who buy a home that is not a part of an HOA are affected by its absence. See? In fact, the Community Associations Institute trade association estimated that HOAs governed 26.3 million American homes and 65.7 million residents in 2013. HOAs also affect me as a real estate professional. Imagine connecting the perfect buyer with their dream home in the ideal location but then informing them that they can’t park the RV that is a big part of their lifestyle plan in the driveway…. it could be a deal breaker (and a heart breaker….). Or worse, as the buyer you’ve closed on your new home, moved in, had an awesome basketball goal delivered and set up at the end of your driveway, then days later you receive a certified letter informing you that it must be removed within 30 days as it violates your HOA restrictions…. but your three boys LOVE basketball! UGGH! No one wants that scenario! The best way to avoid these unwanted surprises is to be well informed about a property’s HOA and its effects on owners. In this blog, I want to go back over what an HOA is and some terminology that buyers should be acquainted with and understand to make informed decisions.
An HOA, Homeowner’s Association, is an organization that makes and enforces rules for its defined subdivision or community. In a planned community, these rules or governing documents are part of the developer’s overall vision for how the property will look when the development is complete. A part of these documents that are frequently referenced are the CC&Rs Covenants, Conditions, and Restrictions (CC&Rs). You could think of the documents as a sort of constitution outlining not only what will and won’t be allowed in the community but also outlining contingency plans for “what ifs” as well as how the HOA will operate and how specific things will be handled. The property is legally bound to these documents and HOA membership is automatically transferred with ownership. * I should note that not all HOAs are mandatory some are voluntary but that’s a rabbit hole we won’t explore right now. Generally, membership brings with it the unpleasant obligation of monthly or annual fees which are controlled by the HOA. There can also be the possibility of “assessments” that require additional money from the membership beyond the expected dues. So, how did HOAs come about and exactly how do they work? Next, let’s give HOAs a historical context as well as some rationale for why they have become so commonplace.
In the twentieth century, particularly the first half, think about the changing landscape of American real estate. America moved from a rural, agricultural majority, through Industrialization, increased urbanization, and immigration, toward high population density within cities…. (vague recollections of fifth grade then High School American History…???) HOAs really proliferated as the mid century approached. Think about the post-war era that created the “Baby Boom” generation. The Federal Government was passing some laws hoping to decrease density problems and clean up urban areas that made it easy for developers to plan away from the cities - the SUBURBS. Culturally, there was an exodus away from the cities and an appreciation for uniform architecture and planned communities…. “ The American Dream”… As developers crafted communities, they used HOAs to control them, protecting their interests until units sold and their interests decreased and control transferred to homeowners, which still happens. Throughout the first half of the twentieth century, HOA rules or laws were mainly restrictive and often exclusionary of certain races or ethnicities of people. In 1948, the Supreme Court found that this kind of rule was unenforceable BUT they persisted through private agreements until the 1968 US Fair Housing Act deemed them discriminatory. One other key historical event in the evolution of HOAs, was the US Clean Water Act of 1977. That sounds odd, right? Go with me though…. It mandated that developers deal with runoff, storm drainage, and water consequences due to development creation in specific ways including having a dedicated water retention area within each plan. I bet you see how this is connecting to the occurrence of common areas, right? Yes, common areas would require agreements from residents AND money for maintenance sooooo… HOAs. That is a VERY general history of why there was such prolific growth of HOAs, now how do they actually work?
The authority or power of the HOA is with its Board of Directors which is made up of homeowners and the developer or the developer’s appointees. The board has fiduciary responsibility for the HOAs’ holdings. Most HOAs have Reserve Funds and Operating Funds, the latter used to create an annual spending budget. Members’ fees contribute to these funds which are used to maintain common areas and or make improvements as necessary and agreed upon by the board. Don’t let your eyes glaze over …. In some cases, the board has the authority to pass along assessments to homeowners that would mandate additional payment for a specific cause that cannot be funded by the typical operating fund. Think about common areas of communities, many have landscapers, changing bulbs in streetlights, if there is a clubhouse or pool, etc. All of these things require money which comes from the operating budget. Fortunately, CCRs are no longer used for discriminatory purposes, but they can be very specific about what residents can and can’t do on their property. Like the example of the RV or basketball goal from the beginning… There are typically minimal architectural standards that every house must meet. These standards could include anything… like parameters for roof pitch and exterior colors allowed, to minimum square footage per structure or prohibition of free standing structures (think back yard shed or play house). CCRs could also dictate how many trees must be in the front yard or what type of vehicle you are allowed to park where or what kind of window treatments can be viewed from outside the home. Some of you may be bowing up at the thought of someone else dictating what you can and can’t do in your own home, thinking… “What’s it to them?” or “What if I don’t … (fill in the blank with whatever you think is aggravating)?” Before your feathers get too ruffled, let’s think about those two questions.
Property Value. Those two words really explain why modern Americans are most drawn to and go along with HOA rules. They are supposed to be designed to protect and maintain the property value of EVERYONE in the neighborhood. That sits a little better right? People have different tastes and different ideas of maintenance and sometimes an impartial set of guidelines just helps keep everything on the higher side of the standard. It prevents the situation of one neglected or aesthetically dissimilar property from devaluing the ones near it. As for what would happen if someone doesn’t comply or pay dues or fees…. Well, that’s ugly to consider, but the HOA has the right to pursue compliance through civil court and request fines as well.
The big take away is that buyers need to educate themselves on the CCRs of an HOA, including dues and fee possibilities, and take what they discover into consideration as they decide what or where to buy. If buyers are informed, and know ahead of time what to expect, they can embrace the HOA that comes with their new home. I think part of my job is to help clients fully understand their real estate choices and being a local expert and resource makes answering many questions about HOAs in East Tennessee familiar to me. When buyers understand HOAs they may have some other items to add to their “property non-negotiable” wish list. That enables me to make sure I help them find the RIGHT home for their lifestyle.