Because You Are Buying More Than a Home: Part I

Mt. Hood“Because You Are Buying More Than a Home!” What does this tag-line really mean? What “more” are you buying when you purchase a home in a homeowner association?

When a buyer purchases a home in a homeowner association (HOA) they are not only purchasing a piece of real property, they are also enrolled as a member or investor in a not-for-profit corporation. Like any corporate entity these organizations require money to operate and in the case of an HOA that money comes out of the pockets of the property owners who purchases homes that are under the jurisdiction of the Association.

There are HOAs that are not incorporated but they are becoming less common and for the most part not much different in terms of the impact that they can have on the personal finances of the HOA members. The number of members can range from as few on into the thousands in the case of large master-planned communities, some of which some of which are the size of small towns…

In addition to becoming a member of a not-for-profit corporation when you purchase a home in an HOA, the property you purchase is also encumbered by a set of rules, regulations and restrictions on its use that are known as the Covenants, Conditions and Restrictions or CC&Rs for short. The CC&Rs are codified in a legal document called the Declaration, which is recorded with the deed to the property. By virtue of the legal attachment of the Declaration to the deed, the CC&Rs are said to “run with the land,” which means the contractual obligations imposed by the CC&Rs pass from one owner to the next each time the property changes hands.

The CC&Rs are typically written by a real estate attorney who is hired by the developer of the property. In legal parlance the entity that records the CC&Rs with the deed is known as the Declarant. In most instances the Declarant is also the entity that incorporates the HOA. The act of purchasing property within an HOA results in a contractually binding “agreement” that carries the full force and effect of any contract governed by civil law.

Among the contractual obligations imposed on a buyer who purchases a home in an HOA is mandatory membership in the Association and the legal obligation to provide financial support to the organization through the payment of regularly scheduled assessments, which are often referred to HOA dues or fees.

Courts throughout the country have been very consistent in upholding the sanctity of CC&Rs. As such it is foolish to assume that the CC&Rs can be ignored or that the “rules don’t apply to you.” Non-compliance with the CC&Rs can result in fines being levied by the HOA and in extreme cases the HOA may resort to civil litigation to enforce the CC&Rs.

Depending on how the HOA is organized the assessments may be paid monthly, quarterly, semi-annually or annually. In the case of condominiums and attached housing developments the dues are often paid on a monthly basis. Whereas many HOAs that involve detached homes in a planned community setting may require payment of dues on an annual basis, similar to the way the county tax assessor levies property taxes.

In addition to regular assessments, which are primarily used to pay for current operating expenses, the members are responsible for an allocated share of long-term debts and future spending obligations which can result in special assessments and even installment payments that are paid directly to a third-party lender by the members as a result of the HOA having to borrow money.

To compel owners to pay their assessments the HOA is authorized by law to lien the property of an owner who is delinquent in paying their dues or any other levies that have been approved by a vote of the Board of Directors or possibly the entire HOA membership. In this respect  the regular assessments and special levies are similar to property taxes in that non-payment can result in the loss of one’s property through the foreclosure process.

Special assessments may require the approval of the entire membership but not in all cases. If the HOA is unable to raise money through the special assessment process it can lead to deferred maintenance of common area improvements, which in turn can have an adverse impact on the value of the homes within the community.

The laws of each state vary with respect to the rights and obligations of homeowners and how lien laws are enforced, but suffice it to say there have been cases where a property owner has lost their property through the foreclosure process as a result of non-payment of HOA dues other authorized levies.

The HOA is governed by a Board of Directors. In this respect the management structure of the HOA is similar to the way a for-profit corporation is organized with one important difference. Whereas most corporations employ managers and senior executives the typical HOA contracts with a third-party managing agent. The practice of using managers who are independent contractors creates its own set of issues which are often at odds with the best interests of the HOA and its membership.

In future installments of this series we will examine the implications of this confluence of the Board of Directors and third-party management services which have combined to create a form of private residential governance under which some 60 millions Americans now find themselves living.