House Shopping? Choose your HOA First!

House Shopping? Choose your HOA First!

elkpeaksassociations_elkpeaks-logoOkay, so you’ve decided to go house shopping.  You are tired of your old house and are ready to move on to a new home.  You are ready to call a realtor and start looking at houses.  But wait: wise home buyers shop for their HOA first then shop for the home of their dreams.

Sure, it is contrary to popular practice but it really makes sense if you think about it. In fact, I believe that more often than not, most of the horror stories that people tell about their past HOA nightmares could have been prevented if they would have chosen their HOA before they chose the house that they wanted to buy. Here is the deal: If you find a great house in a bad HOA it is just like buying a home next to a “secret” toxic waste site, and you certainly wouldn’t do that. Unfortunately, many home buyers purchase homes in a toxic HOA.

And remember, what may look like a nice HOA can be deceiving and often is.

More often than not, the first and last (only) questions that home buyers ask about the HOA are: (a) how much are the assessments and (b) how often do they come due? Every listing agent seems to explain how much the assessments are and when they are paid but that is the tip of the iceberg. Do yourself a favor; ask more questions so you don’t go down with the Titanic!

And remember, oftentimes the “best buys” are going to be in a bad HOA. Buyers that do their homework have figured out that the HOA is a bad HOA and they have passed on the possible purchase, so the seller has lowered the price and sometimes, lowered the price several times in an effort to “dump their house” and escape from a bad HOA.

Despite some of the horror stories that have circulated about life in an HOA, HOAs aren’t inherently bad. In fact, probably most HOAs aren’t.

Don’t be a victim! Colorado’s Common Interest Ownership Act, (CCIOA), won’t protect you from “the HOA” but it does require HOAs to provide the essential information that will enable you to separate the good from the bad HOAs. CCIOA requires HOAs to disclose a substantial amount of information that home buyers should review and understand before they purchase.

An entire book could be written on how to choose a great HOA but here are a few basics. The three key ingredients to an HOA’s success are (a) administrative, (b) financial and (c) physical.

Administrative:

A great HOA is a great administrator. An HOA’s job is to manage the association’s affairs so that essential information is readily available to all owners and prospective owners. The HOA must be efficient at listening to the needs of the owners/residents and addressing those needs in a timely, equitable, ethical and cost effective manner. Further, the assocciation must maintain a strong working relationship with its members which is built on trust, effective communication and full transparency.

Financial:

All HOAs are a non-profit entity. They aren’t designed to “make money” but they can’t lose money either. They need to breakeven. It sounds easy but in order to continue to be financially healthy for the full duration of – often – the decades long life of an HOA, an association needs to find the right balance between providing the needed and beneficial services to the members and residents while assuring that the cost of providing these services are affordable to all members.

Remember, an HOA’s only source of revenue is from assessments. If more services or more expensive services are provided by the HOA, assessments must go up. The association’s duty is to establish effective strategies to provide these services fairly, equitably and with as much transparency as possible.

Per, CCIOA, Colorado HOAs must provide key financial data at regular intervals. If an HOA isn’t providing timely financial data in enough detail to ascertain that (a) the bills are being paid, (b) all of the revenues and expenses are accounted for, (c) bank accounts are properly segregated, i.e. in the association’s name, (d) appropriate controls are in place to protect bank accounts from fraud, and (e) sufficient funds are being deposited in a reserve fund to cover all long-term infrastructure replacement / maintenance needs, then you shouldn’t purchase your dream home in this HOA.

In short, the association should be providing the information that is necessary for members and prospective members to determine the financial health of the HOA. The information should be presented in an easily understandable manner that includes detailed monthly financial reports, monthly and annual budgets, revenue and expense reports, accounts receivable and accounts payable summary reports as well as reports comparing revenues and expenses to budget and the variances from budget. Members should have appropriate access to reports which show where their HOA dollars are being spent!

Physical:

Appearance isn’t everything but it almost is when it comes to a homeowners association. Prospective buyers are attracted to well-maintained HOAs. All residents of an HOA considered appearance when they purchased their property and the buyer that buys their home when they are ready to sell and move will also be heavily influence by appearance.

Unfortunately HOA’s don’t have unlimited budgets so the association’s task is to strike a sensible balance between providing needed and beneficial maintenance and the cost of maintaining a “first class” HOA appearance. In order to achieve this an HOA must focus on preventative maintenance, employ prudent bidding and contractor vetting, seek the most cost effective solutions available and adhere to the best management practices.

And, don’t be fooled by an HOA that looks “too nice.” Looks can be deceiving. Does the HOA look nice because it isn’t setting aside sufficient reserve funds? If so, some day there will be a special assessment in order to pay for what they didn’t properly reserve for.

HOA living can be a happy living experience provided that you have done your homework. In addition to understanding the HOA’s administrative, financial and physical capability and practices, be sure that you fully understand the covenant restrictions. HOA’s have tremendous powers to enforce the recorded covenant restrictions. If your lifestyle is in conflict with the covenant restrictions, you will be very unhappy, the association will be unhappy and ultimately, you will sell and move out of your dream home. Don’t make that unpleasant journey: Be an informed buyer.

© Elk Peaks Consulting Group, Ltd. All Rights Reserved

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