How to X-ray an HOA #7 – Management Companies and Community Amenities

Management.  The first question to ask is whether the HOA works with a professional management company.  Most HOAs prefer to be managed by companies with expertise in the issues surrounding home owners associations.    Delegating the business affairs and routine chores to HOA professionals is a big contributor to the “carefree lifestyle” touted by condo and townhouse communities.  But many smaller developments choose self-management for budgetary reasons.  Self-management is inherently neither good nor bad, but some HOA’s handle this task much better than others.  If you are thinking about … [Read more...]

How to X-ray an HOA #6 – Lawsuits, Judgments and Insurance

Pending lawsuits must be disclosed on Minnesota’s Resale Disclosure Certificate when the HOA is a party to it.  If you are considering a home where the association is in litigation, it is imperative to know what’s at stake.  Is someone suing the HOA over a $2,000 invoice or is the association suing the builder for a multi-million dollar construction defect?  Banks generally don't want to lend money for houses with pending lawsuits and may insist on a higher interest rate to do so.  If you are determined to buy in that complex, first consult an attorney for advice.  I also recommend that you … [Read more...]

How to X-ray an HOA #5- Delinquency Rates, Foreclosures and Short Sales

Buyers should be wary of cash-strapped developers or bank-owned buildings.  Developers and banks tend to lowball the cost of major repairs or improvements.  These groups may also fail to aggressively market the building or fix construction defects.  If the developer still controls the association, review the financial statements mentioned in Part 2 of this series.   Has the developer made the reserve fund deposits on time?  If instead, those payments have been deferred, try to verify the developer’s financial health and reputation.   If it has not already been disclosed, buyers should … [Read more...]

How to X-ray an HOA #4 – HOA Reserve Funds

Good HOA’s, like all good businesses, plan ahead.  Every HOA budget shows how much goes to the reserve fund which pays for capital expenditures as the need arises.   Whether the reserve fund balance will actually meet those needs has been a hot topic in recent years. … [Read more...]

How to X-ray an HOA #3 – Monthly Fees and Special Assessments

There are two types of HOA assessments – annual and special. Annual assessments are adopted by the HOA Board of Directors based upon each year’s projected budget.  The total amount is then divided among the home owners.  Townhouse assessments tend to be divided by the number of units, with each owner paying the same.  Condos typically allocate costs according to square footage, so owners of larger units pay more. The annual assessment has two main components – operating expenses and reserve fund allocations.  Operating expenses cover routine maintenance (landscaping, snow removal, garbage … [Read more...]

How to X-ray an HOA #2 – The Financial Statements and Budget

Every HOA is a business and must keep certain financial records for proper management.  Let’s start with the budget.  If you are buying a new unit directly from the developer, the budget you will be reviewing is almost always unrealistic.  Developers typically understate their operating expenses to lure buyers with claims of low monthly fees.  The developer may be subsidizing expenses or not listing items that are definitely needed.  For example, the budget may show “window washing at $5,ooo per year.”  But in fact, this amount pays for only one cleaning per year when two cleanings are … [Read more...]

How to X-ray an HOA #1 – Overview and MN Disclosure Law

This post kicks off a 9-part series on "How to X-ray a Home Owners Association (HOA).”  The posts will help you discover the inside scoop on an HOA’s financial health and social environment so you can decide if it's where you want to live.  The series will cover these topics: … [Read more...]

Decoding HOA Documents

Most people who live in communities with Home Owners Asssociations don't understand their HOA Governing Documents.  And who can blame them?  Those documents were written by lawyers for lawyers and reading them is as easy and fun as giving yourself a root canal.  Nevertheless, owners and potential buyers should possess a basic knowledge for reasons covered below.   This post discusses some key characteristics of these instruments to facilitate a better understanding of how HOAs work. State laws govern home owners associations so the requirements vary from state to state.  In Minnesota, HOA's … [Read more...]

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