Homeowners Association 101

You’ve probably heard the term Homeowners Association (HOA) before, but do you know what an HOA entails? Here are a few basics to get you started.

What is an HOA? An HOA is an organization that governs a condominium building or planned community of houses or townhomes. It’s made up of homeowners within that building or community; joining (and paying a monthly HOA fee) is typically mandatory for homeowners.

What do HOAs do? HOAs enforce certain rules regarding what homeowners can and can’t do on their property; many associations, for example, have specific restrictions about exterior design and landscaping. HOAs are also in charge of the maintenance and upkeep of public areas within a given community, which is done using the monthly fees from its members.

How much do HOAs cost? It depends. Some HOAs charge as little as $20 a month; some charge upwards of $4000. If your community features a common space like a pool or a party room, or if it’s gated and provides security, expect your HOA fee to be higher.

Fees and Services

Shopping for your dream home? It’s important to weigh the many benefits with the costs of any potential homeowner’s association. Here are fundamental facts about HOA fees and services.

Expect some variance. Each HOA will have different priorities and covered services. Some will charge you a monthly fee, while others will mail an annual bill. Be sure to acquire a copy of the HOA rules, commonly known as “covenants, conditions and restrictions.”

Fees can run the gamut. HOA services can be relatively modest or incredibly extensive, depending on the property and surrounding community. In turn, fees can range from a little as $20 a month to as much as $4,000. Make sure you understand what you will be asked to pay before falling in love with a property.

Don’t expect any flexibility. In almost every instance, you won’t be able to negotiate HOA fees. Because HOAs are legal entities, they have numerous legal documents that apply to every community member. This includes association fees, which are essentially set in stone. Be sure to balance the valuable benefits of HOA amenities and services with the expected monthly costs.

Compliance and Sanctions: What You Need to Know

If you’re one of the 53% of homeowners who belong to a Homeowners Association, you probably know that your HOA has certain rules and regulations that you need to follow. Let’s discuss HOA compliance – as well as what happens when rules are broken.

What rules do HOAs have? Each HOA is unique, with its own specific rules (also known as covenants, conditions, and restrictions, or CC&Rs). Typically, CC&Rs lay out the general regulations you need to follow with regard to things like exterior paint colors, lawn maintenance, parking, noise levels, common areas (if there are any in your community) and care of pets. These rules are designed to protect you and your fellow community members, and to ensure a more harmonious atmosphere. As a homeowner, you’ll need to familiarize yourself with your HOA’s governing documents, which list all of the CC&Rs in detail.

What happens if you break the rules? Again, it depends on the HOA and the rule in question. You may get a written warning and be asked to rectify the situation within a certain amount of time. Or you may be fined. And while you can’t be forced to sell your home, if you accumulate enough fines over time, your HOA may reserve the right to sue you or place a lien against your home – though most HOAs are eager to resolve any potential issues without resorting to any drastic measures.

Who’s in Charge and What Do They Do?

HOAs are non-profit legal entities that function for the benefit of their membership. But who are the HOA managers, and what exactly do they do? Here’s what you should know:

Managing common interests: Essentially, HOAs oversee the aesthetics of the homes and common areas within a community. HOA managers also oversee the management of association funds, collected as member dues. Among other things, HOAs maintain grounds, community utilities, and master insurance while ensuring member compliance.

Choosing an HOA manager: HOA managers are chosen by the HOA’s Board of Directors. As a homeowner and HOA member, you have the right to run for a seat on the Board of Directors, which are generally chosen based on member votes.

Issuing sanctions: When warranted, HOA managers work with the Board of Directors to enforce regulations and resolve conflicts. Depending on the HOA, a manager may have the right to issue fines, file lawsuits or even place liens on a homeowner’s property. It’s important to know your responsibilities as a member of an HOA. Make sure you work with a reputable real estate agent to help you understand the language in any potential HOA agreement.

Taking Care of Taxes

HOAs are not designed to earn a profit, but they’re also not exempt from yearly taxes. Here’s a general overview of what’s expected with regard to HOAs and tax filing.

Do HOAs need to file taxes? In short, yes – HOAs are required to pay taxes. The IRS regards HOAs as corporations, even though they are non-profit organizations.

What type of tax forms do HOAs need to file? Since the IRS considers them corporations, HOAs are typically required to file Form 1120 (the U.S. Corporation Income Tax Return) – which is very labor-intensive and requires a large amount of information. Fortunately, HOAs can bypass filing this form and instead file the more manageable Form 1120-H if they meet the following requirements:

  • More than 60% of the HOA’s yearly income comes from membership dues and fees
  • At least 90% of the income is used on maintenance and upgrades of the property (common areas, landscaping and so on)

When do HOAs need to file their taxes? The deadline for filing is tied in to the end of the fiscal year, so HOAs typically have until March 15 to file.

Who within the HOA should file taxes? Most HOAs depend on volunteers to run their day-to-day operations, so it’s easy to understand why the task of filing taxes could potentially fall through the cracks. If your HOA is having trouble identifying a member who is willing and able to file taxes, you may want to consider hiring an HOA management company to take care of it.

How to File a Complaint

A well-run homeowners association can offer many benefits, but where do you turn when you have issues with your HOA? Here are some tips for handling HOA complaints.

Start small. Begin by filing a dispute with your HOA about the issue. You may be able to work together to clear things up without having to take your complaint to a higher office. Be sure to submit your complaint in writing so you will have a hard copy on record.

Look at your governing documents. Check your homeowner’s association CC&Rs and bylaws for any related provisions. These documents are usually quite detailed because they are designed as legally binding contracts that protect the interests of the HOA board and community members. Whether it’s an ongoing noise complaint or something more significant, you should be able to find relevant details that can help guide your next steps.

Consider legal action. Agreements with HOAs are generally considered legally binding contracts, so you may be forced to file a lawsuit to contest unwanted fees or guidelines. It can be challenging to get a favorable ruling, especially if you knew about the HOA’s guidelines before buying the home. You may want to work with an attorney who specializes in real estate law to determine the likelihood of getting a positive outcome from a potential lawsuit.

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