RealManage Insight

5 Tips About How HOA's Determine HOA Assessment Rates

by Staff Writer on Jul 18, 2017 8:00:00 AM

There is a lot about the question how are HOA assessment HOA rates determined that you may not know; indeed, here are five tips that everyone should keep in mind regarding this topic.

What goes into determining HOA assessments. In most cases, the builder has to apply for government approvals before he can start selling units to buyers. One of the things the builder has to present to the approving agency is a budget that details the costs for operating the HOA and the costs for maintenance of common areas. If the HOA provides services to members who live there, the budget must also include the expenses of providing those services.

  • Developers predisposed to low HOA fees. They know that buyers figure those fees into the amount of money they have to spend on the unit, so high HOA fees are a disincentive to homebuyers. In many cases, the developer has to pay all HOA fees for unsold units; so having high fees adds up.
  • The government expects realistic numbers. The government, on the other hand, wants realistic budgets that create well-funded HOA communities.

These ideals create a natural tension that drives the HOA assessment fees.

Deciding whether an HOA fee is too high depends on what services the HOA fee covers. Depending on where your home is (country or city) and the style of the community (high-rise, single family or townhouse), you may find HOA fees cover:

  • landscaping, which is expensive because it requires people to do the hard labor;
  • pools;
  • a garage and a gym;
  • a lobby to maintain, as well as common grounds;
  • maybe hallways in a high-rise building with elevators.

All these amenities require regular monitoring and maintenance, including painting, cleaning, and equipment repair.

Some HOA fees include expenses, such as:

  • water, gas/electric, trash;
  • snow removal, and sometimes cable;
  • utilities billed to the community association, instead of individually to owners, which means the HOA fee will increase to apportion the charges among the owners;
  • the professional management company fee for paying bills and assisting the Board with managing the community; and
  • other professional fees such as attorneys, accountants, and so on.

Professional management companies call these HOA fee components current year operating costs.

The HOA fee also entails capital reserves. This capital reserve portion of the HOA fee is the amount the Board believes the community must save over time to plan for long-term capital improvements like roofs, parking lots, and roadways. The amount is generally derived from a reserve study conducted by a third-party vendor who is an expert in reserve studies. The study plots out the anticipated repairs and their costs over a 20-year period. Then, the expert determines an annual amount that will fund those long-term repairs which are then apportioned among the owners. This becomes the second portion of the HOA fee.

Special Assessments. There are several reasons why the operating costs in any given year may exceed the HOA fee dedicated to operating costs.

  • Expenses in a given year may exceed the projections due to heavy snow or unexpected repairs like frozen pipes or flooded common grounds.
  • Some owners do not pay their HOA fees which make the HOA fee short for the year.

If the Board uses the reserve to pay the extra operating expenses in any given year, it will come up short on the long-term reserve amount. If owners balk at increased HOA fees going forward to make up the losses, then the Board may impose a special assessment against all unit owners to make up the difference.

Consider this in your analysis: Paying HOA fees protect your real estate investment. Maintaining the amenities and the property means higher prices when you decide to sell later on. Sharing the upkeep expenses also means that you probably could not do the same activities yourself for a cheaper price. The Board will try to obtain the best price possible for the jobs it hires people or companies to do. It has a fiduciary responsibility to do what's in the best interest of the community and the homeowners.

Any homeowner who thinks he could do a better job than the current Board, can always run for a position on the Board and work to bring about changes from within.

 

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