Things to know and things to ask before taking that step.
Purchasing a house or condominium may be one of the most significant financial events in one's lifetime. When one purchases a unit in a Home Owner’s Association one enters a community living agreement. There are specific benefits, but there are also serious restrictions for the individual owner. A few fail to realize the degree to which they give up their individual rights. HOA living can be wonderful, but it isn’t for everyone. The following is from my observations as a condominium owner, the conversations I've had over the years with other owners and professionals at other associations, and also my observations as a board member or an attendee at board meetings.
1. Purchase in a HOA is best to be considered a long term one. Therefore it is best to be well informed prior to making a purchase decision. Because it is a community living situation, each owner cannot simply move at any time and selling may not be as simple as flipping a house. The condition of the entire HOA and it's finances will have an impact on individual unit sales. Because it is community living, many decisions are made by others (an elected board) for the greater good, and some owners don't like that. However, HOAs are not social clubs. They are businesses and a few owners don't like that. Some owners really want to completely manage their destiny. Some expect their wants, needs and desires to be catered to. Some want no responsibility of any kind. HOA living is not for the "My home is my castle" person nor is it for the "I'm a free spirit" person who cannot tolerate restrictions, nor it is for those who expect "I want the maintenance schedule to be based on my desires". To live in a HOA means standing in line as maintenance rotates based upon time and money throughout the entire HOA. A unit owner must be willing to accept compromise. And compromise is impossible for a few.
2. Some HOAs permit owners to rent their units to others. What do the By-Laws say about this? Can you accept having a rental next door or down the hall? At present, how many units are owner occupied and how many are rentals? Do you care?
3. Determine what type of HOA it is. Is it a condominium, or townhouse association or? Furthermore, is it a not-for-profit corporation?
4. HOAs are supposed to operate in accordance with the Illinois Condominium Act (ICA). They do so to varying degrees.
5. HOAs are governed by a board. The board is elected and is comprised of unpaid volunteers. They serve for a specific term (usually 2 or 3 years) and are to be treated just as any other owner would be. Most HOAs have annual elections as part of an annual meeting. The board determines maintenance, the fees and assessments, sets rules and regulations and enforces them. The boards make all important decisions. Management may be empowered to act in emergencies and to make specific decisions such as spending up to a set limit (e.g. $500) but beyond that all decisions, fees, fines, maintenance decisions and things of consequence are ultimately determined by the board. This should be determined equally and uniformly throughout the association. When guidelines are in place fairness and uniformity prevails and when they aren't, then it's a crapshoot and the micromanagers rule, to the detriment of the owners.
6. Boards are critical to the operation of the HOA. Boards do vary in ability and capacity. In general a board member must be capable of operating as a fiduciary and be able to exercise common sense and sound business judgment. What that means can be subject to interpretation. Required skill sets are usually not specified and may not be available when needed. As a consequence some board members may not use email and may also have difficulty understanding spread sheets, or legal and accounting documents. Some may not read the By-Laws or Rules & Regulations and may choose not to enforce them, or to do so inconsistently. Some may not be able to put in the necessary effort. All will vote on any action item.
8. In addition to boards comprised of elected individuals, the HOA may also have committees comprised of owners who perform specific tasks and support the board. Ask about which committees exist and how many owners participate in them. Ask also what the duties of each committee are, e.g. finance, maintenance, rules & regulations, long-term planning, landscaping, etc.
7. All owners are to be represented uniformly and fairly. That is not always the case as the quality of boards does vary considerably.
8. Boards are to operate openly. That means open meetings during which all owners are invited to attend. Such meeting should be at convenient times such as evenings. Agendas and schedules must be published so owners are informed. Ask for a recent agenda. If you want to live in a HOA you should plan on putting aside the time to attend the HOA meetings.
9. Some boards become entrenched and this may be acceptable to the owners. However there may be long term negative consequences for the HOA and the owners. In the best situation each and every owner will serve at some point on the board. However, many owners may prefer to pretend they have no responsibilities beyond paying fees, keeping the rules and acting civilly. The owners’ perspective may be that running the place is what they pay their fees for and as a consequence many owners have little or no interest or involvement in their HOA beyond complaints.
10. HOAs are businesses and they should operate as such. HOAs that don't are like the Titanic and there is an iceberg in their future. If you don't want to be a part of a business, then you might want to reconsider your desire to purchase in a HOA. In fact, if the HOA is a not-for-profit Corporation then each and every owner is a shareholder in a business, like it or not.
11. Because of the power exercised by the board and the impact on quality of HOA living it is useful to meet the board prior to purchasing in a HOA. Most association meetings are restricted to owners, contractors and management. However a potential buyer can meet with the board and attending owners for a short period of time prior to the “call to order” of the meeting. At that time questions can be asked. If such an appointment is requested and a HOA refuses such a meeting that is an indicator.
12. It is also prudent and informative to attempt to meet owners prior to purchase and have informal, candid discussions with them. This is easy to do as they enter or leave the building or complex.
13. Many smaller HOAs do not have professional management. Professional managers must be licensed by the State of Illinois. However, under current Illinois statute Realty professionals were grandfathered in during the economic downturn following the economic crisis of 2008.
14. Does the HOA use an accounting firm or does it rely on management? Audits should be done annually, although they may not be very rigorous. Someone needs to prepare formal financial statements each year. Who is that? If the HOA is a not-for-profit corporation it must file annual tax returns
15. Management quality and tools are a variable. There are some incredible software packages available to managers, but smaller HOAs may simply use spreadsheets and word processors.
16. HOAs fees are collected from owners and are allocated to two budget segments. Operations & Maintenance (O&M) budgets are used for day to day maintenance and operations and can include accounting, management, energy, landscaping, minor repairs, painting, snow removal costs and so on.
17. Reserve budgets are a portion of fees that are set aside to deal with long term capital improvements and long term maintenance. The ICA has general requirements for this, but in fact Boards are given great discretion and latitude for setting aside reserves. Many HOAs have woefully inadequate reserves.
18. Well run associations pay special attention to reserve requirements and take steps to avoid special assessments. Treating all owners equally under the ICA implies that both current and future owners should pay their fair share for reserves. Kicking the can down the road is not a good way to run a HOA and leads to strife and discontent and can have a severe impact on the well-being of future owners. In extreme cases the value of the individual units can be severely reduced.
19. Reserves are properly determined by a long term study. Such studies should be prepared by a paid, outside, unbiased firm. Studies usually have duration of not less than 30 years. Reserve studies provide maintenance schedules with annual expenditures as well as annual collections via fees for each of 30 years. The study will include infrastructure including common and limited common elements maintained by the HOA. This can include roofs, decks, walks, garages, HVAC and hot water systems, lighting, power distribution, entries, doors, windows, etc. However the specifics are determined by the By-Laws which define which elements are HOA responsibility and which are unit owner responsibility. The details vary from HOA to HOA.
20. Boards have great discretion in following reserve studies. Sometimes the studies simply wind up on bookshelves. However, such studies are available for inspection by owners.
21. HOAs are required to maintain the common elements. Limited common elements are those things which are for the sole use of a specific unit owner (such as a unit patio). However, boards can and do turn over the maintenance costs of limited common elements to owners. This became more common after the financial crisis of 2008, during which time many HOAs struggled financially with late fees, bankruptcies and so on. It is a mistake to assume that simply because a HOA maintains something it is a “common element.” Read the By-laws and determine what those things are before making a purchase decision and be aware that at any time in the future a HOA may turn the maintenance of "Limited Common Element" items over to the individual owners.
22. Read the By-Laws and determine what specifically is to be maintained as part of unit owner responsibility.
23. Read the Rules & Regulations (R&R) thoroughly and be sure you understand pet restrictions, noise restrictions, etc. and that you can abide by all of them. Once the closing occurs you will be bound by the R&R.
24. Be aware that By-Laws are not “cast in stone” and can be changed. This is also true for the Rules & Regulations. Be aware of the procedures for changing them. In other words, what is true at the HOA today may not be the situation 5 years hence.
25. Ask if there are any By-Law or Rules changes under discussion or pending.
26. Ask if there are any special assessments pending, or any capital replacement items on the horizon that would exceed reserves or require a special assessment.
27. HOAs are required to provided budgets and fundamental accounting information to all owners on an annual basis. This information must also be provided to potential buyers. Study the budget, Balance Sheet and Income & Expense statements. Request a fee schedule for at least the most recent 10 years showing actual fees, the amounts allocated to Operations & Maintenance as well as to Reserves for each year. HOAs should attempt fee stability while meeting the O&M and Reserve requirements.
28. If you are unclear about what is contained in the financials contact management and also talk to your accountant.
29. Ask for reserve balances for prior years. I’d suggest getting information for at least 10 prior years if the association is that old. Also ask about reserve contributions each year for that same 10 year period.
30. Ask in writing if there have ever been special assessments. If so, when and for what purpose?
31. If it is a new HOA, then ask about how fees were determined and if they include amounts for reserves and how much. Ask if there has been a reserve study and if not, ask if the board has taken the steps to hire a firm to provide one. If the HOA is new, be prepared for a few rough years as true O&M costs become apparent. Reserves may remain an after-thought for quite some time, until those common elements require replacements. At that time if reserves are inadequate the owners should be prepared for special assessments.
32. There are specific procedures to be followed at all HOAs for setting fees, changing By-Laws and the Rules & Regulations. If you want a variance be aware that the HOA must treat all owners fairly and equally under the ICA. In other words, your desire for special treatment may not be possible. Be aware of what the By-Laws and the R&R stipulate and also determine if they are being followed by the board. If the HOA operates with owner modifications as laissez faire, then you may not want to live there. Rules create structure and we all really do want some structure in our lives.
33. Ask for a copy of any "Census forms" or other such forms that as an owner you will have to submit to management.
34. Ask about communications. Is there a HOA website? What is on it? Also ask about newsletters and similar communications. Get recent copies and read them.
35. Ask about building restrictions. The Rules & Regulations will stipulate quiet hours during which a contractor cannot do work. What about window or door architectural and design restrictions? Patio paint colors? Flooring (if above another unit)? If you want to remodel you may find that the R&R has specific stipulations.
36. Prior to purchase get a response from management in writing to questions about reserves, budgets, assessments and fees, special assessments or potential special assessments, rules, By-Laws and so on. Or, write a "Q&A" letter which includes the questions you asked and the response you received. Include the statement "This is my understanding per my conversation with ____________ and I am purchasing with this information. If my understanding is incorrect or inaccurate, please advise me in writing prior as soon as possible but not later than the closing." However, provide management with sufficient time to respond. 10 business days is probably the minimum. Send a copy to your attorney and keep a copy for your real estate file. If you expect or demand an immediate, overnight response then you shouldn't be purchasing in a HOA.
37. It may be prudent to hire an inspection firm to go over the unit and look for problems. In large condominiums they may also identify other, general issues with the common elements. Addressing those will require fees and assessments collected from all of the owners by the HOA. However, if the issue is not an emergency, or a safety issue then be prepared to wait for a long time, possibly years. The potential buyer needs to decide if the problem is a "show stopper" or "deal killer". That's a matter of personal perspective.
Note: This is written with an eye to the requirements of the Illinois Condominium Act. The requirements in other states will vary. Click to go to: http://www.ilga.gov/legislation/ilcs/ilcs3.asp
(c) N. Retzke 2017 All Rights Reserved.
