When you purchase a home in a metro district or homeowners association, you’re buying more than just a home. Joining a homeowners association in Colorado is a lot like buying into a business.
That’s why it’s so important for you to determine how stable and financially sound this “business venture” is before taking it on. It’s time to take a look at the fine print.
Today I’m giving you my best tips for confidently buying into a homeowners association in Colorado. I’ll explain the process and provide my list of essential questions you should ask. When all is said and done, you’ll be able to decide if going through with the sale is smart.
What Happens When You’re Under Contract?
You’ll have the chance to review a stack of homeowner or HOA documents once you’re under contract to purchase a home. These documents will give you a better idea of the financial outlook of this particular community.
And yes, reviewing these docs after your offer has been accepted seems kind of backward, but that’s how the process works.
Both you and your lender need to know what you are getting into with this purchase. This is a critical step when purchasing home in with an association. You will share the financial responsibility of the community with your neighbors, so your investment is at stake. Plus, your lender won’t give you a loan if there’s something amiss.
Take every ounce of that time to review these documents and show them to a lawyer before you sign anything.
HOA Docs 101
HOA docs include but are not limited to the following:
- Financial Statements
- Budgets
- Declaration
- By-laws
- Rules/Regulations
Let’s go over some of the most important parts to focus on during your review.
Financial Statements and Budgets
Basically, these documents provide crucial information on the financial status of your building. Most importantly, look at the association’s reserve fund and operating budget.
Reserve Fund: An HOA’s reserve fund (or savings account) is used for major repairs or improvements to the building. For example, this money may be used for projects like new windows or a roof.
An association needs to build up reserves for future repairs, so a percentage of your monthly fees should be deposited into this fund. If your HOA has a low reserve fund, you may be on the hook (have to pay additional fees) when the HOA needs a major repair. It’s something to consider if you’re looking at an older building, especially ones around 25-30 years old.
A good rule of thumb is that at least ten percent of the HOA budget should go to the reserve account.
Operating Budget: Your monthly fees fund most of the operating budget. Experts say about two-thirds of the operating budget should be used toward expenses. This money goes toward employee paychecks, utilities like trash pickup, etc. Remember, somebody has to pay for those hallway light bulbs! Look closely at this section to See how your HOA fees are allotted each month.
Plus, those expenses add up if your new neighborhood has a 24-hour front desk, swimming pool, elevators, etc.
Remember that your association shouldn’t be dipping into the reserve fund for essential maintenance like trash removal, recreational facilities, common-area landscaping, etc. That’s a big warning sign!
Delinquencies: Knowing what percentage of unit owners are delinquent on their monthly fees is important. If more than 15% are more than 30 days late, Fannie Mae may not approve your mortgage. Additionally, the association could go into a budget shortfall if too many units foreclose.
Rules, Regulations, and By-Laws
You want to check these out to see if you can live by the rules and regulations of your community. Remember, you’re living with many other people, and there will be certain expectations and restrictions. Do these suit your lifestyle? Have you thought about your life five or ten years down the road?
HOA rules vary widely from community to community. Generally, these rules specify a range of things, including its pet policy, the exterior appearance, and even things like Christmas light policies or noise restrictions.
Also, review any grandfather clauses since you might not have the same “rules” as an earlier buyer. It may explain how your neighbor has 23 cats, and you’re only allowed to have 2.
Other Important Questions to Ask
Definitely contact board members or the property manager to ask questions. This additional information can help round out your review of the HOA docs. Here’s a “must ask” list:
•Are there any upcoming upgrades or projects planned in the building? How are those projects going to be paid for?
•What projects are on the 5-7 year horizon? Are there adequate reserves for these projects?
•What significant issues did the board discuss at the last meeting? Ask to receive a copy of the board meeting minutes from the last year.
• Is the association or metro district experiencing any litigation? Whether it’s a small or large lawsuit, legal fees quickly deplete reserve funds.
•How much turnover occurs? Are residents happy with the community?
•What percentage of the units is owner-occupied? Generally, the higher the percentage of owners, the more marketable the home will be for resale. It’s not unusual to find some associations in financial trouble over short sales or foreclosures.
•What does the association’s master insurance policy cover? Your HOA docs should include a list of coverage. By reviewing these carefully, you can determine how much additional coverage you may need for your own unit.
These questions should give you a good place to start. Of course, if you have any more questions about joining a homeowners association in Colorado or want my professional opinion on a potential purchase, give me a call! I’m here whenever you need me for whatever real estate questions pop up.
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