A Guide to HOA Rules
The house you buy might be the single largest investment you make in your lifetime. Even a modest house can cost hundreds of thousands of dollars, plus interest and fees for the mortgage. Investment properties are just as expensive, and it's all the more important that a property you've bought as a business keep its value.
Key Point Module
- 1 HOAs are an agreement between homeowners in a neighborhood that aims to protect property values.
- 2 Participation, and paying dues, in an HOA is usually mandatory and may be a condition of buying the property.
- 3 HOAs generally have broad powers to control common areas and exterior spaces, though their power is limited inside the homes.
- 4 Many HOAs are administered by companies that develop an in-depth awareness of neighborhood conditions and impartially apply the agreed-upon rules.
Lots of things can hurt the value of a property, and not all of them are under your control. That’s why many neighborhoods have homeowners’ associations, often known as HOAs, which are broadly empowered to set the rules for how a community operates and what’s allowed in the community. HOAs can be intrusive and hard to deal with sometimes, but they play a valuable role in maintaining order in a neighborhood and affect the resale value of the family homes they’re responsible for.
HOAs vary somewhat in how they operate and what their duties are, but they all have some things in common. An HOA is empowered by the community charter to regulate the common areas and public spaces in a neighborhood, and they usually have broad authority over the exterior features of the houses in it. HOAs usually follow the land, which means that unlike a mortgage, which is a personal relationship between the homeowner and the lender, the HOA covenant transfers to every owner of the property. Each new buyer must sign an agreement to be bound by the HOA rules for as long as they own the house.
Navigating your relationship with an HOA can be an important part of protecting your investment in real estate. Whether you’re a homeowner moving into a house you intend to occupy for 30 years, or you’re an investor looking to flip a few properties for profit, your experience is made much easier by knowing something about your local HOA. This guide gives a broad overview of what HOAs are and how they work, especially in relation to what authority an HOA is likely to have, how it enforces the rules and common pitfalls owners and investors bump into when dealing with an HOA.
What Is an HOA?
HOAs draw their authority over the land from a common agreement among landowners, often called a covenant, in which they agree to abide by the rules of the association. The original members usually agree to only sell their properties to buyers who likewise agree to follow the HOA regulations and to contribute dues to its upkeep. Thus empowered, the HOA has what can be far-reaching authority to regulate homes and the land they sit on to keep property values high and the neighborhood close to the vision the residents have for it.
As a rule, HOAs have virtually unrestricted power over the common areas in a neighborhood. This includes parks, laundry rooms, pools and other spaces shared by all residents. If the community has a gate, it’s likely the streets are also effectively owned by the HOA, and the association’s rules for these spaces have nearly the force of law. HOAs also involve themselves in the exterior appearance of the homes. Most matters referred to the HOA relate to exterior paint, landscaping, the state of visible damage or dead vegetation and other things that affect neighbors’ property values. While it’s not common, some HOAs have implicit authority to enter private homes with or without the consent of the owner, usually to investigate a safety issue or a noise complaint.
Limits to HOA Authority
There are limits to the power of an HOA and as a property owner, you need to know these boundaries to protect yourself and your investment. Not all HOAs can enter a property, for instance, and even the associations that have the explicit power to do so usually define the specific circumstances under which they might. HOAs may or may not regulate parking on the street, utility service to individual houses or visitors to your home, provided these are not a nuisance that affects your neighbors.
Gray areas exist, however, and not every detail gets spelled out in the covenant agreement. Many covenants contain implicit clauses that may be interpreted as granting an HOA authority. For example, a homeowner may be required to provide an HOA representative with a set of keys to the property. In this case, the right to enter the dwelling under some circumstances may be implicit. This is why it’s always a good idea to have a lawyer look over any covenant you’re asked to sign as a condition of purchasing the property.
How Does an HOA Affect Your Investment?
The implicit nature of many clauses in the HOA agreement, along with the sweeping power of these neighborhood authorities, make the HOA a major factor in the long-term profitability of your investment. A good relationship with the HOA can help you maintain the appearance of your community and keep the property values high, while an overly intrusive or restrictive HOA can make it difficult to improve a property or find a buyer willing to agree to the required covenant.
Most home buyers are careful to read, or to have their lawyer read, the HOA agreement they are asked to sign at closing. However, there are some causes for concern you should look out for.
Strict property standards: Many HOAs have strict rules that govern everything from the exterior color of your house to the location of your trash cans. On balance, strict regulations tend to keep things running smoothly, but too many restrictions can make a house difficult to occupy. Rules governing the location and positioning of vehicles, for example, could result in a bevy of fines and, if space is limited, even the need to park a vehicle off-site or to sell it.
Overly complex language: HOA covenants can get complicated, but the language they use should be understandable by everyone, not just lawyers. Covenant documents with excessively complex language or multiple and seemingly contradictory clauses and sections can create a tangle that’s hard to parse and harder to abide by. Prospective buyers of your property can be put off by hard-to-understand documents, potentially hurting your final sale price.
Unfavorable or inadequate dispute resolution: Every covenant, like any written agreement, should contain a mechanism for dispute resolution. It’s inevitable that some homeowners in the community will disagree with the HOA’s rulings, and there has to be a clear and easy-to-understand dispute mechanism. Often, this is a mediation or arbitration clause, but if there isn’t one, you might only have recourse to the court system. The prospect of litigation over an overgrown lawn or damaged yard fence could hurt a property sale later on, if only because of the uncertainty it introduces.
Terms that violate the law: HOAs are powerful, but they are not infinitely so. Every HOA covenant must conform to applicable laws in your area, and terms in the agreement that run counter to the law are usually deemed unenforceable. One example of an HOA rule that violates the law is an ordinance banning the installation of satellite dishes. This violates the 1996 Telecommunications Act, which takes precedence in court. Having many unenforceable terms in a covenant is a bad sign as it suggests that the document is obsolete or the drafters were less careful than they should have been.
Frequent or unannounced rule changes: It often happens that an HOA management company alters the bylaws of a neighborhood. This is most common when a new company takes over and tries to harmonize the rules in one place with the bylaws in other sites it manages. The changes to the bylaws may be subtle and may go unannounced, but even a minor alteration in the way an HOA does business can have dramatic effects on how you manage your property. Prospective buyers can also be put off by an HOA with a reputation for silent rule changes.
What About a Property Management Company?
It can be a challenge for any home buyer to learn and apply everything they need to know to successfully interact with an HOA. It can even be challenging for experienced real estate investors to make sense of some HOAs’ bylaws and covenants. Given the generally complex nature of HOAs and the potentially dramatic consequences of a misunderstanding on your home value, it may be worth your while to contract with an experienced property management company to handle your investment.
The initial cost of hiring a property management company can be off-putting for beginner landlords. The potential benefits massively outweigh the expense, however, as the PM company performs many of the most time-consuming and onerous duties you would otherwise have to handle for the property. Your PM company can, for instance, advertise vacancies and screen prospective tenants for you, saving you a lot of time and keeping your occupancy rates high and productive. The company can also inspect the properties it manages and book repairs with minimal involvement on your part. Property management firms also tend to organize paperwork and expenses for you, and the time savings from only having one bundle of paperwork to manage each month can be enormous.
Perhaps best of all, a property management firm can act as your intercessor with the local HOA. As far as a neighborhood association is concerned, the PM company is their only point of contact with you as the owner, which keeps all interactions professional and productive. The experienced staff at your property management company can also read through covenants and find any irregularities that could trip you up years down the line, renegotiate binding agreements as needed and even present your side of a case in arbitration. Whatever the cost of a property management company, it’s almost certainly less than the expense of a lawsuit or foreclosure action, which its professional help is meant to prevent.