What are HOA Special Assessments?
When you own a condo or a home that is part of a Home Owners Association (HOA), you are always living with the possibility of a special assessment which can potentially run into tens of thousands of dollars. Assessments can either leave a significant dent in your checking account or can be financially crippling for a homeowner. They are anything but special!
What is a Special Assessment in Real Estate?
In real estate, a special assessment is a fee levied by the Home Owners Association (HOA) on all the owners when there are insufficient funds in the HOA's reserve funds to cover the cost of upcoming repairs like siding and window replacement. Special assessments can either be paid in one lump sum by each owner or can be split over monthly payments which are in addition to the owner's regular monthly HOA dues.
What's the difference between monthly HOA fees and special assessments?
When you own a home that is part of a Home Owners Association you are required to pay monthly HOA dues. For example, for Seattle condos, the HOA fees will usually cover water, sewer and garbage, common area maintenance, building insurance, and sometimes, earthquake insurance. The owners pay their own electricity bill and insurance for the contents of their unit.
A portion of those monthly dues is used for the HOA's costs of the day-to-day running of the condo development. The remainder goes into maintaining or building up the HOA's reserve fund so what, in theory at least, when a new roof is needed or an unexpected major repairs like failing siding needs to be fixed, there are sufficient funds available to address those issues.
Special assessments occur when expensive repairs or upgrades are needed but there are insufficient funds in the HOA's reserve account. Anytime I drive by a condo development that is surrounded by scaffolding I wonder to myself whether the HOA had the needed money squirreled away or are all those owners writing big checks to cover those expensive repairs?
If the HOA needs a big injection of cash, it will usually get a loan from a bank and then pay it off over time via the monthly assessment payments collected from the individual owners.
How to find out if a property has Special Assessments when buying a home.
Plus what are some red flags that hint at the possibility of future assessments?
When considering buying a home that is part of an HOA, particularly condos, you need to do your homework and investigate the risk level of getting dumped with a special assessment. Just because there is currently no assessment does not mean that the HOA doesn't have a history of imposing assessments or that one is just around the corner.
So how do you protect yourself from, or at least minimize the risk, of buying a home that could be a special assessment hell? Here are some tips.
Read the Resale Certificate as if your life depends on it!
When you buy a condo in Seattle, the seller must provide you with a copy of the Resale Certificate for you to review as part of your due diligence. Sometimes a copy of the Resale Certificate is available to review before you make an offer. However, many sellers will wait until they have an accepted offer before order the certificate.
Sometimes it's a good idea to hire a real estate attorney to review the resale cert for you. Your real estate agent is not an expert at interpreting these documents so don't rely on them exclusively.
Within that stack of PDF's you will find certain documents that will help you investigate your probability of getting lumped with a future assessment...or have to inherit a current one.
The Resale Certificate Summary document: This is a summary document that specifically states if there is currently a special assessment in place how much it is for.
The Reserve Study report: for the Seattle area, any condo development with 10 or more units are required, every few years, to hire an independent audit company to assess the overall condition of the development. The company will go visit the property and write up a report detailing all the repairs and upgrades that need to be done now, or within the next 3, 5, 10, and 20 years.
The report will then compare the total of all those costs against how much the HOA currently has in their reserve account. In my experience, the majority of HOAs only have 20% or less of the required emergency funds.
When the HOA gets those reports, they can either stick their heads in the sand, continue with inadequately low HOA dues, and "hope for the best". Or they can take action and raise their monthly dues to boost their reserves. The lower the HOA reserves relative to projected repairs, the greater the risk of special assessments.
The Meeting minutes: homeowner associations are supposed to hold monthly meetings to discuss the running of the development and any issues including expensive repairs and financing. Although there might not be a current special assessment, the meeting minutes might reveal the potential of one on the horizon.
However, many HOAs are not very well run and seldom have meetings. Some might just have an annual meeting and any notes might be 11 months old.
Financial statement + the overall condition of the property: in the Resale Certificate there will be a copy of the latest banking statement showing how much funds the HOA has set aside to address both known and unexpected repairs.
Now go walk around the property, both inside and out to observe the overall condition of the place. If the paint is peeling, the roof looks old, the driveways are cracked and there are other signs of deferred maintenance but the reserve fund is low, then you are pretty much guaranteed a special assessment.
The Seller Disclosure Statement: home sellers are required to fill out a 6-page questionnaire detailing their ownership of the home. The form specifically asks if there is are any current or pending special assessments. Some property owners fail to check the YES box when they should, so don't rely on this form too much.
Just talk with other owners! For some finger on the pulse and up-to-date information just walk around the development and chat with the people who live there. Most of them will be happy to talk about the place and any gripes that they might have, including any information on special assessments and what the history of assessment there is like. If you can find a long-term owner, all the better.
Special assessments are generally not "advertized" in online listings. You need to ask!
Listing agents know that any mention of a special assessment in the fluffy listing description of a home will be an instant turn-off for most buyers. That's why they tend to "forget" to mention that fact upfront. They want you to fall in love with the home first and then maybe you'll overlook the elephant in the room.
There's a section for listings that is only visible to Realtors on the MLS (multiple listing service) and usually, the listing agent will mention the existence of an assessment in there. But plenty of times they don't. Buyer beware, do not rely on the information on online listings for a full picture of the financial health of an HOA. Do your due diligence and ask lots of critical questions.
who pays the special assessment, the home buyer or the seller?
There are a number of ways this can go and many times it will depend on how much equity the owner has in the property and how motivated they are to sell.
If the seller has a healthy amount of equity, they will usually be willing to pay off the assessment from the proceeds of the sale at closing, especially if the remaining amount is on the smaller side.
If the seller is only close to breaking even on the sale of their home, then they will want the buyer the take over the monthly payments of the assessment after they get the keys to the home. Whether the buyer is willing to do so will depend on how large that cost is and how badly they want that home.
Trying to sell a home with a current or upcoming special assessment is never easy if the owner is not willing to pay it off at closing. Buyers have plenty of other options to choose from.
Also, If the home has a special assessment and the seller is not willing to pay out off, the buyer's lender might not be willing to give the buyer a loan for the home.
How common are Special assessments?
Speaking specifically for the Seattle area condo market, in my experience special assessments are very common. At some stage over the life of the condo development, there is a good probability that there will have been at least one levied on the unit owners unless it's a recently built community.
The most common big-ticket items tend to be the replacement of failed siding, windows, and decks plus adding a new roof. As a buyer, if you can find a condo that has had all of these items recently updated AND already paid off, they can be a really good purchase. Why? Because it will probably be another 20 plus years before those expensive upgrades need to be redone. Maybe longer.
Will builder warranties and property insurance protest against special assessments?
Builder warranties only cover the building for a few years after initial construction. Even if the issue happens during the warranty period, you'll need to keep your fingers crossed that the builder is still in business or doesn't declare bankruptcy to avoid paying for those expensive repairs. If they did shoddy work on your building they probably did the same on other housing developments.
Insurance companies love to say that they are here for you and that you are in good hands. Until you file a claim that is. It is not uncommon to see HOAs trying to sue their insurance providers to get their claims paid. This can drag on for years with no guarantee of any success. In the meantime, those essential repairs are not being addressed.
To summarize in regards to What is an HOA Special Assessment, basically, it's something you should be very aware of when considering buying a home that is part of a homeowners association. Make sure to do your full due diligence and research to minimize your risk of buying a home prone to expensive assessments.
Here are some additional useful resources on the subject:
Questions to Ask Before Buying a Condo from Kevin Vitali.
What are the Pros and Cons of Home Owner Associations? from Luke Skar at Madison Mortgage Guys.
Essential HOA Rules You Should be Aware Of from Sharon Paxon.
What to Look Out For on the Property Disclosure Form from Paul Sian.