Q: How are HOAs a permanent, mandatory housing cost that can escalate with little warning? 

 

A: When you buy into a community with an HOA, the association is legally tied to the title of the home, making compliance and participation mandatory - there is no opting out. The cost of that HOA is always evolving, depending on inflation, the cost of insurance, utilities, etc. A homebuyer should always assume that the HOA fee will increase over their tenure as an owner. When you factor in the cost of major maintenance items or even an unforeseen litigation, expenses can very quickly escalate. If the HOA has not been adequately funding their reserve account, the result can be deferred maintenance in the community itself, dues increases, or special assessments to the homeowners. Dues increases are often gradual, but special assessments can be very expensive, and are typically paid in a limited timeframe. I have seen special assessments in San Diego County range from a few hundred dollars all the way up to $80,000 per homeowner, depending on the location. That means that each HOA member can receive a bill on top of their normal fee that must be paid in full by a certain date, no matter what. When you buy into an HOA, there is the known cost at the time of purchase, but also the unknown cost of future expenses.

 

Q: How do they function like fixed debt, like your mortgage? 

 

A: HOAs function like fixed debt in that participation and payment are not optional if you own in the community, and also because if you do not stay current with your dues, an HOA can actually file a lien against your home, just like a mortgage holder. After that lien is filed, if the debt is not paid, an HOA can actually foreclose on the home to protect their financial interest, even if you are current on your house payments and even if your home is paid off. What many people don't know is that in all 50 U.S. states, HOAs are allowed to initiate foreclosure proceedings, and in many of those states, HOAs actually have "super lien" status, which means their lien will take precedence over the main mortgage used to purchase the property. Second-lienholders often don't initiate foreclosure proceedings unless they are confident they will be paid in full. But in the primary lien position, that isn't a concern. Whoever holds that position will get paid first if the sale is forced, and in "super lien" states, that will be the HOA.

 

Q: What can this mean for potential homebuyers, being priced out or making concessions, like moving farther out or choosing a smaller home?

 

A: Because fixed monthly expenses affect a borrower's debt-to-income ratio, HOA fees directly impact purchasing power. At today's rates, for every $100 increase in monthly fees, your borrowing capacity is reduced by roughly $16,600. This means that high HOA fees can potentially limit the buying pool for a community, forcing buyers to look elsewhere or to seek out a less-expensive home in the community. Less expensive often translates into a home that is smaller, less upgraded, and/or in a less desirable location. Buyers may want to purchase in an HOA-dense area like downtown San Diego, for instance, but may not be able to because of the consistently high association dues. It's not uncommon for San Diego high rises to have monthly fees well in excess of $1,000. 

 

Q: What does this mean for current homebuyers being able to afford where they live and even putting them in danger or something like foreclosure?