Particularly with so many home owners “underwater” and struggling to pay their bills – mortgage, property tax, HOA dues etc. – a big concern for those in common interest developments such as townhouse and condominium communities is whether or not the reserve account is well enough funded. Too often, they aren’t.

Jacquie Berry, owner of Community Association Data Source, is our local expert in HOA documents and disclosure. Recently she spoke at the Los Gatos-Saratoga Association of Realtors Wednesday breakfast meeting and shared these statistics, which are a bit scary:

There are over 48,000 homeowner associations in California; CIDs make up a quarter of all housing in the state of California; 49 percent of CIDs are self-managed and less than 25 percent are 100 percent funded in their reserves.

To read more about her comments to the realty board, please view the post on the Silicon Valley Association of Realtors blog: REALTORS® told HOA compliance is all about disclosure.

Thinking of buying a condo, townhouse, or property with an HOA? Make sure that you check out the reserve account and the rest of the disclosures to better protect yourself against raises in dues or “special assessments” later. If you are currently a member of an HOA, keep a close eye on the financial health of the group vis-a-vis the reserve account.

If you are shopping for a Silicon Valley condominium, townhouse, loft or other property that’s part of a home owners association or “HOA”, you may find yourself flabbergasted at some of the dues being charged in San Jose, Los Gatos, Saratoga, and all over Santa Clara Valley.  A question I hear all the time is this: “Why are those HOA dues so high?”

HOA dues may cover a number of things, including:

• common areas, such as driveways, parking, pool, fitness center, rec room, elevators, landscaping, etc.
• insurance: regular homeowners or blanket insurance but perhaps also earthquake or flood insurance
• reserve funds for planned improvements (repainting, termite work, reroofing, repaving, pool replastering etc.)
• covering the defaults from units where the owners are in or about to be in foreclosure

What is the range of pricing for HOA dues in Santa Clara County and Silicon Valley?

Depending on the age of the property and the amenities, the dues may run between $150 and $250 on the low end (newer, no amenities) to close to a thousand on the high end (The Villages retirement community has extraordinarily high dues but they may include membership in the golf course too).

“Normal” is anywhere from $350 to $400 per month for a typical condo or townhome community.

Dues over $400 per month will deter investment buyers.  Dues over $500 per month will deter almost everyone!

There are several things to beware of when buying a condo or townhouse.  First, and perhaps most importantly, you’ll want to learn how many of the members are in default, because this may ultimately cost you with special assessments.  A friend of mine, Laurie Manny, was a Realtor in Long Beach and wrote about this very eloquently (she passed away after a brief illness in August 2010, though her blog or website makes it look like she’s still selling real estate in Long Beach). Check out her timely post, which is still correct today: Long Beach Condo Buyers Beware! Long Beach Real Estate Condos and Lofts.

Second, you’ll want to check out the grounds and common area items to see if it looks like the community is being well maintained.  Do the buildings have peeling paint, patches of grass without lawn, and overgrown shrubs? If so, those are “red flags”.

Finally, if you’re serious about purchasing a home in that community, read the minutes, newsletters and the rest of the Home Owner Association paperwork. Yes, it’s tiresome and probably 2-3″ thick but it’s important.  (Imagine buying the home and not reading these but later discovering they don’t allow dogs – and you have a large lab!  Bad all around. )  The HOA docs will give you insight on the budget and whether any special assessments may be needed down the road.

What do you need to know if you’re buying a condominium in Silicon Valley?  Isn’t it simpler and easier than buying a house?

No, not really.

With a condo, you are buying not just the unit (or airspace) that you intend to occupy, you’re also buying a shared ownership in the common features.  This means, of course, that you are also buying into any potential liabilities.

Here are some questions to ask and areas to investigate when buying a San Jose area condo:

• What is the percentage of owner occupied homes? (Too high of a ratio and buyers will have trouble purchasing with a loan, which means you could have trouble selling.)
• Is there any litigation (lawsuits) ongoing?  Again, this can impact saleability.  Often newer condo units investigate any building problems around years 7-9 as there’s a 10 year statute of limitations for finding building errors, so younger homes that are just under 10 years of age could be involved in a lawsuit.
• Is the complex professionally managed or managed by owners? (There will be implications for each.)
• How much have the dues been going up each year?
• How many home owners are currently in default on their HOA dues? (HOA dues are often skipped before distressed home owners default on their mortgage.)
• Do the reserves look adequate or will there be a dues increase or special assessment?
• What is the cost and timetable for getting a complete set of Home Owner Association (HOA) documents?
• Are the documents complete? Is there a complete set of newsletters, meeting minutes, bylaws, CCRs, Articles of Incorporation, etc.?
• Is the complex itself in or near a flood plain or on or near an earthquake fault or area of any other natural hazard?  These areas periodically get re-mapped and locations that were previously not in a particular zone but are close may later find themselves within that area.
• Is it an FHA approved condo complex? If so, it may be easier to sell later!
• Condition – if it’s an older community, are the pipes still galvanized steel or are they copper? If steel, is there a plan to replace them?  How about garage doors and single pane windows – are owners on their own to fix and upgrade these items or by any chance will the HOA cover them (and if so, is there enough money to do so?).
• How often are the exteriors of the buildings checked for termites and water damage?

These are a few questions to include in your investigation of any condo you may want to purchase. When you investigate your future home, be sure to include the common grounds and the general ownership of the complex and grounds and know that if you buy in, you’ll want to be comfortable knowing that there are no surprises just around the bend: no special assessments, no lawsuits, no imbalance of owner-renter ratio that can put the community into a downward spiral in terms of “resale value”.

Ask lots of questions, take lots of notes and be as informed as you can!

Homeowner Associations (HOAs) are created to oversee condominium complexes, townhome communities and planned unit developments on behalf of their members. These are non-profit organizations whose purpose is to manage common areas, enforce neighborhood rules and standards, and often, unofficially, to foster community unity too. In most cases, they collect fees from members and have local authority. In other words, if you do not pay your homeowner association dues, or abide by one of its rules*, the HOA can and usually will fine you or even foreclose on you!

There are loads of HOAs in Silicon Valley. As with all organizations, some are better run than others. Its a little different than owning real estate outside of a homeowners association.

What are the pros and cons?

At their best, Silicon Valley HOAs keep the communities they manage beautifully landscaped and maintained, they hire good providers for needed improvements, and minimize risk to all the members. By having reasonable rules and community buy-in, the neighborhood can look inviting and property values can be better maintained.

At their worst, HOAs can be unresponsive to members needs, erratic, arbitrary and irresponsible. They may, by poor planning, cause huge assessments to be necessary or raise HOA dues so that they are very high – to the point where they make homes hard to sell. Not only are those an unhappy occasion, they can also make it hard to sell a home with a special assessment looming. Fortunately, this is seldom the case in most areas – but if the HOA has a high number of defaults due to owner bankruptcy or inability to keep up with mortgage, property insurance etc. it can cost all of the members eventually.

Is it less expensive to buy a house in a PUD? Maybe. You will have monthly fees that may cover your front landscaping, exterior of your structure, and roof. But perhaps not. Its possible that the fees will only cover the street paving – you have to read through the documents to see whats included.

What are some of the issues to be aware of surrounding HOAs in the San Jose area? What are some questions to ask if you are thinking of buying a property with a HOA?

1. HOAs may be big or small and may be professionally managed or may be run by volunteer homeowners. Many small HOAs are run by volunteers, while larger complexes or subdivisions may have ˜professional management (paid). First, youll want to know which it is.
2. HOAs tend to have a lot of rules – and they are not all intuitive – so if youre buying a home in Silicon Valley with a Homeowners Association, be sure to read the HOA packet throroughly. This will include the last years worth of minutes (great for understanding what the homeowners consider ˜issues), the bylaws, the budget, the current financial statement (very important for grasping whether a special assessment may be coming your way in the future), and more. This tends to be dry reading but is vitally important for you to understand before you remove your property condition contingency!
3. HOAs have the power to levy assessments to pay for needed improvements such as repaving, replastering the pool, replacing the roofs, refencing, etc. Most HOAs are underfunded and periodically have these ˜special assessments, so beware!
4. Some HOAs have planned assessments several times a year, so dont be fooled when you see the monthly HOA fee. It may not be reflective of the true cost. For example, Saratoga Oaks, a stunningly beautiful townhome community in Saratoga, has assessments for both blanket insurance and for earthquake insurance which are ˜extra payments occurring during the year. By splitting these out, the monthly HOA looks less imposing than it is in reality.
5. New construction often has unrealistically low monthly dues or HOA fees. The builders want the properties to be attractive to buyers so put the monthly cost on the low side. Eventually the homeowners realize that they are underfunded and then must either raise the monthly charges, do an assessment, or both. Its not fun when that happens.

Selling a home governed by a HOA?

If you are selling your San Jose area condominium, townhome, or single family home governed by a HOA, plan ahead! You (not the HOA) will be required to give the buyer the HOA packet and will need to ask your Homeowners Association to provide the documents that compose it. Your HOA will do so, but will need some time and there will be a fee for this service. It is a good idea to have the HOA package ready to deliver to the buyer once your home goes on the market. (If it takes a long time before your property sells, you may need to update it.)

Your HOA may have rules about for sale signs and open house signs, so check before you get your home on the market. Gated Communities (while fairly small in number here in Santa Clara County) may have rules about hours for open houses, access, too, so find out ahead of time.

If you dont like authority, dont buy in a HOA community.

*The story is told that a HOA had a rule that each condo owner needed to allow the HOA in once every 6 or 12 months to test the smoke detector. The thinking was that if one condo caught on fire, theyd all be at risk because of the nature of the complex. One homeowner didnt want to allow the HOA in, so refused. What did the HOA do? It took the owner to court, ran up a lot of legal fees, and eventually the homeowner was made to not only let the HOA in to check the smoke detector, but was forced to pay a large sum of legal fees too.

Most folks who live in areas governed by a HOA are happy with the association and its work. Many of these neighborhoods, such as La Rinconada in Los Gatos or The Villas of Almaden in Almaden Valley, are impeccably maintained and its clear that the owners appreciate the value of real estate thats well managed. There is often an easier lifestyle associated with living in a HOA because someone else does much of the landscaping, or there may be common areas to enjoy such as a garden, park or pool. And in senior communities, such as along Alberto Way in Los Gatos or The Villages in San Jose, there also can be more affordable and quieter housing made available. As long as its well managed, being in a HOA can be not only a good experience, but good for your homes value.