With a few exceptions, a HOA may normally increase dues as much as it needs to in order to achieve its yearly budget.
Paying monthly dues is an essential aspect of residing in a planned community. Before you purchase in, you may (and should) discover out what the current dues are. However, even if the dues are now inexpensive, what if they continue to rise? Is there a limit on how much the homeowner’s association (HOA) may charge in dues?
Sadly, the quick response is generally “no.” In most cases, a HOA may increase dues as much as necessary to satisfy its yearly budget. There are, however, exceptions. This article will examine several methods for limiting growth in dues and assessments.
First, comprehend the annual budget.
To understand why a HOA may increase dues and assessments, you must first understand what a HOA is and how it sets the amount of dues required. An HOA is often a nonprofit company formed to manage the development.
When a homeowner purchases a house in a development, he or she immediately becomes a member of the HOA. HOAs are typically managed by a board of directors comprised of individual members (homeowners) chosen by all members (owners). (However, in a fresh new development, the board of directors will most likely consist of the developer and its representatives until a specific percentage of the property is sold.)
The tasks of a HOA often include paying for the operation, upkeep, repair, and replacement of all common amenities in the complex. Expenses may include the price of cleaning and maintaining a communal pool, as well as the expenditures of heating, lighting, and cleaning a shared clubhouse.
The HOA creates an annual budget that covers the cost of all ongoing maintenance and operating expenditures, as well as a reserve fund. (See Nolo’s article “Why a HOA Needs Sufficient Cash Reserves” for additional information on reserve money.)
The HOA then calculates how much it needs to collect in periodic dues from each owner to satisfy the budget. The HOA may pay for any expenditures that emerge that are not covered by the budget by levying a special charge on each owner or withdrawing cash from the reserve account.
Because expenditures are always rising due to inflation, most HOA budgets call for yearly increases. As a consequence, most HOAs must collect additional dues from owners each year. Circumstances may necessitate that the HOA raise dues considerably (more than the amount necessary for general expense increases) or levy hefty assessments. This might occur, for example, if the HOA does not have enough cash in reserve to cover a common area repair.
It’s reasonable for a homeowner in a complex to question whether there is a cap on these costs after apparently continual dues rises and assessments.
In the CC&Rs, look for Assessment and Dues Limits.
The Declaration of Covenants, Conditions, Restrictions, and Easements (CC&Rs) of the development is often the fundamental document controlling its functioning. The CC&Rs in certain (typically older) projects restrict how much the HOA may raise dues and levies. For example, the CC&Rs might restrict periodic dues increases to 2% each year or assessments to a maximum yearly monetary amount.
The only way to find out whether there are any dues or assessment constraints in the development you live in (or are thinking about purchasing into) is to read the CC&Rs.
If the CC&Rs do restrict increases, it’s not necessarily a good thing. If the restrictions are too stringent, the HOA may be unable to collect enough funds to effectively maintain and administer the complex. A 2% yearly restriction on dues increases, for example, might be problematic if cost of living rises average 5% each year. Due to a lack of funding, the common spaces of the property may fall into ruin. This may reduce property prices across the complex. As a result, although you may save money owing to decreased dues, the value of your house may fall.
State Statutes Limit Assessment and Dues
State legislation may control assessment amounts and dues increases depending on where your development is situated. Some states cap assessments at a set amount every year, while others need the agreement of some or all members (homeowners) before the HOA may increase dues by more than a certain percentage.
In Arizona, for example, the HOA cannot raise dues by more than 20% each year unless a majority of HOA members vote (Arizona Revised Statutes 33-1803).
You’ll need to conduct some study or contact an attorney in your region to find out whether your state has rules regulating dues or assessment increases.
Although there is a possibility of a HOA running out of funds if dues and assessments are restricted by state law, unlike CC&R restrictions, state legal limits are often rather liberal (for example, Arizona’s maximum 20% annual dues growth). Furthermore, since state law constraints often leave the ultimate decision to the members (homeowners), it is hoped that the homeowners would support larger increases if required to protect the development from degrading significantly.
Pay attention to the HOA and the Annual Budget.
You may discover that neither your development’s CC&Rs nor state regulations restrict the amount of dues and assessments you may be charged. If this is the case, your best bet for avoiding unwarranted hikes may be to get acquainted with the workings of the board and become active in the HOA’s budget process.
Homeowners in a complex often have the ability to comment on the HOA’s yearly budget. Attend HOA budget meetings and make your opinion known on budget choices. Furthermore, the acceptance of the yearly budget is usually contingent on the consent of a specific number of the owners. If you disagree with budgeted items, express your concerns to your neighbors and do all you can to keep the budget from being passed until excess spending are eliminated.
Keep in mind that the HOA’s board of directors is also a homeowner who must pay any additional dues. Furthermore, the board is presumably well aware that most homeowners are opposed to dues and assessment hikes. Most boards work hard to keep the budget under control and prevent major dues hikes or assessments.
A bloated budget or the necessity for assessments, on the other hand, may be the result of a financially reckless board. It could be useful in this situation to attempt to remove the irresponsible board members. The CC&Rs and other governing agreements will almost certainly include a provision for removing board members. This isn’t as simple as it seems; the procedure is usually intricate and time-consuming.
Where to Look for Assistance
It might be difficult to tell if the development you live in (or want to purchase into) is subject to any state legislation or CC&R dues or assessment limits, or whether the board is economically prudent. If you want assistance, an expert real estate attorney in your region can help.