HOA Fee on New Homes
The HOA Fee (Homeowners Association Fee) on a new home can be rather misleading. A high HOA Fee can deter homeowners from purchasing within a specific, newly built community. For this reason, the homebuilder, indirectly or directly, subsidizes the HOA while it is still building homes within that specific community. This keeps the HOA Fee for each property within the new community artificially low, so the homebuilder can attract more potential buyers.
HOA Fee: How Homebuilders Subsidize
In most scenarios, while the homebuilder is “building out” the new community, it owns a large proportion of the land relative to the homeowners within the community. The homebuilder has control over who will operate the HOA, who will do the services for the HOA, and how much these people will be compensated. Often, the homebuilder will have its own HOA management team, landscaping company or affiliate, and service team. This allows the homebuilder to keep the HOA Fee for each homeowner artificially low for some time, while the homebuilder attempts to sell more new homes in the community.
It is rather common that a homebuilder will lose money on the HOA (Homeowners Association) while heavily marketing new homes. A low HOA Fee allows homebuyers to more easily obtain loan approval, as an HOA Fee will negatively affect the homebuyer’s affordability ratio. The affordability ratio is a correlation between the homebuyer’s monthly income and his or her monthly expenses. Banks and mortgage companies depend on this ratio heavily, in order to determine if a specific homebuyer can truly afford the loan that he or she has applied for. By keeping the HOA Fee artificially low, the homebuilders can create more demand for their newly built homes via an inaccurate affordability ratio. The homebuilder’s incentive for a low HOA Fee is very transparent.
HOA Fee Increases
Within the new community, the HOA Feewill increase as soon as the homebuilder is no longer subsidizing the HOA. The homebuilder will stop subsidizing the HOA when it has “sold out” the new community, home by home. The Homeowners Association will have to elect a new board, hire a new HOA management team, procure a new landscaper, find repairmen/laborers, etc. As the new HOA manager will quickly realize when he or she creates an annual budget, the HOA will not have have enough money to meet its obligations at the current, artificially low HOA Fee.
The HOA Manager will increase the HOA Feeto a point where the Homeowners’ Association will be able to meet its obligations. I have witnessed scenarios where the HOA Fee began at a monthly fee of $50, while it was under the direct or indirect subsidy of the homebuilder. This monthly HOA fee of $50 almost immediately turned into a monthly HOA Fee of $200, when the homebuilder was no longer involved/subsidizing the Homeowners’ Association.
The above example should not be considered extreme. The “bait and switch” strategy comes into mind with the representation of HOA Fees within a newly built community. If the services that are marketed seem to be too good to be true relative to the low HOA Fee, do not be fooled. Expect the HOA Fee to increase considerably.
HOA Fee Coverage
The HOA Fee (Homeowner Association Fee) can vary greatly by association. The most common services/expenses that HOAs have:
- Master Insurance
- Security Services
- Exterior Maintenance (painting, repairs, shared roof…if applicable, etc.)
- Garbage Costs
- Repaving Costs
- Pool Maintenance Costs
- Shared Lighting
- Common Areas Upkeep (mailboxes, tennis courts, clubhouse, etc.)
- Pest Control
- Legal and Licensing Fees
- Accounting Fees
The homebuilder can subsidize all of the above services/expenses listed above. This keeps the HOA Fee per new home artificially low; however, the HOA Fee will not be subsidized by the homebuilder forever.
HOA Fee: Conclusion
When looking to buy a new home that is part of an HOA, think rationally. The logical approach works best for a quick consideration: The higher the HOA Fee, the more services that the HOA provides. Ask for the HOA documentation from the homebuilder, and you should be able to figure out if the low HOA Fee is “too good to be true”.
Ask the homebuilder’s representative about other neighborhoods that is has built, how much the HOA Fee increased two years or so after the homebuilder was no longer associated with the new community, and when the homebuilder expects to be done selling homes within the new community. Be careful of the homebuilders’ “slick” salesmen; they are very similar to car salesmen. Do not allow them to try to confuse you, change the subject, or be vague. Ask several followup questions, and use your gut instinct!
Keep in mind that the HOA Fee for newly built communities will increase drastically. It is only a question of when and by how much…
For more information about Homeowner Association Fees, please check out the article HOA Fees.
Another informative article from google Real Estate.