The United States is home to more than 350,000 homeowner associations (HOA). This represents more than half of all owner-occupied homes in the country, according to HOA-USA. If you’re buying or selling a home in a managed community you should know ahead of time what you will be up against during the transaction.

Not all HOAs are the evil, dictatorial entities we hear about in the media. Their involvement in a home sale does add another layer of difficulty to the process. Any time you add hurdles to an already complicated process, you're going to see an increase in the chances that something may go wrong.

Remember, the HOA is just one entity with its fingers in your home-selling pie. The mortgage company is always there, in the background, scrutinizing every document. They're responsible to look at all the documents the buyer, their insurance company, and the homeowners association provides.

What is an HOA or Homeowners Association?

A homeowner association is a governing body of a community. Not every community has an HOA. But if you buy in one you're required to follow the rules and regulations. “Many HOAs are corporations; that is, legal entities that can enforce contracts with their homeowners,” according to Ilona Bray at lawyers.com.

You are automatically are a part of the association when you purchase a property that has one. And so is following the rules. The association is governed by a board with volunteers from the community’s homeowners.

The HOA board members make decisions on how to enforce the rules. Those rules are known as “covenants, conditions, and restrictions,” or CCRs. They'll also decide on penalties for violations. The board manages the budget and insures dues are paid. They also oversee the maintenance of the common areas. 

Special assessments are different from monthly dues. If the board believes that the reserve funds are low, the may immplement an assessment. That's in addition to regular monthly expenses. Some assessments are due all at once. Depending on how much the assessment will be it might be paid in installments or over a period of time.

4 Common Ways an HOA can Derail Your Home Sale

There are four common ways an HOA can slow down or completely foil your Pacifica home sale. Most of them have to do with the home buyer’s loan. They may be out of the seller's control, but it's good to know beforehand what problems may come up.

1. Liens

If a property owner is behind on their dues, the HOA may have no choice but to put a lien on the unit. They do have that power. 

The cost to remedy the lien can be exorbitant sometimes. It can turn into a lot of money when you add late charges, collection costs, interest, and fines. If the debt goes unpaid, the HOA can begin foreclosure proceedings and possibly even seize the property.

If there’s a lien against the property, it's extremely important for the seller to let their realtor know right away. Sellers will also need to any liens.  And then it's up to the parties to determine who will pay them.

Sometimes the parties can negotiate assessments. But somebody will have to pay.  The title company will not be able to issue title insurance. And the bank will not loan against a property with a lien on it.

Consider the amount of a lien when you determine the list price of your property. In a home sale, the owner typically will have enough proceeds to pay off any late dues and penalties and will probably do so as part of the agreement to sell. The other option is for the buyer to pay those costs, which certainly can be negotiated as part of the purchase contract.

2. Pending litigation

If the HOA is involved in litigation, it's unlikely that a buyer will be able to get a loan from any mortgage provider.. Again, the bank isn’t going to take any unnecessary risk. They won’t give a buyer the loan in that situation.

3. Delayed documents

The Association is required to provide documentation to the buyer and to the mortgage company. If the required demand doesn't arrive at the bank in time, it could delay the closing.

4. The documents are incomplete or incorrect

Again, the bank reviews all the documentation provided. If there's an error, the documents are incomplete or the Association does not meet the necessary requirements, the transaction will be delayed or canceled.

Common HOA litigation cases include:

1.  Failure to perform maintenance – If the HOA fails to repair roof problems and the roof leaks, damaging a home’s contents, the homeowner may initiate a lawsuit against the HOA.

2.  An injury on the property that occurred because of shoddy maintenance practices may also spur litigation against the HOA.

3.  Violations of the rules – Yes, the HOA can violate its own rules and homeowners can, and will, sue.

4.  Building defects – An example of this is the HOA suing a roofing contractor for substandard work.

Most lenders will deny a mortgage application on a non-warrantable property. Non-warrantable simply means that there's ongoing litigation with the property. Yes, there are some who will, but they will charge far more than a buyer would normally pay for a conventional, 30-year mortgage.

It's important for a homeowner to stay informed of the status of the Association and the action of its board members.

Read the documents provided to you carefully. There are a lot of them but it's important to know the financial condition of the HOA before you buy.

You’ll find information about any litigation in the HOA documents obtained from the association. They realtor will provide that info to any interested buyers.

The importance of the HOAs finances

Earlier, we reminded you that an HOA introduces more complications to a home sale. When it comes to finances, it isn’t just the buyer's finances that the lender will scrutinize. It will also take a hard look at how the HOA manages the funds in its community account.

With conventional loans, Fannie Mae and Freddie Mac guidelines prevail. Before a loan will be approved communities have to meet a list of conditions 

Those involving the HOA’s financial health include:

The reserve fund has to have 10 percent of the HOA dues.

No more than 15 percent of homeowners are delinquent in their dues or fees.

The property’s insurance must meet Fannie Mae and Freddie Mac guidelines.

Any financial problems, regardless of how small, may slow down the selling process, but they also could result in a denial of the buyer’s loan.

Owner-to-renter ownership ratio

A bank will not only be looking at the buyer and the Association in determining whether or not they’re going to fund a loan, they’ll also be looking at the neighbors. Real estate research tells us that a homeowner will take better care of their property than a renter – more to lose, right?

Well, if a complex has an abundance of people renting long-term, AirBNB or too many using their units as second homes, there may be a hurdle to overcome. If you’re familiar with the condos at Crystal Springs in San Bruno, you know exactly what I mean. So many people were buying those units as income property, that banks would no longer provide home mortgages - the owner-to-renter ratio was too low. The Association had no choice but to create a waiting list for owners who wanted to rent their units.

Buyers: You should know what you're buying into

Read the HOA document package completely. These are legal documents, full of important information but littered with complex terminology. They're a lot easier to understand now than they were when I started in real estate. They've been made easier by explaining what you're about to read and using bold or highlighted type. 

6 things to consider when you're looking at the HOA documents

1.  The one that's especially important to me has to do with pets. If you have a pet or would like to get one, you'll want to know if there are any pet restrictions.

Some associations don't allow pets at all; some allow pets of a certain size or only certain breeds; others allow a maximum number of pets.

2.  Read the financials to determine if the association is well funded.  Ask if  the money needed to make upcoming repairs is in the fund.  You'll want to be sure you know who's going to be paying that - you or the property owner.

3. Is insurance or any utilities paid by the HOA dues?  Water and garbage expenses may be included in monthly dues. A copy of the insurance policy that the HOA pays will be provided by the bank for their approval. You'll also have to get a policy for the interior and your belongings.

4.  Parking may or may not be included in the monthly HOA dues.

5.  Lawsuits, of course. You want to know as many details as possible as well because if the association loses the suit, you may be responsible for some of the expense of the attorneys' fees - and damages if the Association loses the suit.

6.  Who pays for what? Are repairs or upgrades included in the monthly dues? What about fences, painting, roofs, etc? And has the board ensured that there are enough funds to pay for upcoming repairs?

Be sure to read and understand everything necessary for you to feel comfortable purchasing a property operated by an association.

Buying a townhouse or condo in a homeowners association can be a perfect fit for some homeowners. You'll have to weigh the pros and cons to determine for yourself. A lot of home buyers don't want to be in an association because they don't want to pay the monthly dues. But some think about the fact that so much of the maintenance is taken care of. They don't need to worry about landscaping, exterior painting, or other maintenance because it's included in the dues.