Anyone familiar with how a homeowners association works know that there are certain fees members should pay. Apart from regular dues, homeowners may also need to pay HOA assessments. But, what is an HOA assessment anyway?
HOA assessments are also referred to as a special assessment. What is a special assessment? It is a fee that HOAs charge to members of the community to cover unexpected or unbudgeted costs.
What is an example of a special assessment? Let’s say a disaster strikes your homeowners association, resulting in damages to the fitness center. Your first line of defense is your insurance policy. But, if you lack coverage for this type of disaster, your next option is to turn to association funds. If your current budget fails to cover the cost of fitness center repairs, then you will likely need to charge homeowners a special assessment.
To further understand what HOA assessments are and how they work, you first need to understand HOA dues. HOA dues are monthly fees homeowners pay to the association to cover the cost of day-to-day operations. This usually includes maintenance expenses, management fees, landscaping expenses, insurance premiums, and the like.
A portion of the monthly homeowner dues also goes to an association’s reserve fund. With the help of a reserve study, the HOA maintains this fund to pay for future major repairs and replacements of common elements.
But, what is the difference between dues and assessments? Whereas dues are a recurring fee intended to pay for the day-to-day expenses of the HOA, assessments are a one-time fee typically meant to cover the cost of unexpected expenses.
The calculation of monthly HOA dues takes place before the beginning of each year by making expense projections and factoring in the reserves. In contrast, HOA assessments are calculated only when the need for them arises. Both, however, are calculated by the HOA board.
What are assessment fees for? Homeowners assessment fees pay for unanticipated expenses in the community. Every year, the board sits down to work out how much each homeowner should pay in monthly HOA dues. In most cases, these dues are enough to cover the cost of the association’s expenses for the coming year. But, there are some instances where HOA assessments may be necessary.
For one thing, if the association’s operating expenses turn out higher than anticipated, the board will need to impose special assessments. Some homeowners may also default on their monthly dues, resulting in a budget deficit. When this happens, a need for special assessments may arise.
Natural disasters or emergencies such as floods, earthquakes, and hurricanes may also take place. If your HOA’s insurance is insufficient, then homeowners should be prepared to pay association assessment fees.
You might wonder, “Who pays for a special assessment?” By now, the answer should be clear — homeowners. Within the context of an HOA community, it is the homeowners who shoulder HOA assessments since they are members of the association.
Keep in mind that board members experience no special treatment. If you are a member of your HOA board, you must also pay the assessment fee. In fact, you should set a good example and be one of the first people to do so.
Every homeowner agrees to follow a set of governing documents when they first buy a property in the HOA community. Within these governing documents — usually the CC&Rs — lies a stipulation outlining the obligation of homeowners to pay monthly dues as well as special assessments. By declining or failing to pay, homeowners are in direct violation of the governing documents and may face penalties.
Calculating HOA assessments is actually a pretty straightforward process. When an unexpected cost comes up, the HOA board will take the amount needed to address to cost and divide it among homeowners. How the board should divide the amount, though, typically depends on what your governing documents say. More often than not, HOAs split the cost equally among all homeowners.
Let’s use our example from earlier to demonstrate how to calculate special assessments. If the HOA expects to pay a total cost of $50,000 to repair the fitness center, and there are 100 homeowners in your HOA, then it is a simple process of division. In this case, each homeowner will need to pay $500 in HOA assessments to cover the expense.
There are, of course, certain limitations concerning the amount associations can levy in assessment fees. You will usually find this limit within your governing documents. Some state laws can also come into play. For instance, in California, Civil Code Section 5605 prohibits an association from charging an assessment that is more than five percent of the fiscal year’s gross budgeted expenses without seeking approval from a majority of its members.
Most governing documents also require HOAs to provide adequate notice to members prior to imposing special assessments. The period of notice can vary from association to association. To ensure your HOA remains free from liability, make sure to review your state laws and governing documents.
One question many homeowners ask is whether or not they can claim assessment fees on their taxes. In a word, yes. If the HOA used the assessments for maintenance and repairs, homeowners should be able to claim them on their taxes. But, it is best practice to consult with a tax professional first to avoid running into problems with your finances and the law.
Because homeowners are obliged to pay HOA assessments, a number of possible consequences may follow if they should fail to do so. These consequences can vary depending on what state laws and governing documents permit. Generally, though, residents may face one or more of the following:
But, homeowners are not the only ones who might suffer as a result of refusing to pay special assessments. The HOA itself will also find difficulty paying for the unanticipated expense, which is usually a matter of repair or maintenance.
Without the money to cover the cost of repairs or maintenance work, a domino effect will follow. Poorly maintained elements within the community can diminish curb appeal. As a result, property values in the neighborhood will start to plummet. When that happens, homeowners will grow dissatisfied and resident retention may drop. Before long, the association will have trouble attracting new residents as well.
Many homeowners will naturally want to fight the association when the latter choose to impose an assessment, especially if the amount is a tad too high. But, if the HOA is acting within its authority and in the community’s best interests, and if it is not in violation of state laws and its governing documents, then homeowners have no choice but to pay the fee.
If homeowners feel the assessment is not warranted, they can talk to the HOA board about the matter. The board, on the other hand, should try its best to explain the situation to the homeowners. Perhaps there is just some miscommunication regarding the purpose of the assessment.
If a homeowner is having financial troubles, it is also worth approaching the board and asking to set up a payment plan. Not all associations can do this, though, so check your state laws and governing documents first.
Homeowners can choose to sue the HOA, as it is their right to do so. But, if the court deems the assessment reasonable and justified, then homeowners should be prepared to pay both the assessment and the HOA’s legal fees.
Clearly, there are instances when an association will need to levy HOA assessments. It is not a popular choice, though, so HOA boards must be prepared for potential backlash from homeowners.
If you want to avoid going through with such a decision, remember that prevention is always better than cure. In a lot of cases, you can prevent the need for special assessments through careful budgeting, setting aside an emergency fund, and making sure your HOA has sufficient insurance coverage.
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