What are HOA assessments, and why do homeowners have to pay for them? That’s a question that crosses the minds of some homeowners, given they are already contributing to community management in the form of regular monthly HOA fees. Most homeowners do understand to an extent that homeowners association assessments, on top of HOA dues, are a regular part of homeowners association membership. However, some owners—and even board members—may not fully grasp the importance of assessment payments on the community.
What Are HOA Assessments?
Budget shortfalls, unfortunately, are a reality that many HOA boards face. Your monthly HOA fees may adequately cover the costs of a regular landscaping service to maintain the community lawns. Paying for the removal of a fallen tree, for example, is likely not part of that allocation. Since these occurrences are the exception rather than the norm, HOA boards may decide to vote to collect a one-time, special homeowners association fee to cover this sudden expense.
So what are HOA assessments, and what are the things that set them apart from other HOA dues? For one, the expenses that a homeowners association assessment covers are things that the regular monthly HOA fees don’t already pay for. The regular HOA dues generally go into covering two things: the current year operations, and reserves.
Understanding Regular HOA Dues
The current year’s operations cost will usually include things maintenance and clean-up services that benefit the community as a whole. This will typically include things like lawn care, landscaping, snow removal, or pool maintenance. Part of the current year operating budget also covers the utilities used by community amenities and includes things like water, power, and insurance.
Common area upkeep is one of the most visible ways for homeowners to really feel that their HOA fees are going towards the benefit of the community. When HOA dues go towards common areas like clubhouses and community pools, the more that the homeowners feel that their contributions are worth it. The building and maintenance of these common areas are an important part of the current year operating budget so that everyone can enjoy them.
Part of the regular HOA dues, the ones that are not already earmarked for the current year’s operations, then go into reserves. Maintaining a healthy reserve budget is important for the community since these funds enable the community to plan long-term. With a good amount under the reserve budget, the HOA can pay for things like new roads, an expansion of the community center, or a boiler replacement for the community pool.
The reserve budget also helps to give the community peace of mind, since having a nice amount of reserve gives the HOA the ability to do high-cost repairs or replacements if the need suddenly arises.
Calculating the Homeowners Association Assessment
Every year, the HOA board usually comes up with an annual association budget for the community that supports its current year’s operations, and usually with enough leftover to build up a reserve fund. As long as the HOA board can make an accurate assessment of the expenses for that year, the monthly HOA dues are sufficient to cover everything.
Even if there are some unexpected expenses, or perhaps a sudden drop in the HOA fees collected, it’s likely that the reserve fund should cover the shortfall for a time.
Things don’t always go perfectly right in a community, though, and sometimes, something comes up that will cost the board more than what can be raised by the monthly HOA dues. It might be the case of the board not having a good prediction for their budget that year.
It may also be the case of a costly expense that the association simply has no way of planning for in advance. In some states, it is the HOA board’s fiduciary duty to raise the budget for this major repair or improvement as needed.
What are HOA assessments and what can they do in situations like these? For a planned community, they provide a way for the community managers to cover the gap between the unexpected expenses and the monthly HOA fees.
What Are HOA Assessments Needed For?
There could be one or more reasons why the monthly HOA fees and the reserves might not prove enough to cover a large repair or replacement item. Can HOA increase fees to cover these? Even if the HOA board is allowed to raise HOA dues in the middle of the year, an HOA assessment still provides a more timely solution.
There are three common causes for a shortfall like these, where an HOA assessment will prove most useful.
- The operating expenses for this month could have exceeded the expected rate for the year. The community may have needed to switch to a different service provider for their maintenance and repairs, and they could have ended up having to pay a different rate. Other expenses, like utilities, insurance, and other fees, may have gone up that month as well. These and other spending spikes may prove to be too much of a drain for an HOA budget, leaving little to no room for a major repair item.
- The proceeds from the monthly HOA dues may have been below target for the month. Some homeowners may not have been able or were not willing to pay their share of monthly HOA fees. With not enough collection, the HOA board may be pressed to consider a homeowners association assessment to cover a sudden expense.
- A natural or man-made disaster may have affected the community. While most of the damages may be covered by insurance, it may still fall on the HOA board to come up with a budget to completely restore damaged facilities.
Paying for Homeowners Association Assessments Is Mandatory
HOA regulations differ from one community to another, but most HOA boards have the power to collect regular HOA dues and HOA assessments from a homeowner. If they do not pay the special assessments, the HOA board usually has the authority to place a lien on the homeowner’s property. This gives the HOA the ability to foreclose on that lien, depending on what the state laws and the CC&Rs dictate.
Homeowners association assessments are a challenge for both community managers and homeowners. Need a helping hand with your HOA assessment planning? Give us a call.
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