I recently experienced a real estate transaction that fell through because of an HOA’s financial condition. It was a disappointing reminder that while many buyers assume a lower HOA fee is always a good thing, that isn’t necessarily true.

Today, many townhomes, condominiums, and even newly developed master-planned communities are governed by a Homeowners Association (HOA). An HOA is responsible for maintaining and managing the community’s common areas, including exterior walls, roofs, landscaping, swimming pools, private roads, gates, and other shared amenities. Homeowners contribute to these expenses by paying a monthly HOA fee.

Because it’s a recurring monthly expense, buyers naturally prefer lower HOA dues. However, an HOA fee that is too low can create significant problems in the long run.

1. Deferred Maintenance Can Reduce Property Value

When an HOA collects insufficient dues, it may struggle to properly maintain the community. Landscaping, pools, gates, and other common areas may begin to deteriorate. More importantly, expensive but necessary projects—such as exterior painting, roof replacement, balcony repairs, termite treatment, and structural maintenance—are often delayed.

As the overall appearance and condition of the community decline, property values can suffer, regardless of how well an individual unit has been maintained.

2. Insufficient Reserve Funds Can Lead to Special Assessments

An HOA’s budget is divided into two primary categories:

  • Operating expenses, which cover day-to-day maintenance and management.
  • Reserve funds, which are savings set aside for major future repairs and replacements.

To determine how much should be saved, HOAs typically commission a Reserve Study every few years. This professional analysis estimates the remaining life of major components—such as roofs, pavement, exterior paint, and building systems—and recommends appropriate reserve funding.

When reserve funds are inadequate, homeowners may be required to pay a Special Assessment to cover unexpected repair costs. In other words, saving a small amount on monthly HOA dues today can result in a much larger financial burden later.

3. HOA Financial Health Can Affect Financing

An HOA’s financial condition doesn’t just impact maintenance—it can also affect whether buyers can obtain financing.

During the mortgage approval process, lenders often review the HOA’s financial statements, reserve fund balance, budget, insurance coverage, and other financial documents. If the HOA fails to meet lending guidelines, the community may be classified as a Non-Warrantable Condo.

When that happens, obtaining a conventional mortgage becomes much more difficult. Buyers may need to make a larger down payment, have higher credit scores, or accept higher interest rates through alternative loan programs. As financing becomes more challenging, the pool of qualified buyers shrinks, making the property more difficult to sell.

A Real-Life Example

I recently represented the sale of a condominium in Downey that illustrates this issue perfectly.

The interior had been beautifully remodeled, and both the home inspection and appraisal were completed without any major concerns. However, during escrow, we reviewed the HOA’s financial documents and discovered several serious problems.

The HOA had been operating at a monthly deficit, its Reserve Study had not been updated in over 15 years, and the reserve fund contained less than $20,000. After accounting for a roof leak discovered during escrow, the remaining reserve balance would have dropped to approximately $10,000.

Faced with these financial risks, the buyer decided to cancel the transaction.

Ironically, this community had maintained HOA dues below $300 per month for many years, while comparable communities in the area charged between $400 and $500. Although homeowners enjoyed lower monthly fees over time, the lack of adequate funding ultimately made the property much more difficult to sell.

The Bottom Line

A low HOA fee isn’t always a sign of a well-managed community. In many cases, it may indicate that the HOA is underfunded and unprepared for future maintenance needs.

When purchasing a condominium or townhome, buyers should look beyond the monthly HOA payment. Reviewing the HOA’s financial statements, reserve fund, Reserve Study, budget, and overall financial health is just as important as evaluating the property itself.

A financially healthy HOA helps protect property values, reduces the likelihood of unexpected assessments, and makes financing easier for future buyers. Ultimately, a well-funded HOA plays a critical role in preserving both your investment and your home’s long-term marketability.

Source: Original article by Anna Yang, Honorary Vice President, News Star Realty – Rowland Heights Branch.