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Dealing With A Special Assessment

If you're not familiar with homeowners' associations you'll likely have many questions about these organizations, if you plan on buying a property that's in an HOA community. What most people associate homeowners' associations are rules. While this isn't a misconception, it certainly is not the entire picture. The purpose of these entities is to ensure homes in the community, and, common areas, as well as amenities, are kept in good condition. Essentially, these organizations help to protect home values.

There are many benefits to living in an HOA community, first and foremost is that property values are more stable. Another advantage are private amenities, maintenance, and common area upkeep. Amenities, such as pools, tennis courts, clubhouses, walking paths, and more are maintained by the homeowners association. What's more, because there are bylaws (read: rules), neighbors can't devalue nearby homes by painting their exteriors crazy colors, or, letting junk pile-up. The fees paid by residents go to fund said maintenance. In addition, part of these fees go into a reserve account.

HOA Fees, Reserves, and Special Assessments

Homeowners' associations are funded by the residents, and it's usually residents that sit on the board. They deal with community issues as they arise and do what's in the best interest of the development at-large to help protect its function, aesthetics, and value. HOA fees can be monthly, once a quarter, or other intervals. When the fees are collected, these are divided into funding ongoing and future projects, as well as unplanned expenses.
Unfortunately, where fees generally run in the hundreds of dollars and are predictable, special assessments seemingly can come out of the blue—and can cost thousands. Sometimes they are result of a situation that residents might have anticipated, like potholes in an aging private road, and sometimes not, like damage from a tornado or sinkhole. --Wall Street Journal

The retained monies are placed into a reserve account that is tapped when such unexpected expenses arise. If you are interested in buying into such a community that's under an HOA, this is something you'll be smart to learn about. In newer communities, this fund is generally small but does grow over time. In older HOA developments, the amount of money in reserve varies due to the fact it might have been used to pay for a previous expense. Even if that is the case, it should be well managed to avoid what's known as a special assessment. This, simply put, is a charge to each individual owner that's assessed to cover the cost of an unplanned expense. It is important to note that if reserve levels are depleted, the HOA will likely impose a special assessment on owners in order to replenish said account.

Dealing with a Special Assessment

A special assessment can be thousands of dollars. It might be so costly, not because the reserve money was mismanaged, but because of timing. For instance, a newer community that has not built-up a significant amount, or, an older community that just used the funds for another expense. If you're facing a special assessment, you do have options, such as:

  • Community owners can raise a challenge. The homeowners association must demonstrate the need for a special assessment, with full disclosure. It cannot simply charge residents with a special assessment without a legitimate reason. Property owners can ban together and raise a challenge, and, the process for doing so will be in the charter or bylaws. It will also provide instructions for what circumstances dictate a special assessment may be requested by the HOA.

  • Look into the HOA reserves. As previously mentioned, the homeowners association reserves are under a fiduciary responsibility and managed by board members. The very reason for having reserves is just this--an unplanned expense to make repairs or replace whatever is needed. Properly managed reserves ought to be enough in most situations.

  • Go over the association's insurance. If the reason for a special assessment is to meet a need brought on by a natural disaster, such as a tropical storm, the HOA ought to have sufficient insurance coverage for the same. Residents can request to see insurance coverage and also request to file a claim with the insurance carrier. Should the insurance coverage be lacking, the bylaws might spell-out what rights the HOA and residents have in such a scenario.

  • Legal action might be an option. Residents can also request the matter be taken to alternative dispute resolution, where it is attempted to be settled in mediation, arbitration, or non-binding arbitration. If the alternative dispute resolution does not settle the matter, residents can also look into taking legal action against the HOA. This, of course, is an expensive option that does not have guaranteed results.

The best thing you can do is to learn as much as possible about the HOA, reserve funds, and more before buying a home in a community.