How To Read an HOA Budget and Spot Red Flags Before You Buy

Residences with homeowners associations (HOAs) offer many benefits, including manicured landscaping, amenities such as pools, lakes, and tennis courts, and a slew of other perks. Yet, HOAs can also come with a substantial price tag.

The average HOA fee in the country ranges from $200 to $400 monthly, but can exceed $1,000, depending on the region and amenities, according to HOA Start.

And they're on the rise; in 2024, 65.7% of homes, the second-highest percentage in the survey’s history, were built within an HOA, according to the National Association of Home Builders.

With these becoming increasingly common, buyers considering property in an HOA should carefully assess several factors to evaluate the association’s financial health. Experts agree that spotting red flags early could avoid headaches and additional costs down the line. 

Jane Lin, a real estate expert and marketing manager at Bayshore Residences, says she always tells her clients that an HOA’s budget is like a map of the community’s finances.

“A good point to start is to examine the source of funds. These include: monthly dues, special assessments, or fines. Now is also the time to review spending areas. These include maintenance, utilities, insurance, or management fees,” she says.

Common red flags

Reserve funds

Lin explains it is essential to monitor reserves, as these are where funds are allocated for major repairs such as roof and pool maintenance. Small or inadequate reserves could lead to upcoming assessments and higher costs for owners, as well as unstable or rising insurance premiums.

“Too many special assessments in the past few years could mean poor planning,” she says.

Of note, a whopping 70% of HOAs in the country have inadequate reserves, according to Real Estate News.

Yonatan S. Levoritz, Esq, of The Levoritz Law Firm, agrees, noting that if reserve funds are running low, they will need to be replenished through refinancing or higher HOA Fees.

“Either way, this is a red flag that management is not doing its job properly,” he says.

Another point buyers should keep in mind is that the more complex and amenity-rich the development, the more it will cost to maintain and the greater the reserve funds should be, according to Michael Sherrill, founder of real esate holding company Techno City Holdings. In addition, he says that many newer complexes underprice HOA dues and run thin reserves, which burdens later buyers with special assessments.

Repair costs

Another critical area to focus on is maintenance and repair costs.

“Read this carefully. If they are too expensive, you have to wonder why,” says Bobbi Rebell, a consumer finance expert at CardRates.com.

On the other hand, says that if they are lower than you would expect, it could be a red flag that the HOA is deferring maintenance.

Debt and lawsuits

“Be aware of any debts owed to the HOA. That could signal that some members of the community are not able, or are choosing not to pay their dues, and those unpaid bills could become a cost to the community in the future,” she adds.

Rebell says that another red flag to look for is any legal activity or lawsuits. That can be costly and may signal other issues that should be disclosed to a potential buyer, she says.

Poor maintenance

Of course, experts also recommend that, in addition to reviewing budgets, you inspect buildings to determine whether they are well-maintained.

Doris Sussman Goldstein, an attorney, HOA president, and owner of California HOA guide CondoWonk.com, suggests avoiding a building where the board is not paying attention to maintenance or members are unwilling to pay what it costs to keep the building in good condition.

Tips for evaluating HOA financial health and questions to ask the board

Fortunately, experts say there are several steps that can help buyers assess an HOA's financial health.

Ask for documents

Levoritz recommends that prospective buyers review the upcoming year's budget and assess how the board is allocating funds under its control.

Finally, see what percentage of the HOA budget is allocated to debt relative to cash flow, he advises.

Lin says buyers should review at least three years of financial statements and assess the assessment delinquency rate.

“Anything past 10% is a red flag,” she says.

Look at the governance of the HOA as a whole

Lin suggests carefully studying the HOA’s governing documents, as they set regulations that affect daily life.

“Talk to current owners for important information. They can point you to information such as poor maintenance that you do not know about,” she says.

Understand insurance coverage

CondoWonk.com’s Sussman Goldstein notes that insurance is also one of the largest budget items and that increases are unpredictable and largely beyond the HOA's control.

“An HOA that shows low insurance costs may be one that just hasn’t been hit by a big increase…yet,” she says.

That’s why it’s crucial to understand the details of what that insurance covers.

While some states have uniform insurance policy rules, others rely on requirements set by the HOA’s covenants, conditions, and restrictions (CC&Rs).

In addition, she says that due to current upheavals in the insurance market, some HOAs have lost their insurance altogether. In turn, verify that the HOA has insurance coverage and confirm the deductible amount.

 Additional tips

Square 8 Group’s Sherrill also recommended obtaining the maps and the original condo plan, and reviewing the unit boundaries and parking to understand what part you own and what is within the common areas.

And if you have special needs, such as an accessibility ramp or EV charger, make sure that it’s allowed and you qualify in writing before you close, he says.

“When things are truly bad, there's probably not much worse than a dysfunctional HOA. When things are great, it's an amazing insight into cooperative humanity working together,” he says.

Finally, note that the HOA's composition and order may change at any time.

“What's 'great", "ok, "nice", can go south if (when) owners, management company, or board composition changes,” he adds.

In closing, Sherrill recommends taking the opportunities you find and getting involved on the board if you buy into an HOA.

“And be aware that the members and climate of the HOA could change and it may be time to move on if it becomes too stressful,” he adds.