Low HOA fees are not always a sign of good governance. In fact, more often than not, when fees are too low, it indicates poor management and exposes the association to long-term costs. Associations should be careful not to lower their fees too much, as it comes with consequences.
What do Low HOA Fees Mean?
Homeowners associations and condominiums charge regular fees that are used to cover daily and long-term expenses. These fees pay for maintenance, insurance, amenities, and more. When funds dry out, associations would have no way of ensuring upkeep and quality of life.
Average HOA fees can vary depending on the type, size, and location of the community. The needs of an association can also affect fees.
Those on the lower end of the spectrum typically have fewer needs, less complex amenities, and a lower cost of living. That said, low fees can also indicate problems within the association. Moreover, it can lead to issues down the road.
Why are Some HOA Fees so Low?
When searching the housing market, buyers will find fees of varying amounts. Some communities charge a significantly higher fee than others.
But why would an HOA want to have low fees in the first place? There are two main reasons: higher affordability and financial flexibility.
- Higher Affordability. Some HOAs may want to lower their fees to appease homeowners and attract new buyers. Low fees are more accessible and appealing, especially for first-time homeowners or those on a tight budget.
- Financial Flexibility. Low fees allow homeowners to save money, which they can then allocate for personal use. This is particularly advantageous if costs are on the rise, and residents don’t want another expense on their list.
Are Low HOA Fees Bad?
Low HOA dues may seem like a good idea at first, especially if the board wants to gain some points with homeowners. But this approach often results in both short- and long-term negative effects on the community.
1. Neglected Maintenance
Maintenance is an essential part of an association’s duties, but it costs money. With low fees, an HOA can’t sufficiently perform proactive maintenance, resulting in early deterioration or breakdowns of key components. Condos with low HOA fees face similar problems.
2. Lack of Reserves
When an HOA has insufficient funds, it can’t properly maintain its reserves. The reserves act as a cushion for long-term maintenance and emergencies. When large repairs become necessary, the association would have no way to fund them.
3. Special Assessments
If there are no funds available to cover maintenance or other expenses, associations will be forced to levy special assessments. Depending on the HOA’s needs, these assessments can be significantly large, and they are typically paid all at once instead of monthly.
4. Reduced Quality of Life
Homeowners may initially be happy with low fees, but this feeling is often short-lived. Before long, they will find that their quality of life has been compromised thanks to the association’s incapacity to cover essential costs.
5. Decreased Property Values
Poor maintenance, reduced quality of life, and a high frequency of special assessments can all turn away interested buyers. Dilapidated communities tend to have diminished curb appeal and lower home values, discouraging people from investing.
6. Legal Problems
Board members have a fiduciary duty to prioritize the community’s best interests, and lowering fees at the expense of proper maintenance is in direct violation of that. This can result in liability for the board.
Signs That HOA Fees are Too Low
Sometimes, board members aren’t even aware that their fees are dipping too low. Fortunately, there are a few signs that can indicate something is wrong.
- Underfunded Reserves. The most apparent sign is inadequate reserves. If the association doesn’t have enough savings for major repairs or replacements, it can spell financial trouble for the community down the line.
- Deferred Maintenance. Communities that rely on quick fixes instead of long-term solutions may need to charge higher fees to cover maintenance costs.
- No Fee Increases. Fees naturally increase over time, as costs grow and inflation rises. If an HOA isn’t steadily keeping up, then consequences are sure to follow.
- History of Special Assessments. Homeowners may notice a pattern of high or frequent special assessments. This clearly indicates that the association isn’t collecting enough regular dues.
- Lower Quality of Services or Amenities. If the community is beginning to look cheap or neglected, especially compared to similar HOAs, then it’s time to make a change.
HOA Fees Too Low? How to Calculate Dues the Right Way
It isn’t too late to make adjustments if the board finds that its fees are way too low. There are some strategies associations can implement to calculate fees correctly.
1. Plan the Budget Properly
It all starts with the annual budget. This budget includes projections of costs and contributions, dictating how much the board must collect from each homeowner. If the board plans the budget properly, it should arrive at an accurate determination of dues.
When planning the budget, boards must look at both historical and current data. Look for patterns and trends. Account for economic changes as well, such as rising cost of goods, inflation, and labor.
It’s also a good idea to check vendor prices. This will help boards identify which costs are set to increase. If an HOA can’t keep up with a vendor’s rates, then it may be time to look for a new provider.
2. Factor in Reserve Contributions
Don’t forget to include reserve contributions in fee calculations. The reserve fund essentially functions as a savings account, set aside for major repairs and replacements in the future. If a roof breaks down 10 years from now, the reserves should cover it.
It can be difficult to determine how much an association should have in its reserves at any given time. Ideally, reserves should be at least 70% funded. To arrive at a specific amount, the HOA must first perform a reserve study.
This study identifies the association’s assets and estimates the remaining useful life of each one. It also discerns the replacement cost of every asset and how much the HOA will need to set aside each year to meet this cost. A reserve study comes with a funding plan, which the board can use to calculate monthly contributions.
3. Cut Costs Wisely
Some communities may want to cut costs due to a high number of delinquencies or complaints from homeowners who can’t afford the fees anymore. Cost-cutting is a real option for struggling associations, but it’s important to approach it with care and precision.
Boards should never cut costs randomly. Instead, they should prioritize urgent expenditures and postpone non-essential spending.
4. Hire an Expert
Getting professional help is a surefire way to get an association’s finances in order. The HOA board should consider hiring a Certified Public Accountant (CPA) or an HOA manager. These professionals can plan the budget properly and assist in determining fees that work for everyone.
5. Communicate Clearly
Simply raising dues without explanation can trigger complaints and damage trust. Association boards should make sure to clearly communicate to homeowners the reasons behind the change. Increases may be steep, for instance, to accommodate the needs of the community.
While there is no limit to fee increases in Texas, the law does require the board to discuss and vote on such increases at an open board meeting. This is according to Section 209.0051 of the Texas Property Code.
A Reason for Everything
It is not uncommon for communities to have low HOA fees, but it is important to understand the causes and effects at work. If low fees are truly what the association needs, then there should be no problem. On the other hand, if the community is suffering due to low fees, changes must be promptly made.
Creative Management Company offers financial management services to HOAs and condo communities in Greater Houston. Call us today at 713-772-4420 or contact us online to learn more!
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