What to Consider when Buying Into a Homeowner’s Association.

Homeowner's AssociationIn law school they teach students to think of property ownership as a “bundle of sticks.”  A weird metaphor, but one that makes sense after a bit of thought.  When pioneers “staked a claim” to land, in theory they claimed all of the land between their stakes from the sky to the center of the earth and every right to do what they wanted with the land.  Over time, we have exchanged certain property rights (sticks) for other conveniences.  For example, by purchasing land in a city you might be giving up the right to let your grass grow long, to have loud parties, and to keep vehicles in your yard in exchange for the sidewalks to be paved and to hook up to city water and sewage.  You therefore, have fewer sticks in your bundle of property ownership.

Similarly, if you buy property that is subject to declarations and governed by a homeowner’s association you are giving up other property rights (even more sticks) in order for certain conveniences: shared common areas, maintained lawns, party walls, etc. These are conveniences that often make sense and even can give value to property, but it is still important that you understand what exactly you are buying and what sticks you are potentially giving up.

First, it is important to understand the difference between a condominium, a town house and a single family home subject to declarations.

Condominiums. A condo owner holds the title to the condominium unit only, not the land beneath the unit.  This means condos can be stacked on top of each other. Condo owners usually own from the center of the walls, to the subfloor and the center of the ceiling.  A good way to think of it is that you own the air space. All condo owners share title to common areas. Common areas include land, the exterior of buildings, hallways, roofs, swimming pools and any area used by multiple owners. Condo owners pay property taxes on their individual units. A homeowner’s association usually manages the complex and collects fees from all condo owners in order to maintain common areas.

Townhouses. Townhouses are usually a series of single-story or multistory units that are linked to each other horizontally by common walls. Townhouse owners hold title to their units and the land beneath them, so townhouse units cannot be stacked on top of each other. As with condos, common areas are owned jointly by all townhouse owners. Townhouse owners pay property taxes on their individual units. A homeowner’s association usually manages the townhouse complex and collects fees from all owners in order to maintain common areas.

Single Family Homes Subject to Declarations. In many places, this type of neighborhood is called a “gated community.”  In Minnesota, there are very few actual “gates”, but lots of communities that operate like a gated community.  A homeowner owns the land and the home on the land.  As with condos and townhouses, common areas are owned jointly by all homeowner in the community. Owners pay property taxes on their individual lots. A  homeowners’ association usually manages the neighborhood and collects fees from all owners in order to maintain common areas.

When you buy a condo, town home or single family home subject to declarations you are agreeing to terms and conditions for use that are applicable to the ownership interests as set by the declarations, association bylaws, and enacted regulations for that property.  The property records will include a document, usually called a “Declaration of Covenants, Conditions and Restrictions” that sets forth the main regulations and then refers to bylaws and rules for additional restrictions. Smart associations make sure that they have rules in place that will regulate how units may be modified in order to protect the look, feel and value of the association and its units. For example, you could be giving up the right to paint your house an interesting color, raise hens your back yard (real example!), or put shaker style shingles on your roof.

Smart buyers will examine all the homeowner association documents to understand the rights and obligations they are buying into and to determine if the association is on sound financial footing.  The pertinent documents include:

  • Covenants, Conditions and Restrictions. This is a document that divulges the duties and responsibilities of the home owner’s association and of the individual unit owners. It also will indicate how the homeowner’s association is structured, and any restrictions that are placed on ownership units such as acceptable modifications and improvements.
  • By-Laws and Regulations. This document more specifically talks about how the homeowner’s association is operated and if they have instituted any additional rules or obligations for the members.
  • Meeting Minutes, Financials and Tax Filings for the last year. Seeing the minutes for the last year is helpful as you can tell if the association is paying for insurance, if members are paying their dues on time, if there is any litigation that the association is involved in, and generally how well the association operates.

Each homeowner’s association is going to work differently.  Many associations (especially those comprised of single family homes) are member run meaning that the cost is kept low, but in turn volunteers run the organization. This can be great if you have active and trustworthy members.  Another model is to hire a professional management company who will over

see the management of the association (collecting dues, hiring workers to shovel or mow), but charges a heftier fee to the members as monthly or annual dues.  There are also associations that have completely fallen apart.  This is also something to consider and discuss with your attorney if you find you are buying into a property subject to declarations, but with no active homeowner’s association.  If there is no active association, who is caring for the common areas? What happens if someone starts to farm chickens in their back yard? Or paint their house bright pink?

In future articles, we will address more of these issues, and things you should look for in associations documents.