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Are you Prepared to be Ruled by a Homeowners Association?

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By Andrea Coombes, MarketWatch

RISMEDIA, Oct. 3, 2007-(MarketWatch)-Buying a home is already a complex endeavor. Add in the sometimes unfathomable machinations of a homeowners association and you enter a realm filled with the potential for misunderstandings that may have legal and financial consequences.

Often, home buyers don’t fully realize the tradeoff they’re making when they move into communities that involve becoming association members, experts say. More than 57 million people live in associations governing everything from large and small condominium developments to subdivisions of single-family homes, according to the Community Associations Institute, a trade group in Alexandria, Va.

“Many people have trouble accepting the fact that decisions will be made by others,” said Mark Pearlstein, a partner with Levenfeld Pearlstein LLC, a Chicago-based law firm that represents associations.

“They are trading the convenience of having someone else maintain their property in exchange for being subject to the decisions made by others, [including] what they can do in their unit, expenditures for maintenance of the property and the assessments they will have to pay,” he said.

Sixty-nine percent of homeowners in a recent survey said homeowners associations are either a “major headache” or a “minor annoyance,” though 25% of respondents said they had not lived under an association, according to a survey of 3,000 homeowner subscribers to a newsletter from ServiceMagic.com, a Web site in Golden, Colo., that connects consumers with contractors nationwide.

Associations provide a number of important benefits including, for instance, landscape maintenance and access to fitness facilities, and their rules often help protect property values. But it’s the horror stories that make the news: Full-blown fights over a homeowner flying a flag, stringing a clothesline or owning a large dog. And in some states associations are within their rights to foreclose on homeowners who respond to disagreements by refusing to pay their dues.

Two common homeowner complaints: Unexpected increases in dues and unwelcome rule changes.

Homeowners are often “surprised about the ability of an association to change the rules,” Pearlstein said.

For instance, recently, to forestall declines in property values, more associations are prohibiting homeowners from renting out their units. “Courts in most states have held that an association can change the rules by a vote of the ownership to restrict or eliminate leasing,” Pearlstein said.

Still, despite the difficulties, associations offer plenty of benefits, including supporting property values by keeping common areas well-maintained. A separate survey conducted for the Community Associations Institute found 78% of homeowners agree that associations protect and enhance property values.

Associations “maintain property values at their highest level,” said Bill Kosena, a broker associate with Re/Max in Denver. “It’s really impossible, especially in today’s market, to sell a home where your next-door neighbor has a yard that’s gone, or junk cars parked outside.”

Another plus: Homeowners who, alone, can’t afford a swimming pool or access to a golf course can enjoy such amenities through the resources of the association.

Before you buy

Do your homework before signing with an association. Explore the building or neighborhood and talk to the community manager to assess whether the rules will adversely affect your lifestyle.

“See if anyone else is doing what you want to do. If you don’t see any RVs, it’s a pretty good guess the homeowners’ association isn’t going to allow RVs,” Kosena said.

Potential conflicts include restrictions on:

- The size, type and number of pets. “We do have one client who has a scale in the manager’s office to weigh a pet. They don’t want big dogs,” Pearlstein said.
- Exterior antennas, clotheslines, flags, fence types and paint color
- Running a home-based business, including restrictions on parking commercial vehicles
- Next, read the association documents, or covenants. “You think you’re buying a home but really, in addition to that, you are entering into a contract and it’s a very elaborate one,” said Peter Dunbar, an attorney in Tallahassee, Fla.
- Ask what the monthly dues cover, whether the association hiked dues substantially in the past and, if so, why? Ask about additional fees, such as move-in fees.
- Ask about the size of the reserve fund. Some states, including California and Florida, require associations follow a reserve-fund formula, but in other states there is no good rule of thumb for how much is enough, Pearlstein said. At the least, ensure there is an amount large enough to cover future large maintenance costs, and consider talking to a real estate attorney if you’re unsure.
- Ask when the association last commissioned a reserve study. These studies ensure the association is putting aside enough money to cover major upcoming expenses.
- Ask for the minutes from recent meetings of the association’s board of directors, and for a copy of the association’s most recent financial statement. “If they don’t have one,” Dunbar said, “that’s a red flag immediately.”

If you find it difficult to obtain these documents before you buy, make your signing of the contract contingent on the review of certain documents, so that you can back out if those documents prove worrisome.

Andrea Coombes is MarketWatch’s assistant personal finance editor, based in San Francisco.

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