Due Diligence on HOA’s

A few years ago I realized I was missing out on deals because I was holding to the conventional wisdom that Home Owners Associations (HOAs) were bad and that I simply should avoid any properties that have them.  Some in my real estate network were seemingly making a killing investing in condos and townhomes and I was sitting on the sidelines watching.  I took it upon myself to figure out why I had been listening to the conventional wisdom, what my network knew that I didn’t and get in on the fun.

The big hurdle was my complete lack of knowledge around what HOAs do, and more importantly how to differentiate the good ones from the not so good.  I approached this from two different angles:

What does a lender want to see?

What should I know as an investor/owner?

Let’s first look at this from the lender perspective.

Why would we do this?  If I want to hold the condo as a rental, I will probably need long term financing.  If I am going to do a flip, then my back end buyer will probably need financing.  So…understanding what the financing looks like is important.

So what do the lenders look at? Here are some of the important qualification questions a lender will want to know:

  • Is there a deed restriction or re-sale restrictions?
  • The lenders never want to see more than 15% 60 day delinquent on HOA dues

-This could be a sign of foreclosures coming!

  • Is the HOA involved in any active or pending litigation?
  • Total number of units sold or closed or under contract to investor owners?

-If 50% or less owner occupied then:

  • Total units owned by the HOA?
  • Number of owners (individual or entity) that owns more than 1 unit:

– Never want to see more than 10% with 1 owner

  • Any units used for commercial or non-residential purposes?

-Don’t want more than 25% commercial use.

There are certainly more than just these.  There is actually a 5 page questionnaire that is usually filled out by the HOA…and you should know that one “NO” could mean that you cannot get conventional or FHA financing.

So what about the other diligence?  Here is what you as the investor and owner should be looking at:



The seller is obligated to provide these to you if the contract if filled out properly.  You could buy from the HOA for $300 or less. Right now in a hot sellers’ market, you might get away with forcing the buyer to pay for these docs.  But when the tide turns and it becomes a buyers’ market, you will want to be have this at the ready.  This would make your unit seem more attractive and you, as the seller, easier to work with since you have your ducks in a row for the buyer and the buyer’s lender.

So what are we looking for?


First and foremost, is the HOA solvent?

Solvency is the ability to meet its long term financing obligations.  It is essential to staying in business as it asserts a company’s ability to continue operations into the foreseeable future.  Solvency should not be confused with liquidity though.  Liquidity and how much they have in reserves or in the bank could run out.  Solvency looks at the bigger and long term picture.


What is their operating budget?

Do they have a clear and timely accounting of revenues and expenses annually?  This is not the federal government; however, this budget needs to be balanced and hopefully should show at least 10% of revenue going to reserves each year. Further, the budget should be approved each year.

If the HOA and accounting do not seem well organized, the complex might not be approved for financing.  This might also be a red flag as to what direction the complex is going, like downhill.  This could affect future financing, future values, rents, etc.


Do they have enough for day to day operations?

Can they afford to mow the lawn, remove the snow, get the trash removed, keep the pool operating, etc.


Do they have enough in reserves?

Do they have the liquidity to handle the day to day operations of the complex as well as have a rainy day fund for when the roof needs to be replaced, or the elevator needs that 10 year maintenance, or any other large capital expenses.  This could be for either scheduled or unscheduled repairs.

If they do not have enough in reserves, then there could be a special assessment – this is an extra charge or increased HOA dues for a certain period of time to raise the money needed for the repair. Sometimes there is a warning of a special assessment coming so owners have time to save and prepare, other times, there isn’t.


Are there any special assessments coming up or currently going on?


Has there been a reserve study?

A reserve study is done by a third party and inventories everything the HOA is responsible for right down to the individual sprinkler heads! These should be done every 10 to 20 years.



Get a copy of the policy and have your agent review for any gaps in coverage.  Look at hazard, liability, flood and fidelity insurance. Fidelity insurance must be larger than the reserves!!  Why, because fidelity insurance covers someone stealing the reserves!


Review the Board Minutes

How often do they meet?  Do they discuss if and how the rules are being enforced? This shows how well run the organization might be.  You can find out a lot of great tips and read between the lines on many topics from reading through the minutes!


Legal Documents

First and foremost, will they allow me to do what I want like have a rental and how can the rules be changed, so I cannot rent any longer?



This is the Covenants, Conditions & Restrictions commonly referred to as the CC&R. This is the governing document that establish the homeowners association and what rules the owner, tenants and guests must obey. These will detail the condo units’ legal existence and describe the unit’s dimensions. It will identify the common elements lie the hallways, lobby, stairwells, and limited common elements like storage units, parking spaces, balconies, which are generally for 1 unit’s use.

It will also spell out the percentage interest each unit possesses in the condo association. Monthly condo fees are assessed in proportion to each units percentage interest! Are there restrictions on your units sale?



These are the instructions for how to operate the HOA. They outline the condo association’s rules of operation for annual meetings, voting, officer elections and the board of directors and this is where you would look to see if they specify whether a unit can be rented.


House Rules

Informal rules of the association that are binding on owner AND tenants!! This is important to know if you are planning to keep your unit as a rental.

This can cover things like pets, move in and move out policies, satellite dishes on a balcony, when can I put and leave trash cans outside, Christmas lights, penalties for noise and other nuisances.

If you are going to keep the unit as a rental, you must make sure that the tenant is aware and agrees to comply.  You might even be able to put something in the lease that makes the tenant responsible for any fines.

This is not meant to be a pro or con to investing in condos and/or townhomes and their associated HOAs.  These points to review are meant to educate – I certainly used them to evaluate deals that have come my way! I hope these help you understand the ins and outs of HOAs, and perhaps open the door to evaluating a deal with an HOA in the near future.

Keep in mind that Pine Financial does lend on Condos and Townhomes and that Condos and Townhomes should certainly be added to your potential investments.

Unsure on if an HOA property is the right investment for you? Contact us today.