When is a $900,000 home more expensive than a million dollar home? When the $900,000 home comes with a $533 per month HOA fee.
If you bought a one million dollar home in Silicon Valley using a 30-year fixed-rate principal and interest mortgage with a 7% interest rate and 20% down payment, your monthly payment would be $5,322. The same terms on a $900,000 Silicon Valley home would be $4,790. The difference per month? $532.
The HOA provides a number of conveniences and economies of scale to its members but it's also important to remember that payment itself is important. (Like your mortgage, if you don't pay your homeowners association dues, you can lose your home, so the HOA payment can be thought of as just as important as your mortgage payment. Though unlike mortgage interest, these HOA dues aren't tax deductible.)
This has two implications for my clients. The first is clear: you can afford a numerically more expensive home if it has a lower HOA fee than one that does, or conversely a home is less affordable if it has a higher HOA fee; the trade-off is that you'll have to pay for the services the HOA would have provided. The second is that the HOA has a real impact on the resale of your home (a good HOA is a plus) so it's important to evaluate the services an HOA provides relative to the HOA's monthly dues.
After all, HOA fees vary from association to association, from a nominal $25 to over $800 in some parts of the Bay Area, and the different homeowners associations provide different services (at different efficiency levels) to their members. For my clients, the key questions are, where is your money going, do you value it enough to pay for it, and will it be worth it to the folks you hope to resell your home to?
Residents to HOA: Show Me the Money
This was one end of the Silicon Valley real estate spectrum. It happened to be in Burlingame and it wasn't a surprise given that higher HOA dues are much more prevalent in and around the San Mateo area. Still, $750 is a mortgage payment in some parts of the country and it's not like this complex had a doorman or other special amenities.
Sure, everyone paid for the electricity that flowed through the dimly lit hallways and the gas that kept them warm in the mild Northern California winters. And looking at the MLS listing, it generously listed that landscaping and gardening were paid for even if caring for the relatively sparse flora (or was it fauna) was included in the fee as well. The security cameras were located in all the right areas and presumably someone was watching them.
But $750. I can't prove that it's the primary cause, but one element that's common between a lot of complexes with high HOA fees (not counting mismanagement) is a shared boiler. The HOA for this complex included not only water, but hot water, which is completely different matter because it's expensive to produce and easy to take for granted when it's "free". How long could a shower last if the hot water never ran out? The dishwasher? A choice between cold and hot water when running the in-unit washer-dryer?
Examples of Services Provided by Homeowners Associations
Each HOA provides a set of services that were agreed upon by the members of its community, voted upon according to the association's governing rules. Here are some examples of services an HOA may choose to extend to its membership.
1) External Building Maintenance. One of the main benefits to an HOA is joining together to gain economies of scale for services that are expensive and sometimes impractical to procure on your own. Homeowners associations often include roof repairs and replacement; paint and siding upkeep; deck and patio maintenance; and, many times, all other external building work with their association fees.
2) Landscaping and Gardening. A key responsibility of the HOA is the maintaining and improving the appearance of its neighborhood and that extends not only to the buildings but to the plants and trees that help make up the community's character. This might show up as anything from running an automatic sprinkler system, trimming the shrubs, and providing spring plantings, to lawn care and maintenance in communities with duplexes and single-family homes.
3) Common Area Maintenance and Utilities. The pool, spa, clubhouse and tennis court are clear examples of common areas whose maintenance is often funded by the homeowners association, but services like sweeping the sidewalks, changing the light bulbs, and ensuring the corridors are heated (or cooled) have more of an everyday impact.
4) Garbage Collection and Recycling. Obviously trash pickup is a critical component to any healthy community. Some HOAs provide additional services to make recycling easier, reducing the amount of pre-sorting required or providing more bins in convenient locations.
5) Insurance. Homeowners associations most often take out various levels of insurance, primarily to cover the external structure that makes up the building and its foundation. Some will go the extra mile and provide earthquake insurance. But, even when the HOA provides insurance, a separate homeowners policy is required to cover your personal property and any gaps the general policy doesn't cover. These gaps may include the fixtures within the unit you own, including cabinets, sinks, tubs, etc.