Why do we need an HOA?

Why do we need an HOA (Homeowners Association)?

Note: The following are my opinions and do not necessarily represent the views of any specific HOA or its board of directors.

The title above is a question I hear often in my neighborhood. The other one is “What do we actually get for the dues we pay?” I think it would help to understand a little history here.

Back in the 1980’s, developers got the idea to bundle some kind of community asset in housing developments. This made the development more appealing. The asset may be a pool, a community club, a park, a greenbelt, or whatever seems appropriate for the size and location of the community.

The problem is, if you have a community owned asset, unless you set up some rules, you’re going to have problems with some of your neighbors. You go to use the clubhouse and it’s all trashed from the last user. You want to enjoy the pool but one of your neighbors has invited his entire extended family to have a wild party at the pool. Or one of your neighbors volunteers to let his homeless family member pitch a tent in the greenbelt.

So with the advent of communities that own assets together comes the concept of having to properly manage them. The way we do that is by incorporating a non-profit corporation, with three main purposes:

  • Provide liability insurance for the community asset.
  • Provide funds for maintaining the asset to community standards.
  • Provide a structure of rules and regulations for the community asset, so that the community may enjoy it.

These three points answer the question of why we have an HOA, and what we get for the dues we pay. We get protection from liability via insurance, and we get our valuable asset maintained in such a way that we enjoy its retained value.

But there is something else. To do all of this valuable stuff, you have to collect money from all of the homeowners, or you will have nothing with which to pay for these valuable things that you agree you need.

Thus, all HOAs have a schedule of dues. Collecting money from homeowners for the purpose of spending it raises all kinds of questions about who collects it, where does it go, who pays the bills, etc. For those questions, you need a board of directors who manage the association affairs. When the association is created, one of the documents known as the Bylaws describes the duties and powers of the board of directors. These duties and powers revolve around making sure money is collected and responsibly spent to maintain the community assets, and monitoring the assets to make sure no one is violating the rules set up for those assets.

Depending on the HOA, the amount of money described by the dues can be minimal, or very substantial. I am aware of HOAs with as few as a dozen homes, and others with as many as 600. How much dues are assessed depends entirely on the size of the association and the cost of maintaining those assets. An HOA with a fancy community center including a pool and multipurpose room is going to need a lot more money than one with a small park or greenbelt.

This brings us to the fourth main reason for the HOA:

  • Collect dues from all homeowners, keeping records of who has paid and who has not; allocate those funds to pay obligations incurred as part of the maintenance of the assets; go after funds owed the association; pay for legal assistance in the normal course of doing business.

This last purpose can be quite a big deal. If your HOA has a small park that has to be mowed during the summer, and has very little other maintenance, you may not need a ton of cash to do that.  The larger HOAs may have quite substantial sums of money flowing in and out of the association bank account. This can cause all kinds of problems, not the least of which is the IRS has rules about how the HOA must do this.

IRS? Well yes, the association is a corporation and although it is non-profit, you have to demonstrate that to the IRS by filing every year. If they judge that the association is making a profit, they will penalize the HOA. This takes some accounting knowledge and is one of the primary roles the board of directors play in the HOA – manage the funds appropriately, while maintaining non-profit status.

If you live in a neighborhood governed by an HOA, by now you may have noticed a glaring omission in the stated purposes above: Where are the rules about paint color; the rules about garbage cans; the rules about roofing; the rules about parking? It may come as a surprise to most homeowners (and in fact, most directors of HOAs) that there are two entirely different sets of rules in HOA association legal documents: The Mandatory items, and the Discretionary items.

What we’ve been discussing above are the mandatory items. You MUST do all of those things related to the common assets. Anything outside of those is entirely discretionary, to the extent that the members of the association may vote to have them or to remove them.

“But wait,” you may say, “our HOA is entirely focused on the length of our lawn, where we park, how we conduct ourselves, and even our choice of roofing material. Are you saying that all of this is discretionary?”

Well it is from the perspective of why the HOA exists in the first place. If there are no common assets, an HOA is not even required. Because there are common assets, the HOA is absolutely required. It has nothing at all to do with the color of your home, or how many weeds are in  your garden. And every HOA has the power to adjust their association legal documents to describe exactly those things they want to control, while leaving out everything else. This is not to say you never want to control anything else. It IS to say that those things are discretionary. 

But there is a caveat: After many complaints over many years, the Washington State Legislature enacted a set of laws to deal with HOA issues (see RCW 64.38.020 Association powers). These laws provide a number of solutions to common problems with HOA management. They also introduce some concepts that may or may not be all that popular, depending on your view of the HOA where you live.

For example, the law now says that boards of directors may impose fines on homeowners for non-compliance – UNLESS the HOA legal documents specifically say otherwise.

So exactly what are these association legal documents that come up several times above? This is what ours has:

  • Articles of Incorporation – the document that creates the corporation in the eyes of the state.
  • Bylaws – the document that describes the board of directors, their powers and their responsibilities.
  • Declaration of Covenants, Conditions and Restrictions – the document that describes the rules that all homeowners must agree to in order to live in the HOA managed neighborhood. Note that these rules also cover the board of directors if they live in the neighborhood. You signed this agreement in the giant packet of papers you signed when you purchased your home; thus you have already agreed to follow these rules.
  • Rules and Regulations – the document that describes rules and regulations not necessarily listed in the Declaration.

If your Bylaws specifically state that the board of directors may not fine homeowners for non compliance, then they may not – otherwise they are perfectly within the law to do so. This bears repeating: If you want your board to behave in a specific way, it MUST be encoded in your Bylaws. Otherwise you do not get a vote!

Can you change any of these association legal documents? The good news is YES you can. Each document stipulates how to change it, including the articles of incorporation. In fact, the articles of incorporation even stipulates how to dissolve the association. But be very careful here – if you own common assets, the last thing you want to do is expose yourself to the liability of not having an association to manage those assets. That would be very foolish, and could even result in your losing your home. That liability insurance is a very good investment.

This has gotten much longer than I had intended, and there is so much more I want to say, but I’ll have to leave those for another post. Good luck with your HOA!

[8/23/15 Edit1: If it isn’t apparent from the verbose descriptions above, you get three things for your money: Liability Insurance, Maintenance of the common assets, and a board of directors who collect and disburse funds related to managing the common assets and any other obligations incurred.]

[1/11/16 Edit2: The link to the Washington State RCW referenced above is RCW 64.38 Homeowners Associations. The reference above is for section 20 concerning Association Powers.]