What Are HOA Special Assessments Used For?

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Homeowners in planned communities often dread hearing the term HOA special assessments. After all, they usually mean having to pay a hefty one-time fee—or even several. However, while levying special assessments is far from ideal, they are often necessary for the HOA.

What Is an HOA Special Assessment?

Many people get confused when they hear about a homeowners association special assessment. What is it exactly and how do HOA dues vs HOA special assessment differ? 

HOA special assessments are extra fees the HOA charges on top of your regular HOA dues, primarily for emergency repairs. They can also be used when there are unexpected large expenses. Hence, they are usually outside of the HOA’s annual budget. 

For example, imagine an earthquake suddenly caused major damage to the HOA’s clubhouse. The HOA dues usually aren’t enough to cover an expense this big, so the HOA has to ask the homeowners to chip in and pay a special assessment for the repairs. 

Why Do HOA Special Assessments Exist?

Special assessments often place a large financial burden on homeowners’ shoulders. However, they exist for a purpose. The following are the most common reasons why HOAs levy special assessments. 

Emergency Repairs

Homeowners associations usually have an annual budget that determines how much the monthly dues will be. The board reviews the previous year’s expenses and forecasts the coming year’s maintenance costs, projects, reserve allocations, and income. Afterward, the board arrives at a reasonable amount each homeowner must pay for upkeep.

With all this careful planning, you would think the board would anticipate the cost of emergency repairs. However, no matter how much planning the board conducts, sometimes things do not go as planned. Whether from a natural disaster like a flood or acts of terror like an active shooter, emergencies do happen. 

Unexpected damages resulting from these calamities must be repaired—and they can cost a lot. Some homeowners think it’s best to leave the damaged property alone rather than levy large special assessments. However, the HOA cannot do that because it is legally obligated to maintain the community’s common areas. 

Community Projects

Some communities may need to fund major projects to create a better living environment. These could entail private road repair, facility renovations, or the addition of new facilities such as swimming pools, access gates, or gyms. However, these are typically outside of the community’s annual budget and require additional funding.

Insufficient Reserve Funds

HOAs expect emergencies to happen, so they allocate a part of the budget to fund the reserve account. This account exists specifically for irregular expenses caused by emergencies or capital improvements. 

With ample reserves, the HOA does not need special assessments. However, sometimes, more than the money in the reserve funds is needed to cover these expenses. As a result, the HOA has no choice but to ask the homeowners to cover the remaining amount. 

Inadequate Insurance

Insurance often pays for major repairs arising from natural disasters and unforeseen circumstances. However, if the HOA lacks insurance or ample coverage, it may need to turn to special assessments to cover the cost. 

Poor Budgeting

HOAs are not perfect and can sometimes make mistakes in financial planning. For example, the board may have forgotten to consider certain expenses. They may have also neglected to inspect the HOA’s aging infrastructure or allot enough money for the reserves. Poor budgeting can lead to special assessments and cost the community a lot of money. 

How Much Are HOA Special Assessments?

Special assessments are often calculated based on the emergency repairs or replacement cost. However, this doesn’t mean the HOA can charge whatever amount they want as long as needed. This is because the state or governing documents may impose an HOA special assessment limit.

In California, the maximum special assessment the board can impose without membership approval is 5% of the annual budget’s gross expenses. That amount is then divided among all the unit owners according to the CC&R’s allocation schedule. However, state law does allow the association to exceed 5% with a majority vote of a quorum of the members. 

The governing documents may also impose certain restrictions on the amount of special assessments HOAs can levy. The community residents should review these rules thoroughly to ensure the HOA is following them. 

Can HOAs Charge Special Assessments Anytime?

It varies depending on state requirements. For example, California HOA special assessment rules state that boards cannot levy special assessments of more than 5% anytime they want. They must gain approval from a majority of the quorum of the membership. However, the board can impose special assessments without approval if they only cost 5% of the annual budget. 

In addition, California law requires proper notice of special assessments. It states that homeowners associations must provide notice not less than 30 or more than 60 days before the assessment’s due date. Likewise, there may be HOA special assessment rules within the governing documents. 

Remember that boards shouldn’t avoid levying special assessments even if the HOA follows these rules. Special assessments should be charged very rarely, if at all. Instead, the board should practice better financial planning and increase the operating budget. 

They should also aim to conduct reserve studies and fully fund the reserve account to avoid special assessments, which should be a last resort and not a common occurrence. 

How Special Assessments Impact Communities

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HOA special assessments can impact the lives of homeowners in various ways. Special assessments are often too much to pay for. After all, many people can’t afford to pay $1,800 within 30 days. As such, special assessments give them great financial hardship and may even put them in debt. 

Apart from this, special assessments often disrupt community peace and harmony. Board members and community residents often get into heated conflicts regarding special assessments. In the worst-case scenario, this can lead to lawsuits and even more bills to pay as both parties must cover the cost of litigation. 

In addition, special assessments may make it hard for potential buyers to obtain a mortgage for properties within the community. Lenders often assess the HOA’s finances and how many homeowners are in debt. This may impact mortgage rates and reduce sales. 

Furthermore, real estate agents must disclose any existing special assessments within the community. If a buyer finds out about these fees, they may forego the purchase in favor of a different community. After all, some special assessments pass from sellers to buyers, adding a financial burden on their mortgage. 

Finally, special assessments reflect poorly on the community overall. Nobody wants to live in a financially unstable neighborhood, especially if they treat special assessments as a regular income source. Hence, HOAs that levy special assessments may have lower property values as buyers are discouraged from purchasing homes within the community. 

Can You Refuse to Pay Special Assessments?

Non-payment of special assessments is not a good idea. Like regular assessments, homeowners must pay special assessments to the HOA. Otherwise, the association may impose late fees and limit their rights and privileges.

Apart from this, a big enough debt could result in a lien on the homeowner’s property. The homeowners association can initiate legal proceedings and foreclose the property to collect the debt. 

Can Homeowners Challenge Special Assessments?

HOA special assessments that are illegal or levied outside of proper procedure may be challenged by the homeowners. However, it’s important to review state law and the governing documents to ensure these assessments are unreasonable. Otherwise, homeowners may pay more in legal costs if the court finds the assessment valid.

How to Avoid Special Assessments

Homeowners associations would do well to avoid special assessments as much as possible. Here are some strategies to improve your financial standing and avoid these additional charges.

1. Conduct Reserve Studies

HOAs should conduct reserve studies periodically to assess the current condition of their property. This will give them a good idea of how much to put in the reserves and how long the HOA has before these facilities need major repairs or replacements. 

2. Practice Proper Budgeting

Proper budgeting can help most HOAs avoid special assessments. Take everything into account, such as planned projects or potential emergencies. It’s also important to consider your location, especially if your community is in an area prone to certain calamities, like floods or wildfires. 

3. Hire a Professional

HOAs can sometimes get by with self-management. However, financial planning can be difficult for laypersons without financial knowledge. Consider hiring an HOA management company to help with the community’s finances. 

4. Get Insurance Coverage

Ample insurance coverage can often cover the cost of major unexpected repairs. Make sure to purchase a policy with adequate coverage to avoid special assessments.

Frequently Asked Questions

What Is a Special Assessment Tax?

A special assessment tax is a payment related to property tax and differs from HOA special assessments. It is unrelated to homeowners associations and is only levied on taxpayers. Special assessment taxes fund local projects like road maintenance or construction.

Can Insurance Cover Special Assessments?

Homeowner insurance policies may include loss assessment coverage as an add-on. Property owners can consider this policy to cover any special assessments the HOA may levy on the homeowners. However, it’s best to review the policy’s specific terms to determine the extent of coverage and its exclusions.

A Last Resort

HOA special assessments can be burdensome for many homeowners. It can cause conflict within communities and even be a source of distress for residents. As such, it’s important to employ good budgeting practices and treat special assessments only as a last resort.
Does your community need financial management assistance? Personalized Property Management has the qualifications and experience to help HOAs in Southern California. Call us today at 760-325-9500 or email us at info@ppminternet.com for more details!