A recent Wall Street Journal story on spotting HOA risks before you buy a home stopped me in my tracks. I didn’t even need to read past the headline to feel a jolt of recognition.
My husband Earl and I lived through our own HOA fiasco not too long ago, when we sold two investment properties we owned in the same Raleigh, North Carolina condo community. What we went through taught me more about homeowners associations than any article ever could, and I want to share those lessons with you here.
For context: we owned two units in a 42 unit condo complex, one in each of the community’s two buildings. When it came time to sell both properties, we assumed the process would be straightforward. It was not.
Here’s what actually happened, and what I want every homebuyer and seller to know before dealing with an HOA.
1. An underfunded reserve fund can stall or sink your closing
Every HOA is supposed to maintain a “reserve fund,” which is essentially a savings account set aside for big ticket repairs like roofs, siding, and structural work. Based on some of the answers that came back on our lender’s questionnaire, our lender initially asked for a current reserve study before either sale could close.
That’s when we discovered how painfully slow this process can be, and honestly, how unprepared most HOAs are for this request.
One reserve study company wouldn’t even give us a price quote until we filled out an online form, and then told us a standard study would take 45 to 60 days, with a “rush” job still taking 30 to 45 days.
We also looked into a cheaper do it yourself reserve study kit, but it turned out those don’t hold up for mortgage lending purposes because they skip the site visit, the professional inspection, and the independent evaluation that federal lending guidelines actually require.
We ultimately found a workaround that satisfied our lender without commissioning a full study, so it never became mandatory for our closings. But the process was still a real eye opener. We learned that the vast majority of HOAs and condo buildings simply do not have an up to date reserve study on file, which means this exact scramble is waiting for a lot of sellers who have no idea it’s coming.
The takeaway for buyers: ask to see the HOA’s most recent reserve study before you make an offer, and find out when the next one is due. A reserve study that’s old, missing, or clearly underfunded relative to the building’s age and condition is a real warning sign, and it’s more common than you’d think.
The takeaway for sellers: don’t wait until you’re under contract to find out whether your HOA’s reserves and paperwork are in order. Ask the board now, while you still have time to fix problems calmly instead of during a closing deadline.
2. Missing insurance coverage can become your emergency, not just the HOA’s
This was maybe the most frustrating discovery of the entire process. Our lender required proof that the HOA’s master insurance policy included Law and Ordinance coverage, essentially protection that helps pay to rebuild to current building codes after a covered loss. Our HOA did not have this coverage.
When we asked around, we learned the board had been talking about adding this coverage for 12 years without ever actually doing it. Twelve years! Their inaction became our emergency, just days before our closing.
We initially offered to cover a full year of the added coverage if that’s what it took to get the deal done, and based on the premium estimates we were given, we were bracing to pay as much as $7,000 to $8,000.
It turned out we only needed to pay for the coverage on a prorated basis, covering the period through our closings and up to the policy’s renewal date. That ended up being $578, so getting it done for a fraction of what we’d braced for felt like a huge win.
Once our sales closed, the ongoing cost of maintaining that coverage going forward became the HOA’s responsibility, as it should be. Renewing and paying for adequate insurance year over year is on the association and its remaining owners, not on a departing seller.
The takeaway for buyers: ask specifically whether the HOA’s master policy includes Law and Ordinance coverage, and ask when it was last reviewed. Don’t assume a policy is complete just because a policy exists.
The takeaway for sellers: get a copy of your HOA’s current master insurance policy well before you list. If there’s a gap, you want to know about it on your own timeline, not your buyer’s lender’s timeline.
3. Sloppy HOA paperwork can derail a deal that has nothing wrong with it
Our lenders required a Condominium Project Questionnaire from the HOA’s management company. When it finally came back, it was riddled with errors: incorrect building counts, contradictory answers about multi unit ownership, and most alarming, a “yes” answer to a question about outstanding critical repairs. That single incorrect answer triggered additional scrutiny from the lender’s project review team and threatened to delay our closing.
The truth was our HOA had completed a comprehensive capital improvement project a couple of years earlier addressing balconies, roofing, and major building components, and that work was fully completed and fully funded. There were no outstanding critical repairs.
But someone at the management company checked the wrong box, and it took a very specific, well documented correction to get it fixed before closing.
The takeaway for buyers and sellers alike: whoever is filling out lender paperwork on the HOA’s behalf, whether that’s a management company or a volunteer board member, can make mistakes that have nothing to do with the actual condition of the property. Review these forms carefully, and don’t assume that a scary sounding answer is accurate just because it came from the HOA.
4. Special assessments and capital projects need to be understood, not just disclosed
Our HOA had gone through a real, and expensive, capital improvement cycle involving balcony repairs, roofing, and other major building components, funded partly through special assessments.
That history mattered a great deal during our closings, because federal lending guidelines actually treat special assessment funded repairs differently than unfunded critical repairs. Understanding that distinction, and being able to explain it clearly, made the difference between a delayed closing and a smooth one.
The takeaway for everyone: don’t just ask whether an HOA has had special assessments. Ask what they were for, whether the work is complete, and whether it was fully funded. The difference between a past special assessment for planned capital work and an unresolved, unfunded repair is not just a technicality. It can directly affect whether a lender will approve financing on the property.
The bigger lessons
HOAs can offer real value, shared maintenance, amenities, and a sense of community. But an HOA is also a business, run mostly by volunteers, and like any business it can be well managed or poorly managed.
Earl and I learned that the hard way, not because our HOA was fraudulent or malicious, just chronically slow to act on things that mattered. Thankfully, one board member in particular went above and beyond to help us get things resolved in time, and that reminded me how valuable it is to have even one responsive, cooperative contact within your HOA when things get tight.
If you’re buying into an HOA, do your homework before you’re under contract. If you’re selling, get ahead of these issues before a lender’s deadline forces your hand.
Either way, ask for the documents, read them closely, and don’t be afraid to push for answers. It’s your money, and often your closing date, on the line.
Frequently Asked Questions About HOA Red Flags
What HOA documents should I review before buying a condo?
Before buying a condo, review the HOA’s budget, financial statements, reserve study, master insurance policy, meeting minutes, bylaws, declarations, rules, and information about current or planned special assessments. These documents can reveal financial problems, deferred maintenance, insurance gaps, pending repairs, or disputes that may affect both your ownership costs and your ability to get financing.
How can I tell if an HOA is financially healthy?
Look at whether the HOA consistently collects enough money to cover operating expenses while also contributing to reserves for future repairs. Large amounts of unpaid dues, frequent special assessments, inadequate reserves, deferred maintenance, or an inability to provide current financial records can all indicate potential financial weakness.
What is an HOA reserve study?
An HOA reserve study evaluates major components of a community, such as roofs, siding, balconies, pavement, and other shared infrastructure, and estimates when those components will need to be repaired or replaced and how much the work may cost. It also evaluates whether the association is saving enough money to meet those future obligations.
Can an HOA problem prevent me from getting a mortgage?
Yes. Mortgage lenders evaluate more than the individual condo unit. Depending on the loan program and property, they may also review the financial condition, insurance coverage, ownership concentration, litigation, structural condition, special assessments, and other characteristics of the condominium project. Problems at the HOA level can therefore affect whether a buyer can obtain financing.
What is Law and Ordinance coverage for a condo association?
Law and Ordinance coverage is insurance that can help pay certain additional costs associated with rebuilding or repairing damaged property so that it complies with current building codes and ordinances. A lender reviewing a condominium project may require evidence that the association’s master insurance coverage meets applicable lending requirements.
Are special assessments always a red flag when buying a condo?
No. A special assessment should be investigated, but its existence alone does not necessarily mean an HOA is poorly managed. Find out why the assessment was imposed, how much owners must pay, whether the work has been completed, whether additional assessments are expected, and whether the project addressed planned improvements or unresolved structural or safety problems.
Who pays a special assessment when a condo is sold?
Responsibility can depend on the association’s governing documents, the timing of the assessment, applicable state law, and the terms negotiated in the purchase contract. Buyers and sellers should determine before closing whether an assessment has been approved, how much remains unpaid, and who will be responsible for the balance.
What happens if an HOA does not have enough money for major repairs?
An HOA with inadequate reserves may need to increase monthly dues, impose a special assessment, borrow money, postpone repairs, or use some combination of those options. For homeowners, that can translate into unexpected costs and, in some circumstances, financing or resale difficulties.
Can incorrect information on an HOA questionnaire delay a home sale?
Yes. Lenders often rely on condominium questionnaires and other HOA documentation when evaluating whether a project meets their lending requirements. An incorrect answer concerning repairs, insurance, litigation, ownership, or other project characteristics can trigger additional review and delay a transaction until the information is corrected.
What are the biggest HOA red flags for condo buyers?
Some of the most important warning signs include severely underfunded reserves, major deferred maintenance, inadequate insurance coverage, unresolved structural problems, frequent or unusually large special assessments, significant owner delinquencies, ongoing litigation, incomplete financial records, and an HOA or management company that has difficulty answering basic questions about the property.
Lynnette Khalfani-Cox, The Money Coach, is a renowned financial expert, author, speaker, and media personality, empowering people to achieve financial success. Visit her personal website at https://lynnettekhalfanicox.com.
