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What Is an HOA Special Assessment?

Hint: It's not special in the "surprise and delight" way. Quite the opposite, special assessments strike fear in the hearts -- and a dent in the bank accounts -- of homeowners.

[Updated: Jun 07, 2021 ] Jan 16, 2020 by Lena Katz

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What is a special assessment?

If repairs to the buildings or common spaces of a covenanted community (aka HOA-governed community) are deemed necessary by the homeowners association and will cost more than the HOA has in its reserve fund, then the HOA board can require all owners to pay a "special assessment" -- a portion of what the repair or special project costs.

Capital improvement assessment -- similar, but not the same

Another category of HOA assessment, often confused with special assessments, is the capital improvement assessment. These are major structural alterations, common area improvements, or new structure construction within the development that are planned out and will increase the value of homes in the community and/or be useful to the residents. These projects tend to be larger and more expensive; therefore, HOAs have to follow more legal restrictions and bylaws to adopt them.

The government version

Another type of special assessment is levied by the municipal government to pay for improvements or repairs to a neighborhood. It covers things like road improvements, light installation, and emergency medical access. Similar to the other type of special assessment, this gets charged when the community doesn't have enough funds in its reserves -- funds collected by taxes.

How do you plan for a special assessment?

The unpleasant answer is, you can't really plan, and neither can the association. If catastrophic weather damage or hidden mold creates a huge problem in the complex, that the association's insurance won't cover, then even a smart and well-run board may need to impose a special assessment.

But since not all boards are smart or well run, many are tripped up by their own bad budgeting. Therefore, you should always ask to see the financial statements or at least the budget reserves for the development where you're thinking of buying. You'll want to make sure that other homeowners have been paying their monthly dues and that there are adequate reserves to pay for any unforeseen repairs or special projects. If you are buying a condo, the lender will actually ask for this information and also check to see how many homeowners are in arrears on their monthly dues before approving a loan.

Once you're a homeowner

Like with many expensive and exhausting parts of homeownership, once you've bought, walking away is no longer an option. All you can do is keep your eye out for proposed improvement projects and be a voice in the association meetings.

One of the most maddening things about special assessments is that there's no real range for the cost. A special assessment to redo a fitness room in a big building might cost homeowners $500 a month, billed as $100 a month for five months. A special assessment for major repairs to an old, large development after a 10-year storm might cost $500,000.

While sometimes there's a community vote on a project and special assessment, especially if the costs are over a certain amount, smaller special assessments are not necessarily the subject of much prior discussion. There will be a notice in the community newsletter or bulletin board and a board vote -- since these are both legal conditions -- but smaller assessments are often decided quickly. If you don't attend board meetings, you might hear about it for the first time when you get a bill.

What's the connection between monthly fees and special assessments?

When shopping for a property, people typically prefer lower monthly HOA fees. Since lenders typically tack HOA fees on top of your monthly PITI (Principal, Interest, Taxes, Insurance) to calculate your monthly mortgage payment, they very much impact how much house you can afford. So lower is better.

Except sometimes it isn't, because if monthly fees are too low, the HOA can't collect enough reserves to pay for major repairs or special projects that will certainly be needed at some point.

So, some owners think higher monthly HOA fees are better, because then they feel secure in the knowledge that the association has high enough reserves to pay for any repairs or building upgrades without further financially burdening the homeowners.

Except sometimes that's also not the case. If the building management hasn't been able to collect HOA fees from a significant number of homeowners, then there could still be insufficient reserves -- meaning, there may still be a special assessment, even on the people who regularly paid.

Are special assessments just for condominium owners?

As alluded to in the definition above, any "covenanted community" can have special assessments imposed. In addition to condos, this includes gated communities, golf course communities -- any planned community that is HOA-governed.

Special assessments that are levied by the local government can hit any homeowner, not just those in planned communities. However, they can only be charged to homeowners that will directly see benefits from the upgrades or repairs. This is different from HOA assessments because if an HOA board determines that one part of the development needs repairs and they don't have the budget for it, even if you live in another area, you probably will still get a bill.

How do special assessments affect buyers and sellers, as well as investors/existing homeowners?

As a seller, if you intend to sell a property that has a special assessment, your realtor will need to let potential buyers know upfront, because the cost is either the responsibility of the buyer or seller -- it doesn't go back to the association.

As a buyer, the big questions to ask the seller's agent and/or community association manager right away are:

  • Is there a special assessment currently?
  • Is there a possible or pending special assessment?
  • How much for?
  • What's it for?
  • How and when will it need to be paid?
  • And most importantly… Is the seller willing to negotiate who pays it?

When are special assessments a red flag?

When special assessments are necessary due to low reserves, it is indicative of one of two things:

  • Poor budgeting within the HOA
  • Irresponsible owners failing to pay their monthly fees

Either of these is a red flag. Even if you sympathize with the owners and wish you didn't have to pay, it's part of what everyone agrees upon when they get a mortgage on a property that has these fees. Many people refusing to pay them, and an HOA and/or management company unable to collect them, is indicative of a poorly run community.

More than just a red flag, special assessments may indicate that the condo is ineligible for conventional loans. If the lender studies the condo's financials and determines that the condo reserves are low, or that too many homeowners are in arrears on their fees, they will generally not approve a conventional loan. Fannie Mae actually sets parameters in its review guidelines for both of these requirements, but a lender's guidelines may be even stricter.

How does special assessment payment collection work?

Once the board or members have adopted the special assessment, it's each homeowner's responsibility to pay their part. As noted above, though, there are generally some negotiations about how these extra fees will be collected. Sometimes the agreement is to pay monthly, sometimes it's at multiple predetermined calendar dates or project milestones, and sometimes it's a one-time thing.

For example, a luxury high-rise I toured in South Florida had imposed a special assessment requiring each unit owner to pay $7,000 at the beginning of summer to begin a gym remodel and complete exterior repainting. A second $7,000 would be due from everyone when the work was complete. The property manager could give no guarantee of how long the work would take, and only the HOA board had a say in which contractors would be used.

Can you challenge a special assessment?

You can, but be aware that unless many homeowners are ready to challenge alongside you, it could come down to a fight between you and the HOA board. You may wind up having to sue, and if the assessment is deemed reasonable and legally executed, you could lose and have to pay the HOA's court costs.

So, before it gets to that point, do two things:

  1. Check the bylaws and make sure every single thing was done by the book -- sufficient prior advertising, all homeowners invited to a discussion before the vote, etc.
  2. Have a conversation with the board and share your concerns and questions.

Note that if you decide not to pay a special assessment without formally contesting it, the HOA can put a lien against your property.

One bright spot

You can typically claim an assessment payment on your taxes, although you should always let your CPA have the final word on this.

Should the special assessment scare you away?

Not necessarily, but maybe. There are many HOAs that look at special assessments as a very last resort -- an emergency measure that they hope to never take. These associations are generally proud of their solid financials and will be happy to share. Even HOAs that have had to levy special assessments will be forthcoming about it. Ask for the financials, ask plenty of other questions, and assess the risk. In some ways, it's the same as deciding whether you can afford the repairs on a home.

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